One of the most remarkable factors characterizing business today is the amount of potent business opportunities. Technology is changing, consumer behaviors are taking on new forms, public policies are often taking dramatically new turns, and the epicenter of global economic progress is shifting to the east.
This opens up an abundance of new business opportunities for modern family firms that are strong in adaptation, quick, determined and flexible. But there are obviously challenges to this positive agenda.
Two overriding issues face families owning so-called heritage businesses who wish to maintain sustained business success: achieving strong business performance and ensuring family harmony.
A strategy that might be more focused on the wider set of opportunities that now are increasingly available might lead to a further strengthening of performance.
A portfolio-driven strategy typically opens up for more entrepreneurship. The portfolio entrepreneurs come alive! While family firms represent assets, i.e., “things”, portfolio entrepreneurs are real people who might contribute to the growth of these assets in value.
The portfolio entrepreneur is defined as a manager who has simultaneous ownership of multiple businesses. Wealth creation seems to be an essential driver for a portfolio entrepreneur; i.e., to develop profitable new businesses, and to try out a new business concept, inspired by the creative impulse or intellectual curiosity.
A strategic commitment can result in the long-term building of family-owned portfolios over many years, even over generations. My own portfolio investment firm, SUI, for instance, was founded in 1929 as a shipping company, but is now a portfolio; I represent the third generation of ownership, and the fourth generation having just taken over. Maintaining the required level of entrepreneurship over the generations requires active commitment. A strong involvement in business activities in the portfolio seems key, including the ability to grow businesses, as well as diversify, wind businesses down, or exit certain sectors. Entrepreneurial drive is thus paramount.
The portfolio itself might be diverse. For instance, SUI’s portfolio consists of five different areas of business. Some parts of a given business portfolio might yield more stable cashflow returns than others, which might perhaps be focused on more growth.
Starting a portfolio may not only be driven by financial considerations, however, as manifested as profits, cash flow, risk, and so on. There may be personal motives too, to do with career fulfillment. For instance, I have an extensive background in the business educational sector, which served as a guide to SUI’s involvement in the education business.
When it comes to closing down of parts of a portfolio to free up resources for new investments, this might be seen as a “natural” entrepreneurial activity rather than a scaling back as such.
Raising more capital – say, for mergers or acquisitions – is also typically a family concern, often likely impact the concentration of ownership. Is the owning family comfortable with potential ownership dilution? Acquisitions might alternatively be financed through taking on more debt, of course, implying a higher degree of risk for the firm, with no dilution of ownership other than by ‘paying’ with shares in the company held by the owning family. But this would also be an issue of control and affects much more than the decision about whether to merge/acquire or not. Acquisition of new capital might typically be easier in the case of portfolios rather than when having a heritage firm.
For many family business portfolios, having a particularly value-based culture is vital. Values typically directly influence investment strategies. Perhaps the most important aspect of this is the fact that as large a proportion as possible of the funds generated from the various entities within the firm’s portfolio should be reinvested by the firm, with only a relatively small fraction of the firm’s economic result being paid out as dividends. While some parts of a portfolio might generate reliable cash flows, others might be more suited for reinvestment. An owning family thereby has a much greater degree of flexibility when it comes to the withdrawal of cash from such business portfolio types of firms.
One way of viewing a portfolio might be according to its degree of risk. A portfolio might consist of the following four parts:
Moonshot
Very risky investments, typically found in start-ups, and with significant payoffs when successful.
Core wealth creation
Family-owned and actively managed businesses.
Steady income ‘generation’
To support a family’s living expenses, say, through rental incomes from real estate.
‘Hurricane’
To support a family members in case of a crisis, say, by holding gold (physical rather than certificates) in various locations. Holding Bitcoin may represent another way to achieve this.
A way of looking at what might be a good portfolio for a family firm might be through the lens of the human competences in a family firm. A business portfolio might be built based on the core capabilities that exist in a company. What might be key for a leader, then, is to empower people in their organization to take advantage of what they seem to know best.
