Family-run businesses make for easy, stable and resilient investments, said top executives of large private equity firms, while adding that the best of these investments typically come into firms run by first-generation promoter-founders.
“80% of our investments are in family-run businesses,” said Sanjay Nayar, chief executive officer of KKR India Advisors Pvt. Ltd (KKR), an arm of Kohlberg Kravis Roberts and Co. LP.
Nayar was speaking at a Family Business Conclave organized by the Indian School of Business (ISB) in Mumbai.
KKR India has disbursed about Rs.17,000 crore so far to 55 companies including GMR Holdings Pvt. Ltd, Avantha Group and Apollo Hospitals Enterprise Ltd, which are all entrepreneurial ventures.
Roughly half of the funds that Apax Partners India has invested is in companies associated with large promoter families such as the Reddy family-led Apollo Group, the Murugappa Group, the Piramal Group and the RPG Group, said Shashank Singh, partner and India head of Apax.
This is owing to “high quality families running high quality businesses,” Singh added.
Family-run businesses are attractive also because they have been tried and tested over a period of time and have survived the changing business environment.
Another reason cited by funds to pick family-run businesses is because they are in established brick and mortar businesses where there is greater assurance of steady returns as compared with some of the new economy sectors.
Family-run businesses are more resilient than professional peers, said Adi Godrej, chairman of Godrej group while speaking at the conference.
They have lower cost structures and operate in stable industries, have lower attrition rates and pursue long-term strategies, Godrej added.
Amit Rathi, managing director of Anand Rathi Financial Services, noted that almost 90% of private equity investments made by his company would be in family-owned businesses as there are few widely held companies such as Larsen and Toubro Ltd in India.
“MNCs (multinational companies) and PSUs (public sector undertakings) are not options that are available to them,” Rathi added.
However, experts caution that funds are wary of investing in companies run by second-generation family owners. Funds tend to treat them with a degree of skepticism until they have proven to be as good at running the business as the first generation.
“The ratio of family-led businesses that have attracted private equity is about 80-90%,” said Nabankur Gupta, founder and CEO, Nobby Strategic Management and Family Business Consultants, adding that a majority of family-led businesses do not survive beyond the first generation.
The pitfalls of investing with family-run businesses largely lie in family conflicts, the inability to professionalize businesses and corporate governance, experts at the conference added.