INSEAD report shows how private equity is helping family firms unlock sustainable value

INSEAD report shows how private equity is helping family firms unlock sustainable value

February 17, 2020
By Claudia Zeisberger
  • Institutionalisation is key to family firms’ survival
  • A significant ‘proficiency gap’ exists between second generation family companies and those with more intergenerational transfers of power
  • Expertise from external sources – such as PE – can help a family business leapfrog the institutionalisation curve.

Family firms are the cornerstone of the global economy. In Europe they represent 70-80% of all business enterprise, account for 40-50 percent of employment, and are catalysts of widespread growth. However, they can also be poorly institutionalised and particularly vulnerable to crises relating to leadership, talent, autonomy and control.

A new report The Institutionalization of Family Firms – Europe, by INSEAD Global Private Equity Initiative (GPEI), examines the benefits of institutionalising European family-owned companies to ensure long-term value creation and growth. It examines the nature of partnerships between family firms and private equity (PE) and identifies best practices that support sustainable value-creation.

Specifically, the report shows how family firms can strengthen their business and guard against crises by bringing in PE shareholders to:

  • Improve corporate governance
  • Professionalise management teams
  • Strengthen internal systems and processes
  • Meet talent shortages
  • Better manage family members

Drawing from in-depth surveys of 121 European family businesses and interviews with leading PE firms, the study provides an understanding of how family businesses have continued to adapt over generations and gives family firms in the region an opportunity to benchmark themselves against their peers. It includes diverse case studies of second, third, sixth and ninth generation firms which highlight specific challenges and opportunities.

The attributes of institutionalisation

The institutionalisation of participating firms was measured according to six attributes: family ownership and succession; intangible family assets (such as family connections and heritage); corporate governance and leadership; growth capabilities; access to capital; and organisational design.

The study’s authors found that third and fourth generation families (referred to as ‘Champions’) significantly outperformed first and second generation companies (‘Ascendants’) across five of the six areas. This “proficiency gap” being greatest in intangible assets. Ascendants scored higher in terms of Family Ownership and Succession where Champions experienced more disagreements regarding the firm’s future shareholding structure, business strategy and day-to-day operations.

Interestingly the study found that Champions were more likely to take into account non-financial factors when making operational and investment decisions and were also more willing to give up higher rates of market return in order to create impact.

Leapfrogging up the institutional curve

The report shows how the injection of capital and expertise from external sources such as PE can speed up the institutionalisation process.  Interviews with seven PE firms experienced in family firm partnerships explores the complexities and dynamics of these partnerships. And shows how, despite the fundamental difference in family companies’ long-term, multi-generational view compared to PE’s focus on short-term returns, both sides can reap benefits when interests converge.

The Institutionalization of Family Firms – Europe report is the latest in a series of studies led by INSEAD and follows the release of  The Institutionalization of Family Firms – From Asia-Pacific to the Middle East  and The Institutionalization of Family Firms, Latin America.

A comparison of the three reports shows that while European family firms tend to institutionalise faster than their emerging-market counterparts, the level of institutionalisation of family-own businesses increases over time regardless of location.