Interesting insight as access to Patient Capital gives Australian Family Businesses the backing to go global.
Family businesses struggle to find sources of external financing. It’s a common problem faced by thousands of family businesses around the world: the need for capital to fund expansion, new lines of business, or to facilitate liquidity events during critical transitions. This lack of financing has consequences: without adequate capital, businesses stagnate and are unable to diversify or take advantage of new opportunities that arise.
Why the problem? In general, Australian family businesses are shut out by traditional sources of capital like banks, venture capitalists, and private equity investors. There is often a mismatch in goals, culture, and expectations that make it difficult for family businesses to get the capital they need at terms they can accept. Private equity investors usually want equity stakes and quick turnarounds that don’t mesh well with the conservative financial structure of many family firms.
In response, increasing numbers of family businesses are breaking with the short time horizons and different goals of traditional lenders in favour of high-net-worth investors with similar values – so-called ‘patient investors.’
A recent global survey of family businesses conducted by KPMG found that 58 per cent of respondents were currently looking for external financing. On the other side of the transaction, 44 per cent of high net worth individuals – defined as those with at least $US 10 million in investible assets – had already invested in a family business. Even better, 95 per cent of those investors had ‘positive experiences,’ which we hope to mean that they are likely to engage in further investments.
Patient capital investing is poised for growth in Australia for a number of reasons: huge demographic shifts as the baby boom generation hands over control to their successors, stagnant interest rates, and impatience with the short-sightedness of traditional lenders and investors. There’s also a crowd effect at play; multi-generational investors and the family offices that serve them are seeking alternative long-term investments and partnerships with other like-minded families who share their values. As generational and financial transitions occur, family businesses will need new ways to diversify their capital outside the business and will naturally seek to invest with partners they can trust.
There are many benefits of patient capital to consider: support from like-minded partners who can help your firm expand into new markets, a willingness to consider longer time horizons and the long-term health of the business, and a shared family business philosophy. Most patient capital deals are also flexible and don’t require ownership stakes, which leave family leaders able to retain control over business operations.
As with any source of financing, there are potential drawbacks to consider. The wrong terms or the wrong partner can be costly. It can also be challenging to navigate cultural differences when dealing with foreign investors and seemingly small differences in communication style and values can turn into big problems at the negotiating table. Furthermore, due diligence on both sides is extremely important given the risks involved in international transactions and the intimate nature of the patient investor relationship.
We believe that it’s well worth bringing in an outside consultant for the deal-making expertise and risk mitigation perspective alone. The benefits of working with family business consultants is that we have the connections to broker deals and the experience to guide clients through the process while looking out for red flags and cultural mismatches.
FINH as the Asia-Pacific partner of de Visscher & Co, have facilitated financing for multiple Australian family businesses, who have used our global network of patient capital investors to tap into new markets, overcome liquidity issues, and jump-start the next generation of growth in their firms.
In our experience, family businesses who are interested in exploring patient capital opportunities, should consider the following:
1. Get your house in order first.
Make sure that you have professionalised your business and have governance systems in place before approaching outside investors. Sort out any family discord and make sure that your key stakeholders are on-board with your goals.
2. Do your due diligence
Find an investment partner that shares your goals, philosophy, and culture.
3. Work with appropriate professionals
Seek advisers who can source deals and help you avoid errors and disappointments along the way.
4. Understand the value of your business and the opportunity you are offering
Don’t be blindsided by weaknesses in your business that could damage your ability to seek external capital.