Changing guards and preserving family legacy- Episode 7

Transcript

Esiri Agbeyi: Hi, everyone. Welcome to our seventh episode of the NextGen Talks podcast. Today we're having Peter Englisch. Peter is our Global Family Business Leader at PwC with over 30 years experience, and he's in Lagos – and Nigeria – for the first time. Today we're honoured to speak with Peter about family businesses, succession and everything you need to know about getting your NextGen on board. Everything you need to know about the trends that are making family businesses take over the world. I welcome you to enjoy this session. Sit still, get a beverage, and listen up. 

Discussion

Host: Hello Peter. How are you? 

Peter: I'm excellent. Thank you so much. 

Host: It's great to have you on the show today, the Businessday Exclusive. Today, of course, we'll be talking about family businesses. We were talking earlier about how family businesses last year outperformed non-family businesses and I found that quite interesting. 

You have a wealth of experience even going back to your time at EY in terms of advising and helping family businesses. And now you're the global family business leader at PwC. My first question is, what would you say are the unique factors that are responsible for the success of family businesses? And how can African and Nigerian family businesses learn from these examples that you’ll be sharing? 

Peter: Family business typically has two enormous advantages over the corporate and listed peers. One is that they have this long term perspective – they are thinking really long term because ‘I want to keep the business for succeeding generations’. The second is that they are really entrepreneurs by heart. They want to find solutions, and they never give up on finding a solution until they get it. And this persistence, reliability ethos, and even codified values that most of the family business have, make them really unique. 

Host: You've talked about the skills that these family businesses have that more or less puts them in good stead compared to non-family businesses. But going further, what exactly do you think is key for family businesses?What is that defining factor that is behind the immense growth in family businesses that we are seeing today? 

Peter: A family business has a unique challenge. In fact, it's not only a positive thing but also a pressure. If the family grows, there is a gross mandate to grow the business at the same speed as a family grows. So they have a mandate and imperative to grow. How to do that? Family businesses are typically held in a private setting, so they have limited access to the capital market. This is why they have to be very, very careful on how they allocate resources and how they innovate. Many of them are pioneering new technologies, and they tested in their own small environment before they made it really big. So they are conscious innovators and conscious adopters and as such, are more effective. 

Host:  So what family business ownership structures can be utilised by African families drawing on the global landscape to ensure asset protection as well as wealth preservation?

Peter:  This is a very tricky question. One is the legal form that you choose. And the other is in the country and the legal environment you want to establish. Let's say you're holding company, and this can be in two different locations; you can have your operating company in one country and you're holding structure and ownership in a different country. There is the fact that in countries with low levels of trust in business partners, in the stability and the long term perspective, there is a tendency that we see in many countries – not only in Africa –  that trust structures became popular again. I would say there is a renaissance of trust structures currently.

Host: Good. You alluded earlier to the fact that there are some challenges that family businesses face around the world. Are these challenges unique to only developed markets? Or do you see the same patterns in African family businesses as well? And how do you think they can address those challenges? 

Peter: I think the challenges are pretty much the same. So it really depends whether you are a local domestic family-owned business or a global international player in the market. Given the current macroeconomic environment, with a lot of instability, geopolitical challenges, the environment is hard to navigate and especially, it's hard to make long term decisions in terms of investments. For instance, in which country to invest what. This is why we see that family businesses respond to this challenge by starting very early to review the entire supply chain. 

And as a result, we see that some family businesses acted very fast and restructured part of the supply chain moving from external to internal sourcing, and combining local sourcing within the country with international global reach. So this has been different in the past when the only guiding principle was how to get cheapest access to resources and materials. Now, other factors came into play.

Host: Times are changing, really. Over the next decade, quite a number of Nigerian and African businesses would be passing on their business to the next generation. From your experience, we know succession planning is a big problem in Nigeria, but what would you say is a global best practice? And how can Nigerian and African businesses really get it right in terms of having the right succession plan in place? 

