Two trends for APAC family businesses: private equity and ESG

01 March 2022 4 min. read

In a new report, researchers from Russell Reynolds Associates have explored some of the key trends and developments in APAC’s family business landscape. Anupama Puranik, a consultant at the human capital consultancy, outlines two of the key trends identified: collaboration with private equity and environmental, social and governance..

Family businesses and private equity

Historically, many family-owned businesses have not been inclined to accept funding from private equity investors, as they typically view such investors as being more interested in making a quick profit than improving the company’s long-term performance.

Anupama Puranik, Managing Director, Russell Reynolds Associates

More recently however, both push and pull factors have nudged family businesses to explore funding through the sale of minority or even majority stakes. This trend has been triggered by:

Lack of successors
The next generation is not always able or willing to step into the shoes of their elders. Bringing in the right private equity partner allows family firms to ensure business continuity and institutionalization to facilitate sustained growth.

Growth and expansion
After riding Asia’s rise over the past decades, family firms that dominate the economic landscape are now looking for financial partners to invest in new asset classes or new economy businesses that are complementary or additive to their existing operations.

Private equity involvement is an especially attractive option for growth if family businesses want to avoid the complexities of going public, which includes laborious stakeholder management and reduced flexibility and agility in the business environment.

Effect of Covid-19 and market trends
The pandemic has upended the way global business is done. Like other corporate executives, family-owned business leaders are feeling the stress from Covid-19, but the effect for them is magnified as their personal wealth and income is deeply tied to their businesses.

Such business owners may be more open to private capital than ever before, as they look to shore up their liquidity to weather the pandemic and sustain their business. This will give investors many more opportunities than in the past to take minority stakes in such businesses.

Increased private equity focus on Asia
Private equity’s focus on Asia has grown by leaps and bounds in the last few years. APAC-focused funds raised close to $800 billion between 2015 and 2019, and around 28% of global private equity assets under management are now focused on Asia Pacific.

Leading the way in sustainability

Family businesses tend to have better ESG scores than non-family-owned peers, according to a global study initiated by Credit Suisse. This is largely true in Asia, with family-owned businesses having a greater emphasis on sustainability and stewardship than non-owner driven corporations. This may in part be because the longer-term horizons and objectives of family businesses are largely aligned with those of environmental and social goals.

However, we see that in some areas of governance, family businesses may not be well-suited to drive the development of new standards. For example, as many family businesses do not have significant outside shareholders, they may not put as much emphasis on the value of a formal board composed of truly independent non-executive directors.

In many ways, ESG is a natural extension of the family business DNA, which has historically been rooted in corporate social responsibility (CSR) activities such as donating time or money to charitable causes in the local community. The next generation of family leaders increasingly appreciate the concepts and benefits of good corporate stewardship and take sustainability more seriously as a way of publicly stating their intention to do good business well.

Family businesses are not usually subject to the same external stakeholder pressures as listed companies but in the case of ESG, every type of company is subject to scrutiny. We are seeing family businesses forge ahead with implementing ESG measures. There are significant benefits in getting it right such as enhancing corporate reputation, defining longer-term purpose and relevance, and providing a North Star that unites family, employees and broader stakeholders.

However, family businesses have to avoid ‘green washing’ and must measure ESG progress in real terms against meaningful KPIs that protect our planet, enhance people’s lives and raise standards in all walks of corporate life. In possession of significant influence at a local and global level, and through managing diverse businesses of scale, family businesses can truly lead the charge on ESG.