Global accounting firm KPMG is finding success facilitating a new business niche: Help family businesses in need of financing find the High Net Worth (HNW) individuals who have the time and money to help.
As it is, family businesses create more than 70% of global gross domestic product. In the wake of the Great Recession, however, banks have been reducing the lending they do to small businesses.
This funding gap is a wide one. A recent KPMG survey found that 58% of family businesses are seeking external financing to fund business plans. Beverly Johnson, a KPMG partner in the enterprise and national leader, family business practice, suggests an underutilized route option is to involve high-net-worth individuals (HNWs) in family businesses.
The match between HNWs and family business makes sense. It is estimated that there are up to 14 million individuals around the world considered high net worth. These HNWs control an astounding $53 trillion in wealth. Helping HNWs find family businesses is a funding/investment channel that has been underutilized says Johnson. “We have a lot of family businesses as clients. Many have a need for financing. This is a match that makes sense” she says.
According to Johnson, there is a natural alignment between the two groups. “The HNWs have time. They are often retired. Typically, they sold a business, but they want something to do. They have some money to invest. Family firms need someone to invest. Why not bring the HNW in?” she says. According to the KPMG study these HNWs see long-term capital appreciation (37%) as their top concern in terms of investment. Family businesses suggest a “long-term orientation towards investment returns” is a key concern.
KPMG will set up in-person meetings, which allows trust to develop. Eventually a private deal can be made. The HNW invests in the family firm, becomes a part of the business, if not a friend to the family. “Most HNWs want structure, rigour and security. What we see with private deals is that the two parties get to know each other through in-person meetings…that can allow a level of trust to develop. Eventually, these meetings can turn into an investment.”
The HNW finds something to do. Business is done with new friends. The returns can often be better than what is found today in public capital markets. “The HNWs want a reasonable return. They will be looking for something higher than their stock and bond returns,” says Johnson.
That is, the deals are mutually beneficial in many ways.
Other findings from the survey:
- 44% of high-net-worth individuals (HNWIs) have previously invested in a family business and the vast majority (95%) say that it has been a positive experience in comparison to their other investments.
- More than three-quarters of survey respondents (76%) say that the family holds a majority stake in the business.
- 60% of HNWIs are looking for investments with reasonable risks and reasonable returns, and are focused on long-term capital appreciation. Both of these traits are well matched by investment in family businesses.