What Family
Businesses
Need Now
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introducing icg
THE
FAMILY
WAY
The very specific needs of family
businesses require a distinctive
combination of experience and
expertise. ICG fits the bill perfectly
F
ABOVE:
MANAGING
DIRECTOR
AND HEAD OF
EUROPEAN
MEZZANINE
BENOIT
DURTESTE.
RIGHT:
CHRISTOPHER
HEINE, HEAD OF
ASIA PACIFIC
amily-owned businesses around the
world face the same group of challenges as other businesses — how to
grow, how to find new leaders, how
to adapt — but they combine them
with a unique set, too: ensuring success across
the generations, gaining access to flexible capital
and finding an investment approach that will
develop and enhance a business while maintaining family control and ownership. Only a few
companies, like Intermediate Capital Group
(ICG), can provide the bespoke capital and
advice that family-owned businesses need.
Both types of problem are more intense today
than ever, especially with the continued global
dislocation in credit markets, so this guide shares
some insights into and perspectives on some of
the challenges facing family-owned businesses
— and how ICG can help.
FAMILY VALUES
Family businesses play an important role in
world economies: one third of all companies in
the S&P 500 index and 40 per cent of the 250
largest companies in France and Germany are
defined as family businesses. Samsung, Cadbury,
JCB and BMW all developed from family ownership. Ricard, Associated British Foods and
Michelin are still family-owned.
S&P’s study, ‘Family Ownership Is No Bar to
Creditworthiness in Europe’, highlights some of
the reasons why family-run businesses can be
more enduring and successful than others. Of
particular distinction is the long-term approach
family businesses take, often because they want
to hand over the business to the next generation.
In addition, family businesses are steadier
throughout economic cycles: they maintain a
consistent rate of investment and expenditure,
so during more difficult downturns they are not
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introducing icg
hasty in halting investment and tend not to
make reactive redundancies. This manifests in a
stabler rating from agencies such as S&P and
strong ‘management and governance’ profiles,
judged by levels of strategic competence, operational effectiveness and ability to manage risks,
all key qualities of successful businesses.
This view is also shared by Boston Consulting
Group (BCG), which claims that, between 1997
and 2009, the global financial performance of
family-owned businesses exceeded that of traditional public companies over the long term. A
broad index of publicly traded companies across
the United States and Western Europe showed
that total returns to shareholders in family-owned
businesses were 2-3 percentage points higher
than companies in the MSCI World index.
CHALLENGING TIMES
Family businesses have always faced unique
challenges, but since 2008 these have intensified. Maintaining the careful balance of managing growth while keeping family control with the
right capital structure has always been a primary
challenge. Moreover, ensuring family accord while
all interests are served is an ongoing endeavour.
There are broadly three distinct challenges:
1
2
3
Securing growth capital that allows a
family-owned business to grow without
affecting the capital structure in a
permanent way, and allowing the family
to maintain management control.
Succession issues where professional
management needs to be incentivised
and retained.
Shareholding issues where a liquidity
event is desired by some family members
and not others.
The entrepreneurial flair needed to conceive a
family business is very different from the skills
and determination required to expand a family
business, so securing growth capital is one of the
most complex challenges. The aim of the capital
could be to pursue a new strategy or to make a
game-changing strategic investment; to develop
the company into an acquisition target or a vehicle to acquire other companies; or to list and
ultimately evolve its ownership structure.
Since 2008 the ability of businesses to obtain
access to working capital has completely
changed. The heady days of unconstrained lending are long gone and the traditional lenders
such as banks are now regulated in new ways to
ensure they remain exposed to far lower levels of
risk than pre-crisis. Family-owned businesses
have been particularly badly hit by this structural change in capital markets, as banks have
retrenched from lending to non-blue chips; and
finding lenders or investment partners who can
provide flexible capital investments without
wanting substantial equity or control in the business has never been more challenging. According to McKinsey,1 only 30 per cent of family businesses survive into the third generation of family
ownership, highlighting the pressures faced.
FINANCING THE FUTURE
Maintaining family control while having a
method of raising fresh capital for the business
that satisfies the family’s cash needs is the key
balance to manage. This analysis is aligned to
ICG’s approach to working with family-owned
businesses. ICG has invested nearly €250 million in family-owned businesses across Europe
and Asia Pacific in the past 25 years. It is one of a
number of specialist non-bank lenders that can
provide flexible financing to family-owned businesses. The key considerations for those undertaking due diligence on which lender to work
with are:
1
2
Reputation: can the non-bank lender
demonstrate good governance and
transparency? Can it provide references?
