Over the last decade, there has been a shift in the way family-owned businesses are financed from traditional means to attracting Private Equity (PE) investments.
The relationship between family-owned businesses (FB) and attracting PE investments can be liken to a two-way chain. An FB can invite a PE as a partner, or a PE invites an FB as a partner.
A recent survey by global consulting and auditing firm, PriceWaterhousecoopers (PwC), on family businesses showed that FB is fast appreciating the benefit from PE firms’ expertise in the areas of governance, financial management, strategic planning, and shoring up companies for sustained success.
According to the survey, 39 percent of family businesses are considering PE investments within the next 1-2 years.
This change in ideology is due to an increased focus on long-term value generation, succession and professionalism at FB, as well as the positive brand perception that an announcement of a PE investment (and re-investment) gives a business.
According to the survey, the most important factors considered when PE’s are looking into family businesses include:
• Identification of core capabilities, and developing them, to create a differentiated position in the market.
• Strong corporate governance that ensures absolute transparency in business operations and separates ownership from management of the business.
• Historical and current financial records that conform to International Financial Reporting Standards (IFRS)
• Compliance with all applicable local and national tax regulations PE firms appreciate the strategic value of good corporate governance and are well positioned to work with FB in strategy implementation such as independent review of existing strategies. This would ensure the FB is better equipped to identify risks and make smart, goal-oriented decisions within their marketplace.
In terms of short-term aspirations, profitability is crucial as 93 percent of the correspondents cited it as a top goal of Nigerian family businesses. This followed with the maintenance of best talent (via recruitment and retention) and contributing to the community.
Globally, family business leaders reported robust health, with levels of growth at their highest level since 2007. Revenues are expected to continue growing for the vast majority of businesses as 84 percent showed with 16 percent of them saying it will be “quick” and “aggressive”.
Regionally, businesses in the Middle East and Africa were the most optimistic, with 28 percent expecting aggressive growth.
They are followed by those in Asia Pacific (24 percent), Eastern Europe (17 percent), North America (16 percent), Central/South America (12 percent) and Western Europe (11 percent).
The survey also showed that 63 percent of Nigerian family businesses (FBs) would consider bringing in private equity as a source of funding over the next 1 to 2 years. This is higher than the global average of 39 percent. 40 percent of FBs also consider private equity as the most attractive source of funding for their business. Currently, private equity (PE) is the most interesting form of investment for foreign investors, as a result of illiquidity in the capital markets.
Research from PwC in 2018 projected that traditional Assets under Management (AuM) in 12 markets across Africa would rise to around $1.1 trillion by 2020 from a 2008 total of $293 billion. This represents a compound annual growth rate (CAGR) of nearly 9.6 percent.
According to data from the Africa Private Equity and Venture Capital Association (AVCA), Nigeria recorded a total of 112 deals amounting to $7.8 billion over a five-year period. These deals, which occurred between 2012 and 2017 accounted for 32 percent of all private equity investment deals in Africa.
This amount was more than the combined equity investments to South Africa (US$2.8 billion) and Kenya (US$1.17 billion). Currently, 80 percent of FBs in Nigeria use internally generated funds for business activities, while 47 percent rely on bank lending/credit lines, which is significantly lower than the global average of 81 percent, the report says.
The report further showed that family-owned business are optimistic on the outlook of the business landscape in Nigeria, however, they see growth being limited by a number of challenges.
Respondents in the survey cited economic environment, corruption amongst others as key challenges over the next two years. Corruption is associated with lower investment, higher prices, as well as barriers to entry for businesses.
PwC estimates that corruption in Nigeria could cost up to 37 percent of GDP by 2030 if the trend continues. This cost is equated to around $1,000 per person in 2014 and nearly $2,000 per person by 2030. Regulation was another issue cited by more than half of FBs.
In addition to the economy, corruption and regulation, other challenges identified by family businesses include: accessing the right skills & capabilities, domestic competition and access to financing, among others.
Nigeria moved up 24 places in the World Bank’s Ease of Doing Business (EoDB) 2018 index to the 145th position from 169th. Despite this record improvement, the business environment remains challenging in the absence of structural reforms. The country dropped one spot on the 2019 EoDB index.
Tax & regulatory challenges continue to impact the growth of businesses in Nigeria. One of such regulatory challenges cited by family businesses (FBs) in the Nigerian Family Business Survey was tax and regulatory compliance obligations. Some issues cited include multiplicity of taxes, incoherent fiscal policies, cumbersome and inefficient tax administration system, high level of tax evasion, ambiguities in the tax laws and lack of transparency on the utilisation of tax revenues for social services and infrastructural development. These challenges have contributed significantly to the low tax compliance level recorded for businesses and individuals in the country.
In addition, FBs are usually exposed to potential tax leakages such as probate tax, inheritance tax, capital gains tax and stamp duties at exit or at the point when inheritances are transferred to the next generation. Hence, FBs need to implement structuring considerations that also take account of compliance with the relevant tax laws.
MICHAEL ANI
