Breaking tradition: Chasing opportunity through alternative sources of finance
The funding attitudes and practices of family businesses in North America, Europe and Asia-Pacific are changing in the wake of the global financial crisis a decade ago. Daniel Bardsley examines the latest research by Campden Wealth in partnership with KKR and asks what these new trends mean for family business growth
The financial crisis that developed a decade ago has had countless effects that continue to reverberate throughout the global business community.
Among these are changes to the ways in which family businesses finance themselves.
Many traditional providers of capital are restricted in the ways in which they can assist family businesses, leading to an increasing focus on what are typically known as alternative sources of finance.
This sector’s growing importance was among the findings of the latest research report published by Campden Research in partnership with the global investment firm KKR.
Family Business: Financing for Growth Report 2017was based on the responses of dozens of ultra-high net worth individuals across the globe associated with family businesses with average turnover of more than $400 million. The 44-page report canvassed the views of people in North America, Europe and the Asia-Pacific region (APAC).
The report looked at everything from how family businesses select financial partners to what types of financing they prefer, as well as what trends are evident in terms of how these preferences are changing.
Among the findings was how important “hard” requirements, such as interest rates, fees and libor floor, are to family businesses when they look for finance.
The terms of financing were cited as important by 88% of respondents, while 86% says the cost of financing was essential.
Another hard requirement highlighted in the report was maintaining family control and continuing to prioritise governance when offering equity, with 85% of respondents noting this was important.
According to Jim Burns, head of KKR’s Individual Investor Business, family businesses do not always realise that firms such as KKR are not looking to exert control when they take stakes in companies.
“As I travel around the world, I talk to people about the report and find that so many are unaware that companies like ours are often times a minority owner,” Burns says.
“Previously, they were under the impression we needed to be in control of the companies in which we invest, and were not familiar with the alternative financial solutions we provide such as debt, whether it’s senior or subordinated, or growth capital in the form of equity.
“We understand many family-owned businesses want to maintain control and we’re fine with that.”
While the high value given to hard requirements was to be expected, a notable finding was that “soft” requirements—those that go beyond the terms and cost of financing and maintaining control—were key as well. This should not come as a surprise, according to Burns, because “fundamentally we’re in the relationship business”.
“From a business standpoint, first and foremost that person needs to trust you and believe in you. They need to know that you understand what you are trying to accomplish with the business and that you will be there through good times and challenging times,” he says.
In the report, 74% of respondents thought it important that financial partners had a good understanding of the business, while 70% wanted them to add strategic benefit and 68% looked for an alignment of values and objectives. Soft requirements are especially important in APAC.
As one of the report’s interviewees, a seventh-generation family business executive from Europe, highlighted, capital providers should have “a long-term approach to our company, with a very clear understanding of our values and what we are all about.
“If they fall outside that, we will reject them as we would any other team member who did not live by our values.”
Most businesses continue to rely on traditional sources of finance such as local and regional corporate banks (85%), retained earnings (78%), and family members (64%). However, non-traditional sources of finance are on the rise, especially in the West, with one-third of family businesses in North America and in Europe increasing their engagement. One-fifth of family businesses are now more involved with venture capital and private equity firms than they were previously.
This trend is to be expected. The 2008 financial crisis ushered in a tougher regulatory regime that means banks have become, as Burns puts it, “more challenged” in providing some types of support to medium-sized companies, including family-owned firms.
“I am not surprised the private credit business has grown so rapidly because that is where the biggest opportunity has emerged,” he says.
“That is clear in the US and is growing in Europe and Asia as well.
“With regard to growth capital, we are still in a relatively low-growth world. When a business does find a way to grow, it is not always easy to find the capital to support that growth. There are not that many funds around the world positioned to help businesses to scale.
“If you are willing to provide that capital, you are going to have a number of attractive opportunities to deploy it.”
Burns is pleased the report showed companies which have engaged non-traditional sources of finance were typically happy to have done so. It will, he says, “make the trend faster”.
“We are already seeing demand for alternative sources of capital in Asia and Europe. There is no reason why it should not continue globally. In my opinion, private credit and growth capital will be the types of alternative finance that will be most appealing to family-owned businesses and will grow most rapidly around the world.”