Guido Corbetta Chair AIdAF-EY of Strategic Management in Family Business
In memory of Alberto Falck
Helsinki, 19th September 2014
Accessing growth capital:
exploring the best alternatives for family business entrepreneurs
- 2 -Source: EY, «The Vital Entrepreneur. High impact at its best», 2013
How do family-owned companiesusually fund the growth of the business?
- 3 -
Long term financial resources for long term investments
Investments time horizon
Funding sources
long term(innovation, M&A,
internationalization, diversification)
«External» IPO (minority) PE (minority) Bonds
To be replaced after 4-6 years
«Internal» reinvested earnings sell of non core assets equity from the owning
family
- 4 -
Traditional internal long term financial resources have some limits
• Reinvested earnings
• Profitability insufficient to self-finance both short term and long term investments
• Equity from the family
• Consistency with family’s committment and decisions of capital allocation and risk diversification
• Sell of non core assets
• Lack or insufficient value of non core assets
- 5 -
If family businesses want to collect external long term resources they need
….
Ambitious and sustainable strategic plan
Effective corporate governance
Reliable and motivated management team (track record)
Transparency and communication
Professional financial planning
- 6 -
Why family businesses are reluctant to IPO or PE? (1/4)
EconomicAsset:
FinancialReturn
Share Value
Share Holders’ValueS
Emotional Asset:Psychological Return
Share Holder Value
Source: Lansberg-Gersick
- 7 -
Why family businesses are reluctant to IPO or PE? (2/4)
«If you talk to PE or people in listed companies, it’s about return on equity, top line growth and key ratios. And the easiest way to achieve those things is to load up with debt and make acquisitions. A long-termist family business don’t do that. I think there’s really a fundamental watershed between the philosophies»
(Philip Aminoff, President Emeritus 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)
«We don’t think in quarters, we think in generations»(Mario Preve, Chairman of Riso Gallo, an Italian rice producer since 1845 - Source: EY 2013)
«We look at our investments over decades rather than in quarters»(William P. Lauder, Executive Chairman of Estée Lauder Companies Inc. – Source: Egon Zehnder International, The Focus vol. XV/1, 2011)
- 9 -
Why family businesses are reluctant to IPO or PE? (4/4)
«I like the markets and understand that they play an important role, and a necessary one, if a company is beyond a certain size. But they overdo it in one direction or another and force you into running a company in a certain way. Especially in a time like this, it is 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)
• 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
• Allowing to buy out family shareholders
Growth
Generational transition
Reputation
Diversification offamily wealth
• Investing resources in other businesses or activities
- 11 -
The advantages of IPO (2/5)
«We decided to list our shares on the Stock Exchange market as we understood the opportunity to use equity as a tool to finance projects – through mergers, cross stock-exchange and any other possibile operation regarding the share capital – that could support the growth of our group»
(Pierantonio Nebuloni, former CEO of ERG Spa, an Italian listed Oil company – Source: Aidaf)
- 12 -
The advantages of IPO (3/5)
2007 2008 2009 2010 2011 2012 201380
100
120
140
160
180
200
220
Luxury Market (Altagamma)
Prada
Ferragamo
PREIPO
POSTIPO
REVENUES
Source: our elaborations based on Prada and Ferragamo financial statements
Index: 2007=100
IPO
# STORESPRADA & MIU MIU
181 202 228 278 339 409 480
+21 +26 +50 +61 +70 +71
- 13 -
The advantages of IPO (4/5)
PREIPO
POSTIPO
EBITDA
Source: our elaborations based on Prada and Ferragamo financial statements
Index: 2007=100 IPO
2007 2008 2009 2010 2011 2012 201350
100
150
200
250
300
350
400
- 14 -
The advantages of IPO (5/5)
Source: our elaborations on Bloomberg database
SHARE PRICEShare price since Prada and Ferragamo IPOIndex: June2011=100 (Rebased in $ terms)
giu-11 dic-11 giu-12 dic-12 giu-13 dic-13 giu-1450
100
150
200
250
300
PradaFerragamo
- 15 -
The advantages of PE (1/2)
… through PE it can acquire competences, experiences, relations,besides financial resources
Organizational restructuring
Ownership restructuring
Accelerating (long term)
growth
Succession
Internationalization
Governance restructuring
Technological development
If the family business is
involved in …
M&A(industry consolidation,
diversification, …)
- 16 -
The advantages of PE (2/2)
«I am very pleased to work with Blackstone and, in particular, with Stephen Schwarzmann, whom I admire for his achievements and who shares the family’s vision for the development of Versace»
(Donatella Versace, Creative Director of versace Group – Source: Versace/Blackstone press release, 2014)
- 17 -
How do PEs position as active minority investors?
Active governance Goals to achieve through active governance
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
The mission of Fondo Strategico Italiano: «patient, long‐term investor, with active governance»
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 evaluate advantages and disadvantages of IPO and PE
• … in any case, create an holding company and define professional governance and management systems