Key takeaway: In today’s challenging economic environment, family businesses are looking for ways to de-risk and diversify their capital strategies, as well as take account of the aspirations of the next generation of family members.
Family businesses are well known for their ‘patient capital’ strategies with a focus on longer-term value creation, rather than the continuous hunt for short-term results. This long-term approach was especially relevant during the Covid-19 pandemic – and remains just as relevant after it, too.
During the upheavals of the pandemic, many family businesses pulled their families together. Some pooled their financial resources to sustain and strengthen their business operations and protect the family legacy. Others prioritised their employees and local communities to help reduce some of the strain on their lives and families.
De-risking financial capital
Now, with the current economic headwinds of the rising cost of living, high inflation and potential recession, financial capital strategies in many businesses are being driven by the need to de-risk.
As we heard about and discussed in a series of roundtables with entrepreneurs and family business leaders, today’s environment is raising a number of key questions:
- With double-digit inflation, holding cash is pointless – so where can business families invest their financial assets for an inflation-protected return?
- Should the business refinance its debt using green funds – assuming it can demonstrate an effective ESG strategy?
- In the event of over-dependence on one sector or business, might it make sense to acquire companies outside the legacy business to generate an alternative profit return?
- What about partnerships? Is there an opportunity to pursue co-investments with other family offices?
- Could supporting the start-up community – including the next generation of budding entrepreneurs in the family – be a smart diversification strategy?
It’s a complex set of questions and possibilities, reflecting the fact that many family businesses are thinking about the actions they need to take to build and pass on their multi-generational wealth.
Beyond financial – human and social capital
While many business families are paying close attention to steps such as these to preserve and grow their financial capital, there is an increasing focus on two additional capital assets that are critically important – namely, their human and social capital. Human capital encompasses the knowledge, skills, experience and social qualities of family members and employees, and their ability to generate value; social capital meanwhile is closely tied to issues of ethics and integrity, community value and the ESG agenda.
Communities are important stakeholders in the family business ecosystem, and the impact of the pandemic on people and the planet have made the need for strong human and social capital even more pertinent. It has encouraged many family businesses to rethink how they are defining their wealth, and what it means to create wealth – as a business, a family and an individual – by looking at the growth and value of the family’s human and social capital as well as its financial assets.
This is the first in a series of three articles on Redefining Wealth in Family Businesses. In the next article, “Leveraging human and social capital in family businesses”, I’ll explore these notions in more detail as part of the diversification of wealth strategies in the complex and changing landscape that family businesses operate in today.