Private equity play a large part in buying Chinese businesses
Melanie Ison, managing director, Nerine Trust Company in Hong Kong, also says that private equity ROI timelines can conflict with family business longevity wishes.
25 November 2016
David Rimmer, client relationships, Hawksford also says second generations show similar patterns investing in overseas real estate and global businesses.
What do families do when the second generation doesn’t want to take over the family business?
The founders of any business will have the passion to grow a business, whereas the next generation, perhaps schooled in modern technology, may not wish to be involved in their family’s less technological manufacturing business, for example. If the family wishes for the business to continue they may look to the external market for a suitably experienced professional board to manage and grow the business. This will allow the children to still benefit from the family legacy but without the responsibility of taking over the business.
Do children to wealthy families in China want to take over legacy businesses?
No, not really. Due to the growth of China’s infrastructure over the past thirty years, the first generation created domestic Chinese businesses to meet Chinese demand. This involved local family investment in local manufacturing, cement and steel, for example, industries that required a different technological input to that which dominates today. The second generation is growing their own wealth by investing in Chinese and global technology companies, educational funds and private equity. First and second generations show similar patterns when investing in overseas real estate and global businesses, but millennials seem to be taking advantage of the banking and finance options that are easily available to them today.
Is private equity useful for a Chinese family business?
Yes, the private equity sector can be an attractive option. The first challenge is to find out if investors will invest in the family business. If the family business is attractive, the investor will install a new board and provide funding during the first two years of investment to grow the business organically and through acquisition. The next challenge for the business is when the private equity house declares an exit strategy, traditionally following three to five years of investment. This could result in the need for a new partner or the family might wish to exit or reduce their shareholding at this stage if the business has grown significantly.
What are the usual motivations of the patriarch to sell?
It will be to either sell or reduce his single asset holding and diversify risk. This crossroad allows an owner to think about succession planning for the next generation and also consider philanthropic giving. The owner accumulates significant wealth during their lifetime, and often becomes more socially aware through the management of the family business. As a result they might wish to create two trust structures, one for future generations and a second structure for charitable purposes.
Tell us about any other issues facing Chinese family businesses.
The Chinese will have to comply with the “One Road One Belt” ethos which is Xi Jinping's, the Chinese Presidents, 2013 economic development strategy; otherwise it might become difficult to invest outside of the Chinese mainland.
A fall in China’s reserves earlier this year and Chinese foreign exchange restrictions are preventing the outflow of capital and this mandate appears to have been tightened recently.
If the family business is manufacturing, then unless it has a Hong Kong subsidiary to invest overseas, it will be difficult for Chinese family businesses to grow outside of China.