Over a 20-plus-year career and as national head of Private Enterprise for KPMG China, Karmen Yeung has gained extensive knowledge of the working of family businesses in the region.
An advisor to ultra-high-net-worth families and private companies on tax, ownership and operational structure, she’s also very active in advising governments on tax policy to promote a better investment environment in the Greater Bay Area.
Here, Karmen talks about how families are dealing with the succession question and why private equity funds are getting increased portfolio attention…
How do you define a successful family business?
A successful family business should have a very clear strategy that can be executed by the management team. Due to the nature of family ownership, the strategy usually ties in very well with the family's values.
Most families are directed according to the shareholders' values with senior executives from the family often leading the business. As their decision making is quite centralised, it can become more important for the family to share their values and set clear strategies with professional executive role hires, so they can get more effective support. For some of the families who are in transition to the next generation, it will be important for them to remain open minded to the longer-term development of Next Gen family talent and involve them in the setting of strategy.
We often ask clients if they have a long-term strategy to engage talent who share the same values as the family and who also see the success of the family business as their own success.
In our culture, we also see quite a lot of successors coming up from the family. Oftentimes, the succession plan is quite subtle and informal. However, to build a sustainable family business (or business family), it becomes more important to have communication on succession planning - which includes how to select the successor within a family and what that successor needs to develop so they can properly represent the family to take up the driving seat of the family business.
What are some of the worries affecting family businesses in China?
A lot of families are having to diversify in a post- COVID world. They’re having to learn how to be agile and face fast-moving change. For example, there’s an increasing need to embrace investment in technology and cyber security.
Another trend focusses on succession. The private sector in China has really only developed over the past 20 to 30 years and we are now riding the wave of transition to the next generation. A lot of Chinese family businesses are exploring this transition for the first time and they have no experience of succession planning. As a result, many families are working with advisors or learning from the experiences of those who have already successfully handled succession from overseas countries.
How do you guide that process for a successful transition from first to the second generation?
Being able to talk openly and transparently about the process within the family is important. Some of the families, because of the culture, may not be as ready to talk about it and that really needs to be addressed.
Because of the one-child policy in China, however, the process can be a lot simpler. The potential successor just has to say yes or no to the question ‘Do they want to take over the running of the family business?’
Although, if the next generation is not ready to take up the business, then what is the plan? I think this has been quite challenging for many families. A client I recently spoke with said his child is not interested in getting involved in the family business. Now, the only choice left to them is to explore a buyer to come in and take over the business.
For those who have a successor lined up, there are increasingly more educational programmes designed specifically for Next-Gen transitions, which can help to ensure the process is a smooth and successful one.
The 2022 Campden Wealth Asia-Pacific Family Office Report found that private equity funds, developing market equities and venture capital have all seen a rise in family office portfolio allocation, what’s the reason for this focus?
I think it's due to the boom of the very innovative and high-tech entrepreneurial sector in China. From an investor point of view, many of those coming up in this sector are Next Gens. They may not be particularly interested in the traditional family business and they want to try something new - like impact investment or private equity and venture capital (PEVC).
Part of Next Gens’ daily role is to help their family look for new and interesting investments. Often, the founder will set aside some money for the Next Gen and ask them to look around for potential businesses which can synergise with the traditional business. The founders see it as part of the Next Gen training - seeing how robust and investment savvy they are - while allowing those Next Gens to branch out with something completely new.