Track record: there are very few non-bank
lenders that have a track record as a
creative investor in private debt. It is essential to choose an investment partner who can do the level of analysis of your business required to have the depth of understanding to formulate and suggest creative, flexible investment ideas. Does the potential investor provide new ideas and solutions that enable the business to make game-changing moves?
Investment philosophy: does the
non-bank lender want to take control of
the business, or a large equity stake? How will that impact the overall balance of ownership among the family? Will they offer the family advice and support and contribute to the company positively?
3
ICG always takes a medium-to-long-term view
of family businesses; it never seeks control; it
works with the businesses to tailor bespoke capital solutions; and it often joins the board of
directors to help them achieve their ambitions
with strategic advice.
No family is like any other, nor are any two
family businesses the same: that’s what ICG
knows and that’s why it can help yours.
1
McKinsey Quarterly, Organisation Practice,
‘The five attributes of enduring family
businesses’, January 2010
ICG AND FAMILY
BUSINESSES
n ICG supports a
management business plan
and provides help and
guidance to achieve that plan.
n It is supportive of growth
where it is accretive to
equity value.
n It is a bespoke capital
solution because every
business is unique.
n ICG structures its
investments according to the
cashflow of the business and
to deliver the best returns for
all stakeholders.
n It works with shareholders
and management, especially
in difficult times, often being
the source of additional
capital — it has a board of
director presence, which is
where its voice is heard.
n ICG is a medium-to-longterm investor looking for
money multiple as well as IRR.
CONTACT ICG
Benoit Durteste
Managing Director, Head of
European Mezzanine
[email protected]
+44 (0)20 3201 7700
Dr Chris Heine
Head of Asia Pacific
[email protected]
+852 (0)2978 2106
icgplc.om
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//
case studies
Case Study 1
Europe
Menissez
baker rises to
conquer Europe
Evolution
of Menissez
1965
Founded by
Jacques Menissez
1980
Jacques’s son
Laurent joins
the company
2006
Jacques retires
and hands over
to Laurent
2006
ICG invests
2007
New strategy
focusing on
premium products
backed by ICG
2012
Company refinanced
with the help of ICG
2013
€50 million
investment in new
production facilities
F
amily businesses make up a large slice of
the corporate landscape in France and
Germany, and in the case of Menissez, a
successful family-owned French baker, this is
literally true. Founded in 1965 by Jacques
Menissez and his wife in a traditional woodburning stone oven bakery in Feignies in the
north of France, in 1975 the business began
industrial bread production. In the 1980s,
Jacques’ son, Laurent, joined the firm and developed a frozen ‘part-baked’ bread product, which
gave the business a focus on exports. Today,
under Laurent’s leadership, Menissez bread
products are sold all over Europe. It produces
more than 100,000 tons of bread each year,
half of which is exported, combining innovative
product development with commercial flair.
In 2006, founder Jacques was ready to retire
and hand over control to Laurent; naturally, he
was keen for a liquidity event to accompany
retirement. ICG invested €63.4 million in subordinated debt and equity in a flexible structure, while helping structure senior acquisition
debt. This investment enabled a handover of
management from founder to son, while maintaining family control at the same time.
Smooth transition
A large number of businesses leave family control at this type of juncture: bringing in new
investors usually leads to a transfer of ownership. In addition, financial restructuring means
bringing in new bankers and advisers, which
can have an unsettling emotional impact on the
family. Thanks to ICG’s support and involvement, the handover was completed smoothly
and quickly, minimising impact on the family.
At the time of ICG’s initial investment, practical
support was given to Menissez’s management
to build management reporting tools, a key step
for future growth. In addition and very rapidly
after closing, the company was backed by ICG for
significant capital expenditure when Laurent
decided to launch new premium products in
2007, having identified this niche as an impressive opportunity. This is now the fastest-growing
chunk of the market, where Menissez has gained
undisputed leadership. A transformational
investment of €50 million is also starting this
year for new production facilities to support
this strategy further — an exceptional infrastructure investment for a company of this size.
favourable terms
Thanks to ICG’s strong involvement and with
the help of banks ICG has good relationships
with, the financial structure of the company
was refinanced in December 2012 to deleverage
the balance sheet on very favourable terms
while raising new financing to support the
industrial strategy without the need for additional equity (hence avoiding potential dilution
risks for the Menissez family). Finally, Menissez
is continuously reviewing future growth strategies and possible acquisition targets and ICG
has been a key adviser in for advice, support,
analysis and financial backing.
Seven years on, ICG remains invested in
Menissez; it is flourishing, maintaining strong
operational performance and product innovation, pushing into new markets, new customer
bases and geographies and maintaining family
control. The company’s leadership grows as it
continues to evolve and innovate, showing that
the rare entrepreneurial qualities needed to
found a company and the very different skills
needed to grow it can be found within the same
family across the generations.
