Family businesses need funding from HNIs, says study

The findings are based on responses from 125 high net-worth individuals and 125 family businesses based across 29 countries

A new report on family businesses by global professional services firm KPMG has suggested that, while bank funding remains the main source of finance for family businesses in India, these businesses need to tap other modes of funding, especially high net-worth individuals (HNIs), and overcome the perception that HNI investors interfere in business.

There are nearly 14 million HNIs around the world with some $53 trillion of wealth. In India, the reliance on bank financing is probably due to the fact only a fifth of the respondents have obtained funding from HNIs, the report said, adding that those who have done so rated their experience as generally positive. More awareness-building on the potential benefits of these partnerships is needed to link these two groups, it said.

The findings are based on responses from 125 HNIs and 125 family businesses based across 29 countries. From India, 10 family businesses and 10 HNIs were interviewed. The sample included both SMEs and large family businesses, with 'family business' being defined as firms in which multiple members of the same family are involved as major owners or managers.

They were split into three main groups: those with turnover of $20-50 million; those with $50-200 million; and those with more than $200 million globally. The family business interviewees occupy senior positions such as chief executive officer, chief operating officer, chief financial officer and head of strategy. Of these, 42 per cent were family members, while 58 per cent were non-family executives.

The survey found that in India, family businesses continue to see banks as their "chief" source of funding. Of the 10 respondents interviewed in India, nine were upbeat about bank financing.

There was one concern, however. An Indian CEO said about bank loans: "Obtaining capital from the banks on an overall basis has been positive, but there were times when we've had obstacles in presenting our financial data and other documents, leading to longer time in procuring the amount, affecting performance."

With more than five million family businesses, India offers a significant opportunity for investors, the report said, adding that HNIs seem keen to partner with businesses to help shape their future.

However, one of the main obstacles appears to be the perceived level of executive involvement from HNI investors. Eight out of 10 people interviewed said HNIs would interfere with the management. But when HNIs were asked if they would regularly express their views to management, a little under half of them said they would not.

In India, the future for families and HNIs working together looks bright. Eight out of 10 HNIs interviewed said they were interested in investing directly in family businesses. Equally significantly, HNIs "have a similar understanding of risks. The fluctuations in financial performance do not really affect their decisions or investments. This makes them a reliable source of capital," the survey said.

The report also noted that, as substantial lenders, banks in India still require mortgages and personal guarantees and have not moved sufficiently towards business-model-based and cash-flow-based funding. Further, interest rates continue to be high, ranging from 12 to 18 per cent and making it difficult for family businesses to service loans comfortably. Accordingly, there is greater scope for raising capital through crowd funding, angel and venture funding and HNI funding for family businesses.

"Promoters have to overcome the perception about HNI Investor interference in business and be open to constructive challenge and better transparency. Family business will benefit from HNI investors who are more amenable to temporary blips in financial performance and open to medium to long term support," the report said.