Private equity play a large part in buying Chinese businesses

Date: 24 Nov 2016

Bumblebee Design

Melanie Ison, managing director, Nerine Trust Company in Hong Kong, also says that private equity ROI timelines can conflict with family business longevity wishes

What do families do when the second gen’ don’t want to take over the family business?
Where it is identified early enough, the patriarch or matriarch can consider their options more closely, such as bring in external people to run the company, selling or perhaps gradually moving ownership to staff. Lack of passion, burden of responsibility or not having the same visions as their parents can count towards some of the problems facing family businesses moving to the next generation. Equally, a reluctance of a patriarch or matriarch to step away from the business soon enough causes problems.
Do the younger generation want to take over their family businesses? 
I suspect not in many cases.  Perhaps the industry their family is involved in isn’t ‘sexy’ enough or the visions of the second generation are not in tune with the vision of their parents. One good example is Kuok Meng Ru, the son of a palm-oil business billionaire, who chose his passion for music over the agribusiness, with help from his father.
Tell us about your clients.
In one case we have a client who has an operating business who is reviewing his succession plan. He does not, at this stage, expect his children to take over the business. So he will either sell the business or hand it over to employees in the coming years, whilst retaining some stake to reap the rewards of the business continuing to do well. The client will need to look at his governance within his business, bring in appropriate outsiders and promote or identify people in house that can assist with this vision. In a similar case, it is clear to the patriarch and matriarch that their children are not interested in getting involved in the family business and all the children live in a different country to that of their parents. The business is very successful and the owners are keen to remain involved for as long as possible whilst handing over the day to day running to the management committee.  They are also using profits from the company to diversify which will allow them to pass on financial assets to their successors. 
Can an existing management team survive a next gen’ owner?
Perhaps not, change often creates conflict. This could stem from years of tension with certain employees or once the second generation are in, they see it as a path to make their mark and show the staff very firmly who is boss. Another reason is that lineage often dictates the successors and the second gen’ can have a sense of entitlement and may be inclined to weed out people who do not see eye to eye with them. 
Is the lack of succession planning in Chinese businesses fuelling private equity?
If there is a lack of a succession plan and a family make the decision to exit their business, private equity will play a large part. The key with these types of partners is to find one that understands and respects the values and priorities of the business.  Generally, there will be a conflict in expected time horizons because a private equity partner works on shorter time horizons to realise their investment. 
What other issues do Chinese family businesses face today?
Confidentiality is an issue.  Chinese families tend to deal with everything within the family unit rather than seeking a third party to assist and help in the transition of a business from one generation to the next. Out of respect, the next gen’ don’t question their elders on the goings on of the business and likewise, some parents will not share everything they should. 

This article was published in Citywealth Weekly, our mid-week roundup of topical news and exclusive expert comments. Sign up here to start receiving the Weekly in your inbox. 

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