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case studies
Case Study 2
Asia Pacific
SCF Group
taking back control
of the family firm
Illustrations by Phil Wong
I
n a vast country like Australia, the movement
of goods is big business. The founders of SCF
Group have built the company into a leading
container solutions company for rail and road
cargo, liquid transport, storage and portable
accommodation. This is a story of Aussie entrepreneurialism, building a business from
scratch, helping it grow, selling a majority stake
— then taking back control.
It started in the early 1990s when Richard
Sykes recognised a gap in the removals market
where he was working. He and a couple of friends
got together and explored the financial possibilities in sales and leasing of the growing container
market. With their knowledge of removals and
sales, and corporate financial experience, they
established SCF Containers International. The
key differential was lighter, custom-built containers that were easier to load.
There were manufacturing difficulties to
overcome initially in developing bespoke products, but Sykes worked with manufacturers to
use new and existing technologies to develop
the products and solutions customers required,
initially designing innovative products at home
by night. Together they developed online tracking systems, management data systems and
customer relationship management systems,
which included automatic billing and sales. The
business continued to grow significantly and
gained market share, but eventually it needed a
new partner to take it up a gear.
In 2007 the company wanted a capital injection to expand and achieve its ambitious growth
strategy. A private-equity firm stepped in and
became the major shareholder, taking 67 per
cent of SCF’s equity. SCF responded by tripling
turnover by the end of financial year 2008. In
2010, the company undertook a rebrand, creat-
ing four divisions and adopting a new focus
under the SCF Group banner.
By 2011 Sykes wanted to get more involved in
the business again, as did the management
team, who were keen to reinvest into the business and take control back. ICG stepped forward. Its proposal underwrote 100 per cent of
the capital structure for the management bid
along with the management’s reinvested equity.
ICG offered certainty of financing and allowed
the founding management team to buy back a
controlling equity position.
The proposal kept the company on a stable
financial footing and gave the balance sheet
sufficient space to pursue its growth strategy.
Part of the refinancing proposals gave enough
flexibility that the owners could regain 100 per
cent ownership in five years’ time. The management team is now following growth plans and
considering mergers and acquisitions opportunities, so fortunately the funding structure ICG
put in place is flexible and can adapt to a transformational acquisition opportunity.
planning for the future
ICG maintains two seats on the board of SCF
Group and provides support for the management team in both executing the growth strategy and planning for the future, whether as a
listing or a trade sale of the business.
SCF is an undisputed market leader, with over
a third of market share in tanks; it is also the
number-one supplier in rail container leasing.
ICG’s flexible interim finance facilitated a
smooth transaction and gave the management
team access to follow-on funding. The business
is thriving, increasing earnings by over 25 per
cent in the past twelve months, and now has a
strong presence in all major Australian cities.
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where next ?
SILVER
LININGS
Banks may be making it
tough to borrow, but that
means family businesses can
turn to creative solutions
C
ompanies have traditionally been
dependent on banks as their
main or sole source of credit, but
as the banks continue to deleverage and seem ever more conservative in their lending, implementing the new
regulation that came in the wake of the financial crisis, lending has evolved. With retrenchment has come advancement: a new type of
flexible business partnership between lenders
and borrowers, and ultimately a more efficient
lending structure. Family-owned businesses in
Europe and Asia, traditionally reliant on banks,
have a lot to gain. Perhaps, then, we have stumbled upon the silver lining of the financial crisis.
Historically, the role of banks in Europe and
Asia has been both to underwrite and to buy
credit, which crowded out other potential investors. Both the European and Asian debt markets as a result are far less developed than those
in North America. However, we have found
ourselves in a period of transition: the European banking sector in particular is in the process of a protracted structural transformation.
Today, there is a €1.5 trillion lending gap in
Europe: this is the figure, estimated by S&P,
that banks must shed from their balance sheets
to satisfy the tightened lending regulations
under Basel III and the ECB financial stability
review. This has seen bank loans fall/contract/
ICG IN
FIGURES
€250 million
invested in global family
businesses since 1989
4.5 years
the average period of
ICG investment in a
family-owned business
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squeezed, with a concentration on lending to
domestic markets and a reduced bank appetite
for non-investment-grade lending.
