Family offices can accelerate revival trajectories of family businesses – Here’s how

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November 21, 2021 1:41 PM

By evaluating the risk profile of small and mid-level business enterprises, family offices are in a better position to recommend sector-specific asset investment strategies.

The prevailing market environment presents an excellent opportunity for family offices to identify stressed assets with high turnaround potential and deploy their investment pool for acquiring such assets.

Family businesses and family-owned enterprises in India form a core component of the Indian economy and have played a key role in ensuring its sustainable growth trajectory over the years. Micro and Small Medium Enterprises (MSMEs), which form a major constituent of family-owned businesses, have been the growth engines of the Indian economy and have contributed immensely to the country’s socioeconomic development. Characterized by a highly centralized and rigid decision-making structure, ownership and management are often inextricable in such entities.

The outbreak of the COVID-19 pandemic and consequent nationwide lockdowns had a debilitating impact on the financial health of small and mid-level businesses in the country. Faced with the prospect of diminishing cash flows and restricted access to liquidity, a large number of MSMEs faced great difficulties in maintaining operational momentum of their businesses.

It is also a known fact that banks and other financial institutions have a risk-averse attitude when it comes to providing easy working capital to small businesses. Foreign institutional investors and portfolio investors have also demonstrated a marked preference to invest their funds in large businesses with operational scale and global market outreach.

With the Insolvency and Bankruptcy Code (IBC), 2016 expediting the resolution of stressed assets with a strong ‘buy low sell high’ potential, their acquisition can help in the capital raising capabilities of small businesses and facilitating inorganic growth opportunities for them. In fact, the prevailing market environment presents an excellent opportunity for family offices to identify stressed assets with high turnaround potential and deploy their investment pool for acquiring such assets.

According to industry experts, entities such as CA firms in tier 2 and 3 cities and wealth managers from private banks with a keen understanding of regulatory compliances and profound knowledge of asset turnaround can help family offices in structuring stressed asset transactions and making prudent investment decisions.

By evaluating the risk profile of small and mid-level business enterprises, family offices are in a better position to recommend sector-specific asset investment strategies. In emerging economies like India, family offices are playing a commendable role in the revival of businesses by helping them earn improved returns on risk deployed. A long-term investment strategy will need to be adopted by family offices to fully unlock the value of stressed assets and harness their benefits for the present and next business generations. For firms firmly established in their core businesses and examining the prospect of diversifying into other growth sectors, stressed asset investment can be a key fund-raising avenue.

“Indian businesses have a peculiar nature of running them hands on and owners generally run all departments themselves and take help of professionals to sustain the operation and growth. They always lead from the front – be it business viability, production, engagement with key customers and liaison with governmental work or crises management. These are more relevant when businesses are small to mid-size and affordability of engaging with a high performing professional team is limited. When such businesses go through adversity, they tend to find it hard to salvage their business with typical 3rd party financial investors or global capital,” says Nirmal Gangwal, Managing Partner, Brescon & Allied Partners LLP.

Family offices of local entrepreneurs who are successful in managing their core businesses and are looking for diversification can leverage the untapped potential of stressed assets to expand their asset base and pursue inorganic growth opportunities. “Local CA firms or wealth managers with the help of professional advisory firms can help them identify and structure the transaction which could be win-win for all stakeholders, be it lenders, existing borrower, employees, and all other participants of such businesses,” adds Gangwal.

Mahesh Singhi, Founder & MD, Singhi Advisors, says, “The enactment of the Insolvency and Bankruptcy Code (IBC) has been a game-changer in making stressed asset resolution a seamless and transparent process. The stressed asset sector in the country has emerged as the next big investment destination and has been witnessing significant global investor interest and activity. Realistic asset valuation in the stressed assets space has resulted in investors earning improved returns on their investments. By unlocking the growth potential of stressed assets, family offices will have a crucial role to play in accelerating the revival trajectories of small family-owned businesses and developing a sustainable roadmap for their future growth and development.”

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