My article this month outlines a different type of capital that is specifically available for family businesses. Patient capital is a growing global trend with “families investing in families”. It has many benefits including avoiding the traditional limitations imposed by a capital infusion. David Harland – Family Business Advisor
Patient capital is one of the key competitive advantages of a family business. It is the equity provided by business owners who are willing to balance the current return on their investment against long-term value and the continuation of a family business tradition. In a family business context, patient capital has a more extensive meaning: it incorporates all the capital and sweat equity poured into a business by generations of family owners and represents much more than the material value of the equity.
Patient capital also provides family businesses with the tangible financial benefit of a stable capital structure that allows them to weather short-term financial cycles. It’s important not to underestimate the importance of intangible patient capital; family harmony, and commitment to values have very tangible effects on shareholder value and give family businesses a competitive advantage that on-family firms simply cannot match.
Family businesses face major challenges that require liquidity like business transitions, ownership transitions, and generational transitions. Each of these changes requires significant capital investment. A developing business and family experiences multiple liquidity and capital challenges; growth requires capital but a growing shareholder base requires liquidity, which can place burdensome demands on a business’ capital and cash flow.
It can be challenging for family businesses to acquire necessary capital from outside the business. Traditional lenders, such as banks lack the necessary understanding of family businesses and are often reluctant to extend loans. Private equity or venture capitalists typically demand significant equity in a business and are focused on high short-term returns that run counter to the long-term view held by most family businesses.
The solution? Access to the patient capital of like-minded, partnership-oriented investors who are committed to the preservation of the family business tradition. On the other side of the equation, proper management of family wealth requires diversification outside the family business and the patient capital system allows wealth managers to partner with long-term, like-minded, and trustworthy equity partners.
Families’ partnering with families is not a new concept, but there are demographic reasons for this growing trend. The “baby boom” generational transition will result in the handover of over $3 trillion USD over the next decade. There is also a growing disenchantment with the private equity model; high fees and short-term outlook leave sophisticated multigenerational family businesses seeking partnerships with other like-minded businesses.
There are tangible long-term benefits to the partnership route. Family businesses get partners who are patient, culturally compatible, and willing to take a long-term view towards their investment. Arrangements are typically flexible and have no control requirements, meaning that families retain control over business operations. This isn’t to say that the patient capital approach doesn’t come with its own set of obstacles. Common challenges include the difficulties involved with including outsiders in family governance, cultural fit, valuation terms, and business compatibility. However, participating in a successful partnership can address liquidity issues, tap into the experience of other family business leaders, and improve the chances of success in overcoming key business challenges.
We’ve been proponents of the patient capital model for family businesses for some time because we believe that it offers some of the best options for capitalization and growth for family businesses. We have recently partnered with De Visscher and Co. to bring a global network of patient capital providers and seekers to Australia.
Call FINH to discuss how your business can access Patient Capital on 07 3229 7333