India’s family businesses conservative in their use of HNWIs

India’s family businesses...

While many banks around the world are retrenching, it would appear that in India, at least, family businesses still see them as their chief source of funding. Indeed, nine out of 10 Indian respondents in this year’s Global Family Business Survey were upbeat about bank financing.

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“Obtaining capital from the banks has been positive,” said the COO of one Mumbai-based engineering firm. The CFO of a multinational conglomerate agreed: “Bank debts are the main sources of finance; we have maintained a strong financial status and our credibility is high, so we get faster turnarounds on applications.”

As substantial lenders, banks in India still maintain an approach of largely mortgage and personal guarantees and have not moved sufficiently towards business model and cash flow-based funding.

Further interest rates continue to be high, ranging from 12% to 18% and making it difficult for family businesses to service interest comfortably. Accordingly, there is greater participation and investments by way of crowd funding, angel and venture funding and high-net-worth individual funding for family businesses.

Low reliance on HNWIs

This reliance on bank financing probably accounts for the fact that only a fifth of respondents have obtained financing from HNWIs – however, those that have done so rated their experiences as generally positive.

For many family firms, the main benefit of HNWI investment comes through shared experience. As the CFO of a New Delhi motorcycle manufacturer said, “HNWIs have a similar understanding of risks. The fluctuations in the financial performance do not really affect their decisions or investments. This makes them a reliable source of capital.”

HNWI and family business perceptions differ

The main obstacle appears to be the perceived level of executive involvement from HNWI investors – eight out of 10 said HNWIs would interfere with management. “There is a possibility of interference in the decisions and this often leads to disputes,” said one CFO. “This is the main factor as to why we would avoid extensive use of capital from HNWIs.”

However, from the HNWI point of view, this ‘interference’ may not always come to pass. When asked if they would regularly express their views to management, a little under half said they would not.

While only two respondents stated that they had previously invested in family businesses, both were encouraged by their experiences. “Investments are made in the established businesses, so the results are highly positive,” said one investor. A second echoed this opinion, saying: “Yields from the investments were high and met our expectations.”

In India, the future for families and HNWIs working together looks bright – eight out of 10 HNWIs said they were interested in investing directly in family businesses.

“India offers a significant opportunity for investment with over 5 million family businesses poised for growth in an economy set for reforms and investment,” says Sanjay Aggarwal, Head of Family Business for KPMG in India. “HNWIs in India are keen to work [with] businesses in shaping their future and opening their network and connects to help business plans to materialise. I believe the next decade will be very exciting.”

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