A large minority of family businesses have, at some point in their business, made use of investments from high net worth individuals (HNWI) and other family business investment pools. According to our recent Family Business Global Survey, some 42% of family businesses have previously received direct investment from these sources.
Encouragingly, the overwhelming majority (92%) of those that have attracted HNWI funding say that their experiences of working with such individual funders was positive in comparison with their receipt of financing from other sources.
Among the advantages family businesses experienced from working with HNWIs was the expertise and long-term investment expectations of the latter.
One survey respondent from the UAE had this to say about HNWIs: “They are reliable and easily approachable compared to the other sources of finance; also we could add-on skills to our management through their expertise.” Echoing this point, a finance director from France said, “HNWIs not only provided us with capital, but also their international knowledge and strategic expertise.”
A chairman and family member from Italy had this to say on the subject: “HNWI individuals tend to stay loyal to their investment decisions and do not get restless if the business is going through a few rough times. They do not plan for early exits as they are patient and willingly give chances for the business to perform.”
Indeed, when considering possible investment from HNWIs, the family businesses responding to our survey rated longer investment timeframes and similar understanding of risk as the most important positive attributes on offer. These were followed by easier negotiations, lower reporting requirements, and a willingness to offer support and advice. A Brazil-based CEO said, “We feel the need to have more minds to work on different strategies and external investors could be the key to making effective business decisions.”
Across all respondents, the top reason family businesses offer for why they may be dissuaded from seeking investment from HNWIs and other family businesses is the potential for interference with management. However, the experience of many of those who have sought funding from these sources suggests that these fears may be unfounded. As a US executive said, “We seek investment from HNWIs because they tend not to interfere with the decisions of the company.”
When it comes to potential barriers to partnerships between HNWIs and family businesses there is a marked split in views, according to whether the respondent is a family member or not:
Collectively speaking, the respondents felt that the need to offer equity ranks as the second most important barrier to accessing this type of capital, although again non-family members are more concerned about this than family members.
These results suggest that while many family managers and owners may be open to the idea of bringing in HNWIs and other family businesses as equity investors, the difficulties in sourcing this type of capital and finding the right investors are holding them back.
The potential for good partnerships clearly exists – however, misconceptions around interference and reporting requirements, together with a lack of coordination in sourcing HNWI investment, appear to get in the way. This is where further education from family business associations and other economic bodies may help to bridge the gap.