In the British reality television series Dragons’ Den, budding entrepreneurs pitch for equity funding from a panel of hard-nosed venture capitalists.
The VCs -- all high net worth individuals -- are willing to part with some of their private cash in return for an equity stake. But the added value for the small percentage of business owners who actually receive a funding offer is that, along with the cash to expand their enterprises, they also receive something that money can’t always buy -- expertise.
And that’s where family business specialists see a growing opportunity in Australia: where high net worth individuals (HNWIs, defined as individuals with at least $US10 million in liquid assets) can become an alternative funding source for private businesses to the big banks and private equity firms, the latter typically preferring a position of total or majority equity control. Many HNWIs, on the other hand, are prepared to provide funding on agreed terms -- usually an equity position -- but prefer to leave the family business owners in control.
Their modus operandi is to achieve a solid return on investment, generally over a long-term period and, quite often, they’re willing to provide their business advice free of charge. In most cases, they will take a position on the family business board, but in a non-executive capacity.
A KPMG international survey just released found that 58 per cent of family businesses say they are currently seeking external financing to fund their investment plans, but finding the right strategic investment partner is challenging. The same survey found that 44 per cent of HNWIs had already invested in a family business and that 95 per cent had found it a “positive experience”.
The global HNWI funding pool is enormous. KPMG estimates there are about 14 million HNWIs around the world, collectively controlling a massive $53 trillion in private wealth. There’s no accurate HNWI figure for Australia, but it’s feasible there are billions of dollars in private capital potentially available. Moreover, it’s evident that international HNWIs are lining up as potential Australian family business funders.
David Harland, founder and managing director of Queensland-based family business advisory firm FINH, says he’s aware of wealthy foreign investors with a keen interest in funding Australian private businesses, including Middle Eastern investors looking to inject capital into Queensland projects. He also points to Australian HNWI investors wanting to assist a family business with the distribution of a product, under a joint venture arrangement.
Harland uses the term “patient capital” to describe wealthy private investors who are interested in providing not just financial capital, but human capital, to family businesses to achieve long-term returns on their investments.
“It’s patient family capital. The investors have aligned themselves to a growth strategy rather than a short-term return strategy … they like to take a non-controlling position so that the family retains control.”
Chairman of Family Business Services for KPMG Australia, Bill Noye, says there is a significant opportunity for family businesses in Australia to access HNWI capital, however at this stage there is no formal connection point for the two to meet.
“There are natural connection points in place through stockbrokers, Family Business Australia and family office associations, but there’s nothing formal in place.”
Direct capital participation in a family business by a private investor can be done in multiple ways, through the issue of equity by the family business, or where a HNWI provides debt finance under a borrowing structure, similar to that of a bank.
Noye says that wealthy private investors typically do not want a controlling interest, and require both an agreed entry process to facilitate their investment as well as an exit strategy. The terms and conditions of the entry stake would be negotiated with members of the family business, based on a valuation exercise being conducted at that point in time. Similarly, the exit point and price would be negotiated between the two parties based on another valuation being conducted further down the track.
“The HNWI opportunity presents a position where a minority interest is taken up, but it’s a more tailored equity approach. The key issue for family businesses is to maintain family control,” Noye says.
Loss of control is the biggest obstacle for family businesses contemplating private equity funding, so many businesses choose to do nothing rather than dilute ownership. This, of course, substantially reduces their growth potential.
Wealthy private investors -- and there are many of them across Australia -- can fill the funding void and, along the way, provide invaluable business knowledge and support. For family business owners brave enough to enter, the Dragons’ Den approach is definitely a winner.