Most family businesses aren’t going to get too worked up about the investment environment. The best investment for them is their business and that’s the prism they view the world from. But some - and all family offices - want the occasional insight into the bigger themes affecting their businesses and investments. As such, Family Capital has listed five themes it reckons might be relevant to the family investment world. But, first, there is one big caveat...
To predict anything more than a few weeks ahead of today is a fool’s game. To predict how things unfold over the next year with any certainty is the game of someone with certifiable mental problems.
Nevertheless, with the risk of being labeled mentally unstable, Family Capital has given it a stab. Take, or discard, what you want from these...they are what they are: a few words and shouldn’t be taken as investment advice.
This prediction has little to do with China’s current volatile economy, which might, or might not continue to be volatile, but rather about what that country’s companies will do abroad. As they started to do in 2014 and accelerated it in 2015, Chinese corporations will buy a lot more family businesses in 2016. Most of their buying efforts will be directed at German companies, which they particularly want because of their technology. At the other end of the deal, there will be many European family businesses wanting to sell because of succession difficulties and/or resource constraints. This deal making will happen against the background of accelerating mergers & acquisitions across the corporate world.
Against the background of a buoyant M&A market, many family businesses should improve their competitiveness because of easing cost pressures. The cost of labour will remain low - in Europe because of high immigration, and because of continuing weak bargaining power of unions across the developed economies. The price of oil looks likely to fall further, given weak global demand led by China, fracking in the US, and the increasing use of renewables. Interest rate hikes will be minimum, and in Europe rates will remain flat. But whatever happens to interest rates will have little bearing on family businesses, as most have negligible debt levels. As their competitiveness increases, family businesses will be more likely to make acquisitions, thus further accelerating the the M&A cycle. Those less competitive, or facing insurmountable succession difficulties will sell.
Even as costs fall, many family businesses will be looking to finance growth by borrowing. OK, we aren’t looking at a bonanza in family business borrowing, but a more sanguine financial sector when it comes to listening to the needs of family businesses and low interest rates might just increase borrowings among family businesses. There will be some interesting deals to be had in providing financial products to the family business sector, but only for those financiers who believe in the long term when it comes to realising a return. Public listings will probably be minimal, and private equity will continue to be scorned by family businesses.
Family business culture
This is potentially the biggest theme of all because it could have repercussions for the entire corporate world. At the end of 2015, Family Capital ran an article about the increasing use of words and phrases like stakeholder and long-term among non-family businesses. This trend should continue, with more listed companies opting out of the quarterly reporting regime and emphasize stakeholders, and not just shareholder values. They will do so because it is in their interest.
What Family Capital can predict with absolute certainty is there will be plenty of “unknown unknowns” ahead. The world at any level doesn’t move in a linear way and so it is with investment themes. Follow contrarian views and look at deeper analysis like that presented by the excellent US investment house GMO and its chief analyst Jeremy Grantham to get some different perspective. And, of course, read Family Capital as often as possible...