Private equity firms are betting that family-owned businesses are a profitable though overlooked way to gain a foothold in developing markets.
Private equity can often provide expertise and capital, which are typically in limited supply for small and medium-sized enterprises (SMEs). Smaller businesses can have great products, but they usually lack the business machinery and capital sources to compete against well-oiled transnational companies and expand abroad.
Ageing owner-operators may lack the experience and drive to overhaul the way they do business in the digital age, and their companies often lack collateral, which makes it hard to secure capital from traditional financial institutions.
The Talaypu Natural Products Co Ltd team, which sells natural hair and skincare products.
The Value of Family
According to the Boston Consulting Group, family companies account for 56% of the top 200 companies by revenue in Southeast Asia. As this emerging market grows, so will the number of family businesses over the next decade.
"More than 7,000 large companies will emerge from developing markets by 2025, and we expect 80% of these to be family enterprises," says Heinz-Peter Elstrodt, former co-leader of McKinsey's family business practice.
Family businesses traditionally perform better than their widely-held counterparts, thanks in part to their ability to execute strategies that span years, decades or even generations, he said.
They can also move quickly, as owners do not need to confront board members or professional directors. Family businesses are also better than many public companies at infusing a sense of ownership and mission among their employees, says Mr Elstrodt.
More importantly, these companies know the market better than anyone else, having worked in the same industry for generations. In emerging economies, where law is less developed, family businesses are also perceived as more trustworthy and can have considerable influence with regulators, which may account for the fact that return on investment for these companies is close to two times as large as that of other companies, he says.
In the Crosshairs
Because of their deep knowledge of the market and their established brands, small family firms are starting to become prime targets of funds looking for a foothold in emerging economies. The practice of acquiring an under-invested family SME is not very common yet, but is gaining momentum, says Mr Kok Tjun Chan, managing partner of Springtide Equity Partners.
"The idea is to identify owner-operators who are approaching retirement age, as they are usually more risk-averse and start wanting more time for themselves," he says. Some of these companies have great product portfolios, but are owned by operators who are satisfied with what they have built and are unwilling to invest in expansion, says Mr Chan.
Mr Chan met his partner Nakrin Narula at Harvard Business School in 2012.
"Nakrin and I were remarkably similar. We were both lucky enough to have good-sized family businesses, but in both cases the founders were not our parents. In my case there were already people working in the right places in the business," says Mr Chan.
The pair concluded they wanted a career in Southeast Asia to be close to their families. The attractive thing about Bangkok is the strong underlying economy, which is growing at 7-8% in sectors driven by middle-class growth like healthcare, education and consumer goods, he says.
Two years ago Springtide invested in Khaokho Talaypu, a family-owned personal care producer founded in 1987, which it now manages independently. The brand sells natural hair and skincare products, mainly targeted at women aged 25-50.
"The owner was looking to devote more time to spiritual pursuits. His son was lightly involved in the business, but was trained as a chef, and his dreams were very much in the culinary world," says Mr Chan.
Revamping Tradition
Over 30 years the founder built a loyal following and a distribution network that includes Tops Supermarket, 7-Eleven, Big C, Tesco Lotus and The Mall Group. However, the family was not very interested in pushing the commercial potential of the products.
"When we arrived the company was spending less than 1% of its revenue on marketing. This year we implemented the first digital marketing campaign, and next year we will allocate 20% of our revenue on marketing," he says.
The firm also put in place the first digital campaigns, which increased sales by 100%, says Mr Chan.
Moving forward, Springtide will export Talaypu to Asean and other markets with a burgeoning middle class, including Russia, Taiwan and the Middle East, where there is a growing concern with health and a positive view of Thailand as a tourist destination. The firm is also looking to invest in other similar Thai brands with revenue below 400 million baht per year to take them to the international market.
Private equity firms can help in both of these respects, but they have to move carefully to avoid destroying the unique value these companies have built over decades. Unlike multi-generation firms, private equity emphasises quick returns, since they often own businesses for less than five years.
Mr Chan says they are moving away from the traditional private equity model and are prepared to spend decades to take local firms overseas.
"I turn 30 today, and my partner is also 30, so we can see the company grow for decades," he says.
Culture clashes are also likely to develop, as private equity partners may stress measurable results and demand a more professional environment.
Firms should be careful not to stray too aggressively from the brand, and Springtide relied extensively on the founder during the first 12 months of the venture to avoid a rough transition, says Mr Chan.
"There is so much history in the company and the brand, and we wanted to be very careful not to butcher everything they built," he says.