Family businesses and private equity: a story of reciprocated affection

10/01/19

Although unimaginable not so long ago, more and more family businesses are now willing to accept private equity. What has changed? And are such partnerships a good idea?

By Niels Govers, family businesses adviser at PwC, and Remco van Daal, PE Industry Leader (PwC NL)

New relationships are always exciting. Family businesses are increasingly likely to form ‘a couple’ with private equity providers. Although family businesses have traditionally preferred to work with their own assets wherever possible, we have noticed that more and more of our customers are now interested in other types of financing. Recent PwC research showed that over a third of all family businesses do not exclude the idea of private equity, a lot of changes have actually taken place on both sides.

Transfer no longer straight forward

Compared to post-war generations, things are no longer straight forward when it comes to transferring family businesses to descendants. Today’s world differs from the one where baby-boomers built up their businesses. Doing business has become more complex and more transparent, and markets are subject to a great deal of disruption. We speak to many business owners, who ask themselves whether they want to place such responsibility on the shoulders of their children – and whether their children will actually be willing to accept this burden.

Big ambitions

Similarly, we also see many people in their thirties and forties pursuing their ambitions away from their family businesses. However, some also have major ambitions for their businesses, and prefer to collaborate with an experienced partner. This means they are willing to sell a stake in the business. And private equity providers have become increasingly willing to serve as a strategic partner instead of a distant financier.

Yields must be based on strategic value creation

Very little has remained the same in the world of private equity. Funding for investment is plentiful, which means investment prices are increasing and another approach must be adopted to obtain yields. That is why private equity firms are increasingly focussing on strategically and operationally improving the companies in which they invest. And these are the specific areas that offer many opportunities to family businesses. Such companies are characterised by solid entrepreneurial qualities and a long-term focus. Quite a few of them have been able to claim fantastic positions in the market, but need more to achieve further growth.

Fresh blood and a fresh perspective

A family business that occupies a leading position in the Netherlands, but is now taking successful steps abroad. A company in a niche market, which uses a broader product portfolio to enter another sector. These are just two examples from our day-to-day experience, where private equity providers use money, a larger network and expertise to help create extra value. Fresh blood and a fresh perspective also make it possible to explore new avenues.

Control and core values

Private equity firms have always been on the look-out for solid companies with potential for growth. We have noticed that family businesses are still hesitant because they fear losing control and believe their core values could be eroded. So these are the exact topics that must be discussed when looking for a partner. And not just: ‘what kind of professionalisation and growth can we realise together?’ But also: ‘which private equity firm has demonstrated its ability to contribute to our core values?’. And ‘which governance principles will allow us to create the right balance between entrepreneurship and control’? A wide range of feasible arrangements can be made when deciding how such a joint undertaking will operate in practice.

From operated to controlled

Can the new romance between family businesses and private equity providers be seen as a positive evolution? Yes, we believe so. It can benefit both parties. In many cases, companies will transform from family-operated businesses to family-controlled businesses, where value creation will also benefit future generations.