Danai Pathomvanich
Mar 5, 2015
Foreign institutional investors in Asia realize that co-investing with influential family-owned business groups is good business.
A recent McKinsey Quarterly article, The family-business factor in emerging markets said organizations that want to collaborate – or compete – with these companies in emerging markets must first understand them.
Emerging markets family businesses
According to McKinsey, approximately 60 percent of private-sector companies with revenues of $1 billion or more in emerging markets were owned by founders or families in 2010.
“And there are good reasons to suspect that these companies will remain a more significant part of their national economies in emerging markets than their counterparts in the West did about a century ago.”
McKinsey predicted that an additional 4,000 family owned companies could hit $US1 billion in sale by 2025, representing 40 per cent of the world’s large enterprises.
Developing an understanding
A critical success factor is developing a clear
understanding of how family businesses operate.
From McKinsey experiences in Asia, and especially in South East Asia, family-controlled local business often enjoy demonstrable, even dominant “home field” advantages.
“They have a deep understanding of their countries and industries, as well as considerable influence on regulators.”
Most importantly, these family businesses have derived personal relationships across the value-chain and many have proved resilient through economic crises.
Rapid decision making
A great advantage of working with Asian family businesses is their rapid decision making processes.
In most cases there is little need to pass decisions up a chain of command or to put them in front of an uncooperative board, and many of the principal–agent challenges that confront non-family-controlled companies are neutralized.
McKinsey noted that family-owned businesses are often able to place big bets quickly, even though they may not pay off.
“Still, manager–owners are largely relieved of the quarter-to-quarter, short-term benchmarks that can define—and distort—performance in Western public companies, so they’re freer to make the hard choices necessary to create long-term value.”
Strong management practices
Surprisingly, the McKinsey study showed that Asian family-owned companies are stronger than their non-family counterparts on several specific management practices, including shared vision, strategic clarity, employee involvement, and creativity and entrepreneurship.
This resilience of family-owned businesses in emerging markets contains a paradox for global companies.
“Many companies approach these markets in search of rapid growth, yet the family-owned businesses they’re considering partnering with are balancing the importance of liquidity against an extremely long view.
Some founders and families held their shares for decades, even centuries.
“For us,” the chairman of such a business explained, “short term is 5 years, and medium term is 20 years—that is, one generation.”
Conflicts with core competence strategies
Many family-owned companies place a premium on building strong, well-diversified businesses—sometimes to an extent that conflicts with the developed world’s conventional core competence–based strategies for value creation.
“The largest conglomerates in China, India, and South Korea are entering new businesses (often in unrelated industries) at a startling pace, adding an average of one new-business entry every 18 months.
These family-owned companies relish playing the portfolio game, taking advantage of access to talent and capital, as well as allocating family assets across different industries.
Dangers and opportunities
Although co-investing with family-owned businesses brings many advantages, McKinsey also warns of many dangers.
“....such businesses may create ownership models that are inflexible and lack transparency, drawing the attention of activist investors who see value in better governance, more disciplined capital structuring, and getting out of so-called hobby businesses that support family members.”
Potential partners, investors, and competitors, McKinsey said should look carefully at a company’s family tree, ownership models, and current succession processes before drawing conclusions about sustainability.
Moreover, they should also closely evaluate governments’ increasing regulatory role, as they attempt to strike a balance between denying family-owned businesses excessive privileges and opportunities to make profits and promoting entrepreneurs to further develop their economies.
“Would-be investors ignore at their peril the potential of regulatory intervention to reshape the nature of competition in these markets quickly and dramatically.”
