Academic Insight: The Investment Profile of HNWI: Angels or Wolves in Sheep Skins?

The Investment Profile of HNWI: Angels or Wolves?

The assumption of KPMG Global Family Business Survey is that natural affinities are drawing family businesses closer and closer to high net worth individuals when it comes to raising the funds for growth. This is premised on clearly established limitations of other sources of growth capital. But are HNWIs really angel investors in the traditional interpretation or rationale investors with a better understanding of family businesses as investment opportunities or a passion for the business?

Stephan Schmidheiny Professor of Entrepreneurship and Finance

KPMG Switzerland

Contact

Related content

Meeting

The working assumption of KPMG Global Family Business Survey is that natural affinities are drawing, or should draw family businesses closer and closer to high net worth individuals when it comes to raising the funds needed for their growth. This is premised on clearly established limitations of other sources of growth capital, in particular inconsistent investment horizons, unrealistic risk/return expectations or frustrating control tendencies. But are HNWIs really angel investors in the traditional interpretation[1] or rationale investors with a better understanding of family businesses as investment opportunities or a passion for the business? If so, what are they really looking for in family businesses? How can one such firm portray itself in the most desirable light for HNWI capital?

Not Philanthropy: what are HNWI really looking for in FB investments?

A first interesting finding was that 44% of the HNWI respondents had previously invested in family businesses, and hence were talking about the experience with firsthand experience. Among those, quite a large percentage had actually invested more than once in family businesses. Even more interesting is the fact that 95% of them reported a very positive or generally positive experience overall. Finally, a majority of HNWI respondents (62%) showed at least some interest in investing in FB.

Business First…

The factor most often mentioned (by 44% of respondents) as most important in the decision to invest in a FB is the profitability of the investee. In other words, the investment decision is primarily a rational one to start with: HNWI are interested in solid, profitable companies. This is reinforced by the factors rated 2nd to 4th in the survey, namely the potential for organic growth, strong cash flows and a high level of liquidity. The image that emerges of the dream investee FB is not very different of what would be expected from any respectable, hardcore investor. This is not an emotional decision but a well thought of rational investment. In other words, trying to play the FB card in the face of blatantly deficient fundamentals will only act as cast on a wooden leg.

As seasoned investors, HNWI also value highly board seats, the potential to acquire majority stakes in the target company and a solid board staffed with qualified independent board members. Again, nothing but solid, rational investors, not cutting any corners on their investment decision making. So, why the particular interest in Family Businesses then?

… but with an Emotional Premium

The attraction is thus primarily “physical” in the sense of traditional financial criteria. But beyond the basics, which would be expected of any investment, FBs seem to also show up more often than not on HNWI radar screens because of more subtle “emotional” dimensions, most notably their long-term horizon in management, a better congruence in the definition of risk, shared values and cultures that facilitate negotiations and re-negotiations, a clear focus on capital preservation above and beyond the quest for performance, and the possibility of more personal relationships. In other words, the bride is well endowed… and not to spoil it is also quite pleasant to look at!

Angels or Wolves?

The picture that emerges from the Survey is a qualified “neither”. As investors, HNWI seem to operate as shrewd, experienced operators, which they often are. Their fortunes were created because of their historical commitment to sound investment principles. Corners are not cut: those are professional financial investors in search of returns and growth prospects, definitely not philanthropists. FB looking for “cheap” or “dumb” money will be in for a rude awakening: it is clearly neither. Those investors expect returns and they expect professional governance practices… with a twist. And that twist may make all the difference, and the appeal of HNWI to FBs. As indicated above, these investors are better able than any other to appreciate the values and cultures inherent to family businesses. Most of them have roots in family businesses, current or past. As such, they can recognize and appreciate the importance of these factors in building sustainability. Our times are characterized by an elevated level of uncertainty, and in those circumstances the long-term perspective and the protection of capital are things that gain even more relevance in their highs.

So, no, this is not love at first sight with rationality thrown at the windmills. HNWIs consideration of FB as investments is based primarily on well ordained, rational financial priorities. The familiness component only comes as the icing on the (wedding) cake…

So What?

The bottomline for FBs is that HNWI have to be approached first and foremost as knowledgeable financial investors, with FB values and culture providing the extra incentive to move the discussions forward. HNWI seem to be favorably inclined towards FBs, but that is based primarily on the financial success of such prior investments, not some vague attraction for the emotionally loaded FB environment. The pre-assumption is a favorable one… but it will the FB responsibility to back this up with solid, rational arguments!

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform