“A lack of corporate governance and the appropriate estate and succession planning can significantly limit growth and reduce the lifespan of a family business.”
These are the words of Faizal Bhana, who is Jersey Finance’s Director – Middle East, Africa, and India. In this interview, he looks at the opportunities of new investment areas and the effect of the pandemic on family-owned businesses.
Bhana, who is also a trusted advisor to institutions, corporates, and families across the Middle East and Africa, speaks candidly and broadly about emerging trends and government support for African families and family businesses in Nigeria and the wider West Africa.
Briefly take us through the effect of the pandemic on family-owned businesses?
There’s no denying the fact that COVID-19 will have had some level of impact on family-owned businesses across the region, with their resilience, innovation, and leadership all being tested during this difficult period. The pandemic has placed added pressures on many of these businesses, forcing them to show strength and decisive decision-making to deal with both family and business needs.
KPMG’s annual African family business barometer, which was undertaken during the pandemic, found that COVID-19 has affected the confidence levels of family businesses and that there is some uncertainty among family businesses concerning future economic prospects. Remarkably, however, despite this uncertainty, less than 20% of their respondents said they were significantly impacted by the pandemic, and many generally remained optimistic for the future.
One of the key trends we have seen first-hand is that, despite the challenges presented by the pandemic, the majority of family-owned businesses have maintained their workforce throughout these complicated times. Another is that we are seeing an increasingly inward focus on the local markets, where family-owned businesses are doing much less activity with international exposure.
We have also seen many family businesses turn their focus towards conversations around governance, ownership, leadership, and the role future generations will play in these areas. As a result, we are seeing an increasing need for support with succession and estate planning. One leading factor behind this is the demographic impact of a pandemic on the patriarch and/or matriarch of the family, with this generation being more vulnerable and susceptible to infection, or subsequently death.
Another key driver behind this is the that fact that many of the next-generation family members, who would ordinarily spend much of their time travelling for business, were grounded in their home countries and therefore had more time to sit down and dedicate their time to thinking about, and planning for, the future of their businesses.
As we come out of the pandemic and economies begin their post-COVID recoveries, this will prove to be an exciting time for many – particularly with the African Continental Free Trade Area (AfCFTA) and many of these conglomerates looking outward, ready to hit the ground running. It will be these African family-owned businesses – with capital, a clear vision and values, and a long-term focus on the future – that will be best positioned to accelerate the recovery of their respective economies.
What are some of the new areas of investments that will ensure scalability for family-owned businesses (FoBs)?
From a family business perspective, we are seeing significant investment opportunities in key sectors, such as technology and fintech, education, healthcare, agriculture, infrastructure, and affordable housing. The returns and potential in these local sectors tend to be higher than those in more mature markets, be it with the inherent perceived risks.
Interestingly, a report published by Jersey Finance last year found that the shifting geopolitics introduced by Brexit, Trumpism and now also, COVID-19 is reconfiguring Africa’s place in the world and driving its rapid ascendency. These issues have highlighted the fact that political risk is not idiosyncratic to Africa and so-called ‘emerging markets’ but rather, that they are features of markets everywhere.
In Kenya, one of the big success stories we have seen has been agri-tech company Twiga Foods, which raised Sh3.2 billion (US$30 million) to support more than 300 irrigated medium-scale contract farmers to complement Twiga’s seasonal smallholder farmer supply base.
At a macro level, the AfCFTA presents an enormous opportunity and we are also seeing a strong focus on ESG, impact investing, and SDG-linked activity into Africa. As family-owned businesses rationalise their groups, they are going to need to remove some of their non-performing operating companies, so we would expect to see a lot of M&A activity linked to these rationalisation exercises, which the majority of family businesses will need to go through across the continent.
From a demographic perspective, Africa’s young population also presents a significant opportunity for accelerated economic growth and innovation. In sub-Saharan Africa, for example, 62% of the population is below the age of 25 – the highest percentage in the world – and this figure is only expected to fall to 59% by 2030.
Kindly elaborate on the ‘Founder’s curse’ issue and how this affects business continuity and succession?
Interestingly, this was a key topic during our recent webinar. Understandably, due to the sensitivities around the hard work – the blood, sweat, and tears that the founders have put into building their business empires – they are often myopic and somewