Alternative Sources of Financing: Why Family Owned Businesses in Uganda Should Embrace Private Equity

Family owned businesses are an important feature in Uganda’s economic landscape,dominating sectors such as manufacturing, education and health. These businesses not only contribute to economic growth through employment creation and paying taxes, but also by encouraging innovation. According to a report by Asoko, 11 of the leading 25 family-owned businesses in Uganda have revenues above $100 million, including four with revenues of over $500 million. Key giants among family owned businesses in Uganda that have sustained their business for more than three generations include the iconic Madhvani and Mukwano Groups.

A key characteristic of family owned businesses is the fact that they are mostly managed by a founder or family members through relatively informal structures. In seeking to grow, family businesses often find themselves in need of capital to further innovate, attract talent, introduce new products and break into new markets. In Uganda, family businesses usually turn to family savings or savings made from the business and bank financing to support growth. For family businesses to grow and boost profitability, Private Equity (PE) can also be tapped as a source of alternative capital.

PE refers to capital (equity and debt) invested in private companies, that are not listed on a stock exchange. PE funds are investment vehicles that invest in private companies that are not listed on a stock exchange. According to the East African Venture Capital Association, between 2015 and 2016, 16 pan African and East African PE funds raised close to USD 4.6 billion, with US $ 276 million of that being invested in Uganda. PE funds employ different strategies when investing. Key among the strategies include: venture capital that targets early stage businesses; growth capital that invests in fast growing companies in need of expansion capital; and buy-outs that target mature companies that are financially stable, have positive cash-flows with minimal investment requirements. Globally, more family owned and managed businesses are becoming more receptive to PE partners financing their growth.

Obtaining funding from a PE partner focused on value creation will enable a family owned business to raise patient capital to support development plans, new strategies,acquisitions, generational transitions from one generation to the next and other critical phases of a business life cycle.

Notably,PE partners usually add substantial value beyond the provision of capital for a family owned business. PE partners can play an important role in transformation of business structures and processes in Uganda’s environment where majority of family owned businesses are informal. PE partners are usually an important catalyst in cultivating a strong corporate governance culture and formalization of the management of human capital, financials and internal processes. PE partners bring on board new corporate governance and decision making systems that enable an organization transition with ease to a structured corporation.

PE firms are known to focus on performance improvement by taking advantage of their know-how and relationships. Through their managerial experience, PE partners contribute to the re-engineering process of family owned businesses,hence positively impacting the bottom-line. Succession is also another aspect of a family business that PE partners can aid in. Identification of successors from one generation to the next has been known to make or break successfully run family businesses. PE partners can play a role in generational change by identification of suitable persons through the corporate governance structures and mentoring such candidates (usually family members) to ensure a smooth generational change.

PE financing is advantageous for a business seeking to grow beyond its current state. However, PE financing also comes with a host of challenges. Key among them include, PE firms playing a role in the management of businesses on a day to day basis, which can be perceived as loss of control. This can be a major source of friction between business owners and PE partners. Family businesses are usually steeped in culture and may resist changes that a PE firm introduces that chip away the established culture. Moreover, exit routes may differ as PE partners may prefer the most attractive exit route such as selling to another PE firm or strategic partner. This might be in conflict with owners of family businesses, who might prefer exit options such as being able to buy back shares(equity) from PE partners. This however can be addressed contractually.

PE firms and owners of private businesses should partner in seeking to grow and create value. Business owners need to consider their willingness to work with PE partners as a first step. If the answer is affirmative, the next step would involve identification of partners. In identification of partners, business owners need to undertake due diligence on prospective PE partners, for instance:engaging companies that have previously received funding from a prospective partner; assessing the investment style of the PE partner; and assessing whether there is a match and fit in terms of values and priorities. A well-structured and defined PE deal can be impactful to the growth of family owned businesses and it is high time family-owned businesses in Uganda consider this alternative funding source.