Why dealmakers prefer to talk with 'rich second generation'
With family successors drawn more to Silicon Valley-style business models over 'boring' manufacturing, many are willing to sell their stakes
Economic uncertainties on the mainland have indirectly helped private equity dealmakers to make more acquisitions as capital-starved companies struggle to survive. Making their job easier is the rise of the second generation holders of family wealth, and even the next generation down.
On the mainland, the term "rich second generation" refers to the sons and daughters of the business founders who built fortunes for themselves and their families. Nowadays, we are also seeing the grandchildren as the wealth moves down to the third generation.
We all know a generation gap can easily see misunderstandings escalate into disputes and that may also explain why some private equity dealmakers find talking to the younger generations can lead to some interesting prospects.
Last week, a private equity industry forum was held in Hong Kong, where many of the participants observed a trend: a growing number of successful private businesses on the mainland are keen to get new shareholders on board - and even new controlling shareholders.
While the economic challenges are a factor, it is clear that the younger generations are increasingly thinking about what to do next with the family business. Some of them simply lack the interest to keep running these business, and may even think some enterprises in industries such as manufacturing or coal mining are, well, kind of boring.
"The new generation has many new ideas. They have read many successful stories in Silicon Valley and they will naturally ask themselves: why can't I do that kind of new and fancy business to make quick money rather than to stick to a just-so-so but boring manufacturing plant?" said one private equity fund partner.
"Thanks to the second or third rich generation, I actually find now it is easier for me to talk to these pretty successful private businesses about a controlling stake investment deal," said the fund executive, in comments that help explain why parents are inclined to seek private equity when they realise their children are neither ready nor willing to take the helm.
Private equity in Asia does not have a long history. In China and India, in particular, many dealmakers often complain about lack of buyout opportunities at family businesses. While many family business founders tend to feel strongly about family succession, something is clearly changing.
"I once asked a 'rich second generation' kid what he wanted to do if he sold his company to me. He talked about making investments in financial derivatives to make more money, perhaps even faster than what the company his dad founded could earn in a year, without worries about hiring so many people, pressure for pay rises and other troubles," the fund executive said.
If we look at these changes purely from a business perspective, it might be a good thing for both private equity and the family business owners and their successors. As with most things, passion is the key to success. Lack of interest will not lead to a good result. However, such decisions also come with sentimental considerations.