Nov 11, 2020

New generations, new business models for family-owned companies

Family-owned businesses must negotiate two major transitions in the 2020s: the succession of the first millennials to run these companies and the decisive shift towards an economy driven by digital innovation. As new generations take control in family businesses and invest in new business models to secure their legacy for future generations, they should also explore new sources of liquidity – including private credit.

Of course, family-owned businesses have a commanding position in today’s economy – especially in Asia. By definition, though, a multi-generational family business’s strengths tend to be in sectors that have been around for generations: real estate, banking, retail, manufacturing, agriculture and so on. These sectors are enduringly important to economies everywhere, but the new engines of value creation are in the technology sector. 

A strong base

The sheer scale of family-owned businesses mean they approach both transitions from a position of strength. They account for some 70% of global GDP and 60% of jobs. Two-thirds of the largest family-owned firms in the world are based in Asia, where they dominate public equity markets.[1] A recent Credit Suisse Research Institute study of 12 markets in Asia Pacific found that 540 family-owned companies account for 51% of total market capitalization in the region, or more than US$5.56 trillion.[2]

That’s just as well, because succession time is here for many of the largest family-owned firms. In Hong Kong, for example, the last of the four biggest real estate developers – worth more than US$100 billion between them – completed the handover to a new generation of the founding families in 2019.[3] And in mainland China, one in three chairmen at listed private sector companies is aged over 55, with 15% older than 60, according to the South China Morning Post.[4]

While new generations will frequently inherit stable businesses that can continue to generate strong returns, most will also want to reposition these businesses for the future. A PwC survey conducted last year found that 90% of “next generation” family business leaders believe that having a strategy ‘fit for the digital age’ requires a change in their business.[5]

Investing in new technologies and business models to drive this change will require significant amounts of capital – but the prize is enormous. A report published last year by Google, Temasek and Bain found that the digital economy in Southeast Asia alone had tripled in size over the previous four years to US$100 billion and forecast that it would triple again to $300 billion by 2025.[6] India’s government believes it can create a US$1 trillion digital economy by the same year.[7]

Liquidity for growth

Families that control significant stakes in listed companies often have a large proportion of their wealth locked up in these “crown jewels,” limiting the liquidity available to finance meaningful new investments. Raising capital through equity issuance dilutes existing shareholders. Bond issuance can be an onerous process and bank lending may require the kind of assets that are owned by the company, rather than the shareholders. However, private credit solutions offer a way to use the founding family’s core shareholdings to access liquidity for new investments without dissipating the family’s business legacy.  

EquitiesFirst’s unique financing model enables family businesses to collateralize loans with the stock they hold. That means concentrated, long-term shareholders can obtain funding at favourable rates – typically 3-4% – while retaining the upside of their equity holdings and their strategic investments. They can also feel secure in the knowledge that the stock they have provided as collateral will not be on-lent or used for short-selling. 

On that basis, the value created by previous generations allows this generation to access liquidity and make new investments for generations to come. For family businesses managing the transition to a new era, it could be the perfect solution. 

Disclaimer

The foregoing is intended solely for qualified, professional investors, as may be required by law, and is not intended for, and should not be used by, persons who do not meet the relevant requirements. Information provided herein is for information purposes only and does not constitute an offer to sell (or solicitation of an offer to purchase) the securities or investments referenced herein, or provide any particular advisory services (“Offer”). Any Offer shall only be made through the relevant offering or other documentation which sets forth its material terms and conditions. The foregoing does not provide or purport to provide investment advice and has been prepared by Equities First Holdings, LLC and its subsidiaries (together, “EquitiesFirst”) based on or derived from sources EquitiesFirst reasonably believes to be reliable.  EquitiesFirst has not independently examined or verified the information provided herein and no representation is made that it is accurate or complete. Opinions and information herein are subject to change without notice. Where figures refer to simulated past performance, that past performance is not a reliable indicator of future performance.


[1] www.accenture.com/_acnmedia/thought-leadership-assets/pdf/accenture-family-businesses-in-asia-deepening-the-roots-of-trust.pdf

[2] www.theasset.com/capital-markets/41512/family-owned-companies-outperform-amid-covid-19

[3] www.chinadailyhk.com/articles/102/20/50/1559137173875.html

[4] www.scmp.com/business/companies/article/2180732/china-faces-tidal-wave-exits-ageing-tycoons-their-succession

[5] www.pwc.com/gx/en/services/family-business/nextgen-survey.html

[6] www.thinkwithgoogle.com/intl/en-apac/consumer-insights/consumer-trends/e-conomy-sea-2019-swipe-up-and-to-the-right-southeast-asias-100-billion-internet-economy/

[7] www.theweek.in/news/biz-tech/2019/05/31/india-digital-economy-seen-at-1-trillion-by-2025-official.html