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Yuelin Yang on private equity and family joint ventures

Yuelin Yang is managing director (Strategic Projects) and general counsel of Singapore-based shipping and industrial group IMC Corp (click here to read more). He has worked on many private equity deals and joint ventures with other family firms and corporates for the family firm since joining in 1995 and offers some advice for other family businesses.

If you're embarking on a joint venture, it's important to choose a partner that suits you and your particular project or business. When choosing a partner, Yang believes the culture of the business plays an integral part in making the right choice. He says it is crucial to weigh up the pros and cons of initiating a joint venture with another family business, private equity firm or a publicly-listed corporation.

"Different companies obviously have their own individual cultures and ways of operating but, broadly speaking, you can expect certain types of companies to behave in a similar manner," says Yang.

In the simplest terms, he says that family businesses are often able to make decisions much faster than private equity or listed companies.

"Corporations, in general, are more likely to operate like a bureaucracy, rather than either private equity or a family business. This may seem a simple thing to say, but it has dramatic affects on potential partnerships and you need to be aware of this when entering into a joint venture."

Similarly, whereas family businesses, by their very nature, think in long-term horizons when planning for the future, in Yang's experience there are substantial differences in the way that both private equity and corporations will be judging the performance of a joint venture. Private equity, says Yang, will very rarely be looking outside of a three to seven year time span and corporations are likely to be much more focused on short-term performance.

"This can have far reaching continuity ramifications for potential joint ventures," says Yang. "While family businesses and private equity are more likely to be comfortable taking a longer term view, listed companies that you partner with will be more concerned with quarter to quarter developments.

"Indeed, expectations on returns can be similarly different, depending on the type of organisation you choose to partner with," he continues. "If you choose to enter into a joint venture with another family business, the likelihood will be that they will have similar expectations on returns. If returns are relatively lower, this will not be so much of a problem as long as they are steady. Private equity partners usually need returns greater than 20%. However, listed partners, by nature, are creating value for their shareholders by earning a return on invested capital above the cost of the capital. This means they will be looking for above weighted average cost of capital returns."

According to Yang, private equity is by far the most abundant source for capital injection into family firms: "Many private equity houses are very willing to inject funds into family businesses. They are attracted to the dependable nature of successful family businesses and their commitment to the company. In return, private equity can often contribute much-needed professionalism, governance, compensation structures to attract non-family managers, and financial know-how and discipline to a family business."

However, Yang warns that private equity houses are not the most likely partners for startup or greenfields projects. "Their risk appetite in these circumstances is quite low compared to other family businesses," he explains. "Even listed companies may serve as better partners if they can envision a strategic reason for investment into the joint venture."

Additionally, Yang says that choosing a private equity partner for a joint venture will not usually provide you with any operational support or extra capability: "You are more likely to be able to extend your operational capability by partnering with another family business or with a listed corporation."

Whatever the decision making process, Yang believes that more family businesses should examine the use of private equity for joint ventures and partnerships more thoroughly than they have traditionally.

"Private equity will not be right in all circumstances, but it can be an extremely useful option in such cases as a family firm undergoing generational transition where certain family members need to be bought out, growth capital is required and/or an objective party can help to align family members with advice that is backed up by ‘skin in the game’," he says.

Click here to read more about the IMC group and its use of external managers.

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