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Guido Corbetta Chair AIdAF -EY of Strategic Management in Family Business

Accessing growth capital: exploring the best alternatives for family business entrepreneurs. Guido Corbetta Chair AIdAF -EY of Strategic Management in Family Business In memory of Alberto Falck Helsinki, 19 th September 2014. How do family- owned companies

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Guido Corbetta Chair AIdAF -EY of Strategic Management in Family Business

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  1. Accessinggrowth capital: exploring the best alternatives for family business entrepreneurs Guido Corbetta Chair AIdAF-EY of Strategic Management in Family Business In memory of Alberto Falck Helsinki, 19th September 2014

  2. How do family-owned companies usually fund the growth of the business? Source: EY, «The Vital Entrepreneur. High impact atits best», 2013

  3. Long termfinancialresources for long terminvestments Investments time horizon Fundingsources • «Internal» • reinvestedearnings • sell of non core assets • equity from the owning family long term (innovation, M&A, internationalization, diversification) • «External» • IPO (minority) • PE (minority) • Bonds To be replacedafter 4-6 years

  4. Traditionalinternal long termfinancialresourceshave some limits • Reinvestedearnings • Profitabilityinsufficient to self-financeboth short term and long terminvestments • Equity from the family • Consistency with family’scommittment and decisions of capital allocation and riskdiversification • Sell of non core assets • Lack or insufficientvalue of non core assets

  5. If family businesses want to collectexternal long termresourcestheyneed …. • Ambitious and sustainablestrategicplan • Effective corporate governance • Reliable and motivated management team (trackrecord) • Transparency and communication • Professional financial planning

  6. Why family businesses are reluctant to IPO or PE? (1/4) Economic Asset: Financial Return Share Value Share Holder Value Share Holders’ ValueS Emotional Asset: Psychological Return Source: Lansberg-Gersick

  7. Why family businesses are reluctant to IPO or PE? (2/4) «Ifyou talk to PE or people in listed companies, it’saboutreturn on equity, top line growth and keyratios. And the easiest way to achievethosethingsis to load up with debt and makeacquisitions. A long-termist family business don’t do that. I thinkthere’sreally a fundamentalwatershedbetween the philosophies» (Philip Aminoff, PresidentEmeritus of European Family Business Group and Chairman of Electrosonic Group, a Finnish family business -Source: EY 2013)

  8. Why family businesses are reluctant to IPO or PE? (3/4) «Wedon’tthink in quarters, wethink in generations» (Mario Preve, Chairman of Riso Gallo, an Italianrice producer since 1845 - Source: EY 2013) «We look atourinvestments over decadesratherthan in quarters» (William P. Lauder, Executive Chairman of EstéeLauder Companies Inc. – Source: EgonZehnder International, The Focus vol. XV/1, 2011)

  9. Why family businesses are reluctant to IPO or PE? (4/4) «I like the markets and understandthatthey play an importantrole, and a necessaryone, if a company isbeyond a certainsize. Buttheyoverdoit in onedirection or another and force youintorunning a company in a certain way. Especially in a time likethis, itis an advantage to be a family-owned company» (Heinrich Spaengler, Chairman of the Supervisory Board, Bankhaus Carl Spaengler & Co Aktiengesellschaft, a 180-year-old Austrian private bank– Source: EY 2013)

  10. The advantages of IPO (1/5) Growth Reputation • Collecting significant financial resources maintaining D/E equilibrium • Attracting external managers and renewing the managerial approach • Increasing company credibility towards stakeholders (both industrial and financial) • Increasing the recognition of the value of the company Generational transition Diversification of family wealth • Allowing to buy out family shareholders • Investing resources in other businesses or activities

  11. The advantages of IPO (2/5) «Wedecided to list our shares on the Stock Exchange market asweunderstood the opportunity to use equityas a tool to financeprojects – throughmergers, cross stock-exchange and anyother possibile operationregarding the share capital – thatcouldsupport the growth of ourgroup» (Pierantonio Nebuloni, former CEO of ERG Spa, an ItalianlistedOil company – Source: Aidaf)

  12. The advantages of IPO (3/5) PRE IPO POST IPO REVENUES IPO Index: 2007=100 Source: ourelaborationsbased on Prada and Ferragamo financialstatements # STORES PRADA & MIU MIU

  13. The advantages of IPO (4/5) EBITDA PRE IPO POST IPO Index: 2007=100 IPO Source: ourelaborationsbased on Prada and Ferragamo financialstatements

  14. The advantages of IPO (5/5) Source: ourelaborations on Bloomberg database Share pricesince Prada and Ferragamo IPO Index: June2011=100 (Rebased in $ terms) SHARE PRICE

  15. The advantages of PE (1/2) Accelerating (long term) growth Technological development Internationalization If the family business is involved in … M&A (industry consolidation, diversification, …) Organizational restructuring Ownership restructuring Governance restructuring Succession … through PE it can acquire competences, experiences, relations, besides financial resources

  16. The advantages of PE (2/2) «I amverypleased to work with Blackstone and, in particular, with Stephen Schwarzmann, whom I admire for hisachievements and who shares the family’svision for the development of Versace» (Donatella Versace, Creative Director of versace Group – Source: Versace/Blackstone press release, 2014)

  17. How do PEs position asactiveminorityinvestors? The mission of Fondo Strategico Italiano: «patient, long‐term investor, with active governance» Active governance Goals to achievethroughactivegovernance • Board representation • Role in the appointment of key managers • Support management as «sparring partners» • Veto rights on key topics • Exit protection mechanisms (right to call IPO or sale starting from a certain date) • The objective of FSI in managing its investment portfolio is to create leading global businesses in their sectors • FSI looks at the possibility of its investee companies to: • grow both organically and through acquisitions • consolidate or improve international presence • have a clear path to exit, mostly through IPO, by building a credible equity story Source: FSI, 2014

  18. In conclusion … • … think to the future of your company (and your family) • … IPO and PE may be useful for your company (and your family) • … be pragmatic and evaluateadvantages and disadvantages of IPO and PE • … in any case, create an holding company and defineprofessionalgovernance and management systems

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