High net worth individuals: funding avenue for Maltese family businesses

High net worth individuals: funding avenue for Maltese family businesses

It is widely acknowledged that SMEs are the backbone of the Maltese economy. In the same vein, family businesses can be symbolically visualised as its beating heart, playing a strategic role for the economic development of the Maltese entrepreneurial landscape.

This is factually reflected in the formation of family businesses that constitute 70 per cent of Maltese businesses, employing about 40,000 people.

Families have always been at the heart of business. Just as the heart pumps blood throughout the body to sustain it, family businesses need financial injections to propel growth, ensure profitability and in order to safeguard long-term sustainability.

The core nucleus of a family business, especially if successful, is bound to grow and change. In parallel, the family business must also evolve to accommodate both the changing family dynamics as well as the ever-changing competitive business environment.

To increase profit and accelerate growth, a business requires strong financing. A survey carried out by the Central Bank of Malta in conjunction with the European Commission and the European Central Bank to identify sources of finance used by SMEs revealed that, in 2014, 70 per cent of domestic SMEs elected to use more expensive financing options than their European counterparts (35 per cent) on bank overdrafts, credit lines or credit card facilities.

It transpires that domestic SMEs rely on external financing for inventory and working capital to develop or launch new products on the market, refinance or pay off debt or to employ and train employees.

On the other hand, domestic SMEs rank highest with respect to internal financing, such as retained earnings or proceeds from the sale of assets. This method is mostly attributed to firms with an innovative characteristic streak.

The unique characteristics of family businesses, particularly in Malta where family ties are closely knit, sets them apart from any other companies and financial avenues are highly dependent on the faculty to meet the exigencies of such unique composition.

Securing the future of family members, preserving family unity and especially maintaining the independence and control over the business, imposes restrictions on the possible routes for family business financing, inter alia, private trade sales, initial public offerings (IPOs) and private equity (PE).

As a direct result of these limitations, family businesses may not be maximising their full growth potential.

Just as the heart pumps blood throughout the body to sustain it, family businesses need financial injections to propel growth

It all boils down to creating a unique competing space to secure a competitive advantage. It is about innovation.

A highly innovative financing method was put forward by Dennis Fortnum, global head of KPMG Enterprise and Christophe Bernard, global head of KPMG Family Business. In their detailed report, entitled Financing family business growth through individual investors, the authors take a deep dive into the synergies between High Net Worth Individuals (HNWIs) and family businesses and explore the opportunity for HNWIs to play a role in bridging the funding gap.

The report concludes that HNWIs and family businesses can forge a lasting partnership that is mutually beneficial and yields sustainable return on investment.

Capturing this lucrative partnership opportunity is underpinned by three convergent fundamentals that delineate the synergy between HNWIs and family businesses.

In the first instance, HNWIs come from a family business or entrepreneurial background and so are generally well versed in the way family businesses operate – also because their wealth is usually generated from their own family business.

The majority of such HNWIs generally manage their own wealth and are seeking to deploy their capital in opportunities that provide long-term returns and diversification benefits.

While the tendency is for HNWIs to take on a medium amount of risk to render medium returns to achieve this aim, there are HNWIs willing to take a high or low-risk approach to investments. This suggests that investors in the market exist for companies with differing risk profiles.

Secondly, HNWIs are extremely active business investors having an intrinsic business appetite for SMEs where both the capital and expertise may be highly valued and where a significant potential for return exists. SMEs are their sweet spot, which creates myriad opportunities for domestic family businesses.

Lastly, the major attraction for HNWIs to invest in family businesses is the merging of considerations and attributes that are a common denominator both for HNWIs and family business alike: a long-term view and a personal rather than institutional approach.

As the pulse of SMEs and family businesses beats rhythmically to the subjected perturbations of an organic family nucleus and dynamic business environment, considerations for potential funding avenues are worth exploring to make a calculated but informed decision and subsequently take the plunge and embark on a potentially lucrative and fruitful partnership.

Anthony Pace is the partner for tax services for KPMG.

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