Some of the main obstacles to investment partnerships between high-net-worth individuals (HNWIs) and family businesses are the perceptions on both sides concerning control of the business. Suggested solutions include education of family business owners on investment options, networking, and use of external advisers.
There is the potential for the two groups to work together successfully: both seek to achieve long-term goals, have a shared appetite for measured and managed risk, and value a personal touch. Moreover there is a clear mutual appreciation of what either side can offer and many HNWIs are from family businesses, suggesting they understand some of the characteristics unique to managing this type of company. The question, therefore, is: why are there not more HNWI investments in family businesses?
A meeting of minds and aims
HNWIs’ perception that they are unable to obtain an equity position in family businesses is not necessarily the reality. Indeed, many family businesses say they would offer equity for the right investor, and many even say that they would be prepared to offer a seat on the board.
When asked about the characteristics of HNWIs, there is a close match between family businesses’ perception and the HNWIs’ self-reported profile: HWNIs indicate that they would like to be personally involved, that they would be relatively demanding from an internal rate of return perspective, that they have tough skin and are unlikely to panic, that they would not push hard for an exit, and that they would regularly like to express their views to management.
This high level of personal involvement fits well with the type of investor that family businesses are looking for. Indeed, very few family businesses say that they are looking for an investor to be completely passive. Instead, many suggest that they would want an investor that could add experience and expertise to help them build and grow the business. The key issue for family businesses therefore seems to be the ability to manage the control tendencies of HNWI investors. Board seats are fine but the premium on independence remains strong.
Education and communication are key
Family businesses and HNWIs both identify limited opportunities and a lack of availability as the key reasons for either not seeking HNWI investment or for HNWIs not making more family business investments.
Education may go some way to alleviating any potential lack of knowledge about the possibilities a partnership between family firms and HNWIs could bring. Family business associations, business incubators and chambers of commerce could play an important role in helping to bridge this gap – facilitating any networking or introductions and teaching family owners in particular about the options they have for funding.
Given that most HNWIs come from family businesses, contact and networking between family businesses could help facilitate such investments. Yet the majority (58%) of family businesses surveyed in our 2014 Global Family Business Survey say that they do not currently have many relations with other family firms.
The case for building better networks is strengthened further by the fact that HNWIs say they would be more likely to invest in businesses when they are familiar with the family, as well as with the company, industry and target geography. Although ultimately the company they are investing in is the most important consideration, so by forming stronger and wider networks both sides are likely to improve their chances of finding the right partner.
External advisers are another channel through which investment partnerships may be formed. Both HNWIs and family businesses named business consultants and banks as the two most important sources of advice when looking to invest or seeking investors. This presents the opportunity for these advisors to play an integral role in connecting these two groups, and providing introductions that could benefit both parties.
This is an edited version of an article that was first published in KPMG Family Business. Christophe Bernard is a KPMG partner based in the French firm's Paris office.