Despite looser monetary policy, tighter regulations on the amount and quality of capital that
banks are required to hold are inevitably serving to restrict the level of lending and increase
the cost of credit where it is available. In the US,
where bank lending is the minority for funding
buyouts, non-bank lending has been the norm
since the 1990s (see charts to the right), so this
doesn’t pose a threat as companies are familiar
with tapping into readily available alternative
sources of credit. In Europe, however, with the
situation likely to worsen for corporate borrowers as these rules are introduced and their
effects fully felt, the need for this new type of
direct lender to step in is greater than ever.
DIRECT TO MARKET
An interesting evolution in the lending market
has come about as a result of the void left by
bank retrenchment: Europe is developing a
new direct lending model. There is a growing
body of advisers who can connect family-owned
businesses with direct lenders such as ICG.
More bespoke, flexible lending and investing
structures can be tailored to the client, and the
investor generally takes a longer-term view of a
business and will pursue a closer relationship
with the company’s management team than a
traditional lender. (A recent report by S&P
found that family-owned businesses have a
longer-term investment horizon and are less
likely to base their activities on market sentiment, perhaps due to a desire to transmit business to the next generation.)
This is a far cry from the pre-crunch lending
frenzy; it is reliant on the fostering of relationships on a case-by-case basis, rather than bullish markets and homogenous lending terms.
The effects of the crisis have brought about a
new lending model that is more aligned to the
flexible needs of the family business.
With 60 per cent of all European businesses
technically family-owned, the question of how
direct lending can help ease their challenges is
critical. Unfortunately, family-owned businesses,
like other corporate borrowers, are now subject
to the same constraints when it comes to accessing finance, particularly if they have historically
been dependent on bank loans and perhaps, for
various reasons, do not have access to debt capital markets. They also find it harder if traditional lenders want to take equity ownership or
cannot accommodate the increased level of risk
or provide a flexible bespoke lending solution.
//
where next ?
The marriage of ownership and governance
does not typically leave room for more equity
partners within family-owned businesses. This
method of financing directly threatens the goal
of independence and control as it means outside
shareholders are likely to exert greater influence on decision-making. Understandably, this
is of concern to many family-owned businesses.
Asia is experiencing a different transition.
Banks remain well capitalised and keen to lend,
but family-owned businesses are generally
adverse to leverage. Hence, debt multiples of
bank lending in Asia have traditionally been
more restrictive even as family-owned businesses
seek to preserve their banking relationships.
As growth slows in Asia after the crisis, familyowned businesses are now turning to private
capital solutions to fund their expansion while
maintaining a lowly geared capital structure.
However, similar challenges to Europe remain.
In addition to the need for an exit event in the
medium term, many private capital sponsors
are insistent on traditional buyout terms such
as drag or various control rights, which may not
be acceptable to family-owned businesses.
US BUYOUT
FUNDING
SOURCES
84%
14%
Institutions
Banks
Others 2%
EUROPEAN
BUYOUT
FUNDING
SOURCES
PATIENT, FLEXIBLE
From ICG’s point of view, family-owned businesses’ longer-term investment horizon represents the opportunity for a highly attractive and
mutually beneficial partnership for the few specialist asset managers with the capabilities to
grasp the opportunity fully. ICG typically invests
with a five- to ten-year view, whereas other lenders’ investment horizons are three to five years.
ICG’s ability to invest across the capital structure allows it to not only fill the gap left by
banks and private equity but also go further,
creating genuinely flexible business partnerships with those it lends to and more efficient
lending for family-owned businesses. It can
offer unique investment solutions aligned to
business objectives, reflecting the post-crisis
new reality. ICG’s ‘patient capital’ and flexible
coupon structure are complementary to the
banks that continue to lend to the familyowned businesses, but with their risk exposure
greatly reduced. It also enables the banks to
maintain their relationships with these familyowned businesses and sell more services to
them as they grow.
We are living through the new normal; bank
lending won’t return to pre-crisis levels for years,
if ever. It’s best, then, not to pine for the days of
easy cash but to grab hold of new and more
sophisticated opportunities to help your business grow. Patient and flexible, ICG can help.
47%
51%
Institutions
Banks
Others 2%
CONTACT ICG
Benoit Durteste
Managing Director, Head of
European Mezzanine
[email protected]
+44 (0)20 3201 7700
Dr Chris Heine
Head of Asia Pacific
[email protected]
+852 (0)2978 2106
icgplc.om
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Family businesses need a
special investment partner
ICG provides flexible investment solutions for family
businesses to help them achieve their long term goals.
Like you we take a long term approach.
Contact:
Benoit Durteste - Managing Director,
Head of European Mezzanine
[email protected]
+44 (0)20 3201 7700
www.icgplc.com
Dr Chris Heine - Head of Asia Pacific
[email protected]
+852 (0)2978 2106
FCA Regulated 2013