UK Family Businesses Reluctant to Give Up Equity
26th January 2016
We know that traditionally family firms focus on reinvesting profits rather than taking on debt. KPMG's Head of Family Business Gary Deans takes a look at why business families are reluctant to give up equity.
The KPMG Family Business 2014 Global Survey found that only 33% of UK-based family businesses had previously accepted investment from High Net Worth Individuals (HNWIs) over loans from banks.
The main cause of this was stated as the fear of losing control of the management of the business to the private investors, who would more likely than not want to take an interest in the running of the company.
HNWIs Do Want A Say In Their Investment
The CEO of a London-based brewery explained when surveyed: “Once equity is issued, there are chances that there will be constant involvement of equity holders arguing for returns, and we have known of such cases. So we refrain from getting involved with external investors. Also, once equity is issued, reporting requirements become necessary and cannot be overlooked.”
This sentiment is confirmed in the fact that 100% of HNWIs surveyed indicated that they agree or strongly agree that they would like to regularly express their views to management, and also say they would like to be personally involved. This urge to be involved is not unfounded though, as only one in ten HNWIs surveyed had no prior family business experience – meaning that they understand the daily workings and struggles of a family business, as well as the benefits of investing with them.
The Two Parties Are More Similar Than They Think
Family businesses in the UK are tending to stay away from private investors due to thinking that the investors are more about quick returns on their capital than building the business at its own pace.
In fact, our Global Survey found that seven out of 10 HNWIs prefer fewer, more significant investments, while nine out of 10 agree or strongly agree that they would not push hard for an exit, as they are patient investors.
HNWIs have identified that family businesses often have the ability to be innovative and adaptable to changing economic climates.
One HNWI – the director of a managed services and cloud provider in the UK says: “I am in favour of family businesses as they are creative and have survived the economic storms that occurred over the decade and still are powerful forces in the business industry.”
Current Economic Climate Is Forging The Connection
In the past, UK family businesses would have automatically gone to the bank for a loan, without having to worry about losing equity for a capital injection. However, bank loans are more difficult to obtain in the current economic climate, forcing family businesses to seek alternative investor options.
This is opening up the idea of private or equity investing, and when the dialogue opens up, most family businesses will be pleasantly surprised at how complementary a partnership with an HNWI could be for them.
HNWIs with family business backgrounds have more to bring to the table than just a financial gain for the company.
Traditionally, UK family businesses have been wary of external investment, preferring to maintain exclusive family ownership. However, many are now exploring alternatives to bank finance to fund growth and working with other families and individual investors could prove an attractive option. It is certainly worth exploring these providers of equity or debt as the benefits, financial and non-financial, could be significant.
Gary Deans is Head of Family Business for KPMG in the UK, and a Member of the IFB Advisory Council.