Jim Burns, head of KKR’s Individual Investor Business, speaks to CampdenFB about annual financing decisions, the rising awareness of alternative funders, and generational differences towards capitalising the family business
Why did you decide to carry out the Family Business: Financing for Growth Report 2017?
I would point to three things. Firstly, we wanted to understand how family businesses of different sizes around the world finance themselves. Secondly, we wanted to assess the degree to which people knew about or utilised alternative sources of finance, broadly defined. We examined banks and, for the purposes of the report, we divided these into local, regional or global/universal banks. These were described as traditional. There was also a portfolio of non-traditional lenders: private equity, credit-oriented asset managers, hedge funds, venture capital. We wanted to understand the degree to which families were aware that these options existed and, following that, how many had engaged these alternative sources of finance. Thirdly, we wanted to educate. Many families were not aware all of these options existed outside of banks.
How do you think the results of the study will be helpful to family businesses?
Many businesses owners now know there are a lot more options out there, so one of two things could happen. One, they might consider other options in the normal course of doing business. Every year they do their annual budget or three-to-five year budget, examining how they have financed in the past and evaluating whether they should keep doing that or go down a different path. Or, two, if their business is at some crossroads, maybe it would benefit from a more flexible or a different type of capital provider.
What ongoing impact has the 2008 crash had on how family businesses source finance?
We see some level of cyclicity based on what political party happens to be in power at a specific time in a specific country, but since 2008 there has been an undeniable secular trend towards a more regulated banking sector. That has made it harder for these businesses to finance their operations or pursue growth strategies, but it has created great opportunities for firms like ours.
What aspect of the research findings stands out?
To me, the thing that was most striking was how correlated the awareness and utilisation of alternative sources of finance was to the overall development of the capital markets. In particular, the debt markets within each of the regions. If you think about the high-yield market or mezzanine market, it is more developed in the US than in Europe and more developed in Europe than in Asia. A typical respondent in the US was more aware of alternative sources of finance than someone in Asia, and was thus more likely to have engaged in alternative sources than someone in Asia.
Were there any findings that were particularly surprising?
I was surprised that such a large number of respondents had already engaged non-traditional sources of finance to fund their operations. I expected awareness to be fairly low and engagement of alternative sources of finance even lower. I was surprised to see a good number of respondents had engaged alternative sources of finance and, by and large, their experiences were positive. The first time doing so is hard, but subsequent times it’s easier and the success of that innovative solution becomes known throughout the community.
Are later generations more open to alternative sources of finance?
Our general sense is that subsequent generations are more willing to employ leverage or take on debt and they are generally more comfortable with alternative sources of finance. A founder of a business will develop a commercial banking relationship with someone over a 50-year period. The founder retires, and the next generation does not have that 50-year relationship. That firm will continue to have some good relationships with the company, but in some respects it is a new day. They will be open to new options that are the right fit for the company at that moment in time.