Peter: I think one thing that I strongly recommend is to think beyond management succession. Not only focusing on ‘who is the best talent out of my family pool that can run the operations in a leadership position going forward’. For family members that have different options to get involved as an owner, a competent board member, or as a visionary leader. But don't limit yourself to thinking about the continuation and leadership of the business.

A success recipe that we see is really universal in all parts of the world is that you start with codifying ‘what makes us unique as a family? What are our core values as a family? And how does this relate with the business activities? How does this translate into the codex and the mission and the purpose for running the business?’ In order to really define your licence to operate as a business and to be clear on your values.

Unfortunately, only 40% of global family businesses and even less in Africa have codified the values of the mission. But this is imperative if you want to attract and retain the best talent, which is a fundamental need for growth. If you want to build trust in society and with business partners – and trust is what you want to get. Trust amongst family members to have the full support for the business, trust amongst employees in the management to drive the business with the best capable talent, and also trust with other business partners and investors that they can trust what you are doing. 

So codify your values, start with this. By doing so, it will flow very naturally that you think about, ‘oh, we haven't talked about what is important for you, Chairman, Dad, Mother etc. What are your intentions?’ Something which has not been addressed and discussed amongst the family will come up during this discussion around values, purpose, and mission. This is a good start based on my experience and my recent discussion with business owners here in Nigeria.

I would tend to compare – not similar – but I will tend to compare the attitude that we find here in Nigeria, with those of ethnic Chinese families in Asia. Which means you have a lot of respect for the elderly, and you don't dare to ask for succession. Because this means ‘I want you to die’, and this is completely disrespectful. You never do that. But what you can do is that you can start, ‘Hey grandfather, hey father. So we would love to hear the stories of how everything began. Can we start to learn from you? So what are the key takeaways? And what do you want us to take as a lesson learned and what you want us to transmit to the next generation?’ 

Then things come up naturally and they say, ‘I want the best for my family. I want everybody to be taken care of, but we have the business as a centre of our wealth and it's my baby, I founded this, and I would like to keep this in good hands.’ 

It’s also much easier if you have a different starting point. A non-confronting and non-offensive starting point for the discussion building on the great history of value, starting with some pictures from the past. How mom and dad started something. This is non-offensive and then you gradually get there to say ‘what shall we do with family members not showing interest in the business? How could we select family members for leadership positions? Because it's for a higher good for the family, but we need to know what you, Chairman, think is a good process, because one day, you are not around anymore and can’t decide and make your judgement. And then we want to avoid that. We are arguing amongst ourselves, give us guidance, we need guidance.’

A very recent accident happened over the weekend with a Nigerian businessman in the US who was in a helicopter crash. It has reminded many of the families here that you cannot predict the future. For many families, it came as a wakeup call to say, ‘Oh my goodness, what will happen if something happened to the Chairman?’ 

I think this is a good discussion to have, but I would not recommend this. This can be done in Germany, in the UK and the US and the more western educated world. It's appropriate to ask your father for succession or your mother and say, ‘what is your plan? I need to know this. I want to build my own future.’ But in your environment [Nigeria], it is not appropriate. 

Host: I got that right for sure. Sometimes if you ask Nigerian business owners about their plans for succession, they look at you like, ‘you want me dead.’

Peter: Exactly. You're right.

Host: I'll let my colleague ask a few questions as well. 

Host 2: Thank you very much for your contributions and answers so far. Okay. I will just speak from where you stopped, these success recipes that you shared. So of course, the Asian business environment is different from the African business environment. So I want to ask, is this a one-size that fits on all solutions? The recipes that you mentioned for family businesses. 

Peter: There is no one-size-fits-all because every family is different, every family dynamic is different, every business is different, every cultural background is different. The challenges are always the same, but the solution is different. And even within a country, it varies from family to family. 

What I strongly suggest based on my more than 30 years of experience is to follow a very structured approach, starting with the easy thing that you can agree on. Values, mission, purpose before you get to the difficult ones. Never start with a difficult one. Because then you can always go back when you talk about why you chose my sister over my brother, how have we limited access to dividends? We want what we need for our children, for our lifestyle or whatever? Why should we come back if we have studied abroad? And we don't want to come back. This question can be much easier addressed if you have consensus on the main foundation elements of the family, like values, mission, cohesion, and mission. 

Host 2: All right. Thank you for sharing that stepping stone. So the next question I want to ask is, how has  the family office landscape evolved globally in recent years? And then what significant role does the family office play in wealth preservation and sustaining the family legacy? 

Peter: It's a very good question. So family offices became more popular in the sense of managing family wealth and family investment separate from the business. So we're talking about a single family office, not that the existing holding company takes over a certain role in doing some private investment for the family. 

So we're talking about single family offices, really managing separate from the business, the wealth of the family and taking care to keep them out of trouble. These family offices have grown tremendously – the number of single family offices doubled over the last 10 years. If you see recent developments, it's a part of asset protection, it's part of risk diversification for many entrepreneurs, not only in Africa. The same accounts for Asia and some countries in Europe that they say, ‘where should I locate my family office?’ How to move some assets or some wealth management out of the country? Not being dependent on my family wealth from one place to be or one person to manage it. So it's a huge, tremendous trend towards single family offices.

As I mentioned, the number has doubled, and the results are a kind of race for a kind of beauty contest. Yeah, so Singapore has started a big initiative, right? With a big support of the development agency and with governmental support, leading to the application of 3,000 more single family offices over the last 2 years in Singapore. 

You can imagine that the lack of talent in Singapore will lead to this one day, so many of those going to Singapore for wealth management purposes, but also have a permanent residency or a passport or something like that or some benefits which comes with being there. But it's hard to find good and qualified people. The other common contestants are Dubai, Abu Dhabi, together with typical suspects like the US, UK, Switzerland, and so on. 

Host 2:  The next question I want to ask is about the trends that you've noticed and I've noticed a lot of family offices prefer the UK and Singapore, as you mentioned. But in your 30 years experience, what global trends are you seeing in sustainable and impact investing adoption among family offices? 

Peter: Another very good question. So impact investing is the natural evolution of philanthropy and giving back. So with the realisation that it's more effective to change the system and to fight the root cause instead of healing symptoms by donating money or food or whatever to society. There was a big focus on impact investing.

This field is pretty new. So at the beginning, nobody knew exactly what impact investing really is and how to do it. In the meantime, the sector has developed significantly. You still have black sheep selling something as impact investing, which is a normal, very normal stock election from some listed companies. This is not what we typically believe impact investing is. Has the amount of the strategic asset allocation within a family office dramatically increased towards impact investing in philanthropy? I would say no. 

So it has just shifted from more philanthropic to impact investing. But we see some other trends. 

So 40% of all startups in the world are funded by family officers and family businesses globally, which makes families the most active investors in technology and startup companies. This is their way in order to participate in future technology and in future development. Because many cannot apply technology like GenAI or others in the existing business models very easily. And this is why they start separate family ventures and investments. 

Host 2: Okay, I agree that you mentioned the startups and tech platforms, because that is the foundation of this question. What is the growing appetite for alternative investments like cryptocurrency, private equity, venture capital, real estate among family offices globally? And then how does this compare to traditional public market investments? 

Peter: I think real estate has always been a significant part of portfolio investment, but I think direct investment plays a significant part and also equities play a significant part. 

So other alternatives like private equity, hedge funds, and crypto, as you mentioned. Due to the hype of crypto about two or three years ago, and a lot of loss in value over the last two or three years, I think the family office became a little bit more conscious with regard to the asset allocation towards crypto. They keep it, they hold it, they don't realise the losses so far and I am pretty confident in the long run, they will make good profits out of that, but currently, it's not very popular. Private equity and hedge funds, yes. So still, part of the portfolio, roughly about 5-6% of the total asset allocation, typically, so not too much. And therefore, I think it will continue to have its place. But the bigger trend we see is in direct investment in club deals with other families. This is what we really see is really taking off. 

Host 2: Thank you so much. I'd like to ask. What do you say are the key strategies that you recommend for family businesses that are trying to get the next generation involved in their business. 

Peter: So next generation involvement is always a tricky task. My recommendation is to show them in early years, what the business is all about. Don't be shy, lay it out on the table. So at least what it means, what the business is doing that you understand. ‘Oh Mum, dad, uncle, brother coming home and talking about business and I have no idea what the business is about. Whether we’re in oil and gas, whether we’re in transportation, whether we are producing food for people. Show them the company, show them the impact that you have on the life of others. Show them the employees, and how they are feeding their families with what we do so that they get a sense of responsibility. so that they do not see the business as a cash machine, but as the responsibility that needs to be handled very carefully. 

At a certain age, not too early, I also recommend providing more transparency about what they may or may not expect as an owner, if they inherit shares or as a beneficiary. If the asset line, the trust structure and you get access to funds and money from the trustee, just to manage expectations so that they know what to expect. This requires that you have your succession plan in place, which is often not the case, and then you don't know what to say. 

But I think based on my experience working with next gen over the last 16 years across the world, is that they need to know what the expectations of the parents are. They need to know how at a certain age, what is expectation and access to capital and funds so that they can digest and adjust to this, because what I always say is wealth can easily become a poison gift, ending up having false friends, leading to bad behaviour. 

We have seen wealthy nextgens who were not prepared, became drug addicts, criminals, and didn't have any good time in life. This doesn't make sense. So make them familiar, bring them to the company, allow for internships so that they know what they own, but it also gives them the freedom to choose whether they want to be engaged or not. 

Host 2: So you get them young, essentially. There's something you kept saying. You said at the right age, so what is the right age? 

Peter: I think bringing them to the company and showing them this is what the company is doing. You can start very early – age of 10 years or so. 

Host 2: So they could come to internships at the office?

Peter: I would say internships or working on the floor etc. Not introducing child labour here, but say maybe 15 or 16 years old doing internship so that they understand how the business is working. So what different tasks exist, is it a shop floor for a blue collar worker? So that they start to get a sense of the complex system of the company. 

Host 2: Great. So let me ask this question. In Nigeria today, we have economic growth challenges, right? If I've heard you correctly, family businesses do play a very vital role globally in terms of contributing to economic growth – you said 40 % of investors in startups globally are family businesses. So how important is it for Nigeria at this time? What's the huge gain in terms of helping family businesses in Nigeria really grow and thrive? How would that translate to economic growth and as well as fostering development in Nigeria and across Africa as well? 

Peter: So there's strong evidence, and we do the private business attractiveness index every year. So that we are able to prove that there is a very strong correlation between an enabling environment for private businesses to grow and to flourish, and the GDP growth in the country and the public welfare of the society. It is undeniable. And you look around the world in all countries, there is no exception. Private businesses drive economic growth, drive innovation, and also drive employment. 

The biggest advantage that family businesses have so far, also, according to the Edelman Trust Barometer, is that they enjoy the highest level of trust of society, employees and others. More than government, more than media, even more than NGOs – they are the most trusted and perceived most competent institution on the planet across all countries. 

What's important for Nigeria?Family businesses with codified values, with clear mission, have a clear mandate to build or keep the level of trust with the broader stakeholder group. Not only amongst the family members, but also with the workers, with the communities and others. I think this is, for me, paramount and this is a foundation. 

Another element has to come on top, which is alignment with the government. The private sector and the government need to align towards common goals. What are the things that need to get done in this country? And what is the role of the government? Typically it's setting the rules, describing this is the direction we want, but they're not the executors. The executors are the company, the inventors are the company. So the realiser of new ideas are the companies. And the private sector is ready to contribute, but they need guidance and alignment. For my personal perspective, I think restoring trust in this country is the fundamental number one issue to attract more investments and investors into the country. 

Host 2: Precisely. Thank you so much for that answer. That's it. I don't know if you have any other thoughts you would like to share that we haven't touched on already? 

Peter: You let me know. Is there anything that we missed? 

Host 2: We're good. Thank you so much.