Proof that private equity can work for families

This is the latest in our occasional series on funding the family business. See earlier articles here and here.

If you want to see a lively debate between two opposing perspectives on how to run businesses put a proponent of family businesses together with a staunch believer in the private equity model. All observers are sure to be thoroughly entertained.

Put simply, the differences are that one is all about long term and the other is all about short term. Private equity describes itself as a long-term investment, but in family business terms the usual time-scale of five to seven years hardly counts. There are also, often, clashes over management style, leverage, the importance of growth, and the pros and cons of family members managing the business, among other things.

But can the two actually work together to create value for both parties? One case where it is working well involves Paris-based private equity group Astorg Partners, which earlier this year bought a majority stake in industrial belt maker Megadyne.

Based in northern Italy, Megadyne was founded by Corrado Tadolini in 1957. In 2012, the company had revenues of around €193m and employed more than 1,600 workers in locations across the world. Indeed, the business is a classic example of a mid-market European family business, a hidden gem of the Italian economy.

Despite Megadyne’s considerable success and strong growth, the Tadolini family had for some time being looking at ways to grow the business through acquisition, but didn’t have the necessary internal capital to do so. They, along with senior management, considered either listing part of the business on the Italian stock exchange, or merging with a major competitor to raise the money for growth.

Eventually the company, which is also partly owned by the management, decided the best way to grow was to sell some equity to a third party. So in 2012, Megadyne agreed a deal with the Italian government-backed investment group Fondo Italiano d’Investimento, which bought an initial stake in the business and increased its ownership during the next year to around 14% with an investment of around €22m.

Working with Fondo Italiano, the family decided in 2014 to sell a bigger stake in order to really kick-start the business and grow globally. This is where Astorg came into the picture, providing financing for the partial secondary buyout of Fondo Italiano and further funds for expansion.

The deal was hailed as a success for all the parties involved. Fondo Italiano got a return on its initial investment, the Tadolini family and senior management got money to expand with still a stake in the business, and the private equity investors bought into a growing business with a potential exit either around the family buying back its share, or through a partial listing in the future.

Guido Corbetta, a professor and family business expert at Bocconi University in Milan, reckons the deal represents an innovative approach to provide financing for a family business.

“All the people involved with the Megadyne deal are happy with the outcome,” he said. “The family still retain a minority stake and might decide to buy back a majority stake in the years ahead, but in the meantime they have money to expand the business.”

He adds: “I’m sure others will follow this type of deal in the years ahead. The demand for external finance for expansion is growing among family businesses and many are getting more creative to raise capital.”

Maybe family firms and private equity are not allergic to each other after all.