European and North American ultra-wealthy family businesses will increasingly turn to financing from private investors and private equity as traditional funding from banks and family members is expected to dry up, according to new research by Campden Wealth.
But almost half of the worldwide family businesses surveyed admitted they do not know enough about the “non-traditional” sources of capital available, leading to calls for capital providers to step up their education of family business leaders and realise their growth ambitions.
Family Business: Financing for Growth 2017 published today by Campden Wealth, in partnership with global investment firm KKR, found that 85% of ultra-high net worth family businesses still depended on funding from local or regional corporate banks. A sizable 78% relied on self-financing by retained earnings and 64% counted on family members. Other traditional sources included global corporate banks (55%), private investors including other families (45%), venture capital firms (12%) and hedge funds (11%).
However, the report found that the use of non-traditional finance by family businesses rocketed by one-third in five years. Non-traditional methods included capital obtained from private investors, private equity companies and alternative finance.
The notable increase was due to the dim outlook many family business leaders had about future access to finance: 63% pointed to higher regulation of banks as the main looming barrier while 60% believed the uncertain climate of economic and capital markets might have a negative influence on financing by funds going forward.
Family Business: Financing for Growth also found families had “mixed views” about non-traditional funding: 43% said they appreciated the flexibility of non-traditional providers and 40% believed they could offer more than just capital. Just over half (53%) said non-traditional sources could be more expensive and 43% said they were riskier propositions.
There was a low level of knowledge among respondents about non-traditional sources, with more than four in 10 family businesses admitting they do not know enough about them.
Zuzanna Sojka, quantitative research manager at Campden Wealth, said family business members who were concerned about dwindling access to traditional sources of financing growth were starting to explore non-traditional methods.
“We found that this trend is likely to continue as thinking about the next five to 10 years, more than half of the respondents stated that they are planning to obtain capital from private investors (including other families) and roughly a third will engage with private equity companies and try alternative finance.”
Nevertheless, there is more that can be done to educate families about non-traditional financing as more than four in 10 say that they don’t know enough about those sources.
As traditional financing was expected to become less accessible in the future, family businesses needed to explore non-traditional alternatives, Sojka said.
“Many still feel that they are still unaware or less familiar with the non-traditional sources that have emerged outside the regulated banks and capital markets, such as private equity firms, alternative finance or private investors, including other families.
“Those who had an opportunity to use those sources in the past told us that they found them more flexible and appreciated the strategic benefits that the offered, including specialist skills and expertise. Nevertheless, as non-traditional financing comes in all shapes and sizes, it is important that families ensure that they have a good understanding of their merits and shortcomings.”
Jim Burns, head of KKR's Individual Investor Business, said: "The results show that a relatively high number of participants do not feel they know enough about the non-traditional sources of capital available for family-owned businesses. To me, this suggests that there is a meaningful opportunity for both family businesses and alternative providers of capital, as the dialogue evolves and both sides find new ways to work together.”
Rebecca Gooch, director of research at Campden Wealth said it was interesting to see how carefully family businesses assessed capital providers against a broad variety of criteria.
“I was particularly struck by the importance of factors that go beyond the terms of contract, including the alignment of values and objectives as well as added strategic benefits such as skills or expertise,” Gooch said.
“It is clear that families are seeking long-term partnerships that will support the future growth of their businesses.”
Campden Research surveyed 73 respondents representing family businesses on average worth more than $400 million from January to February 2017. Five interviews were conducted with five family members, family business and family office executives.
For more information about Family Business: Financing for Growth 2017 visit Campden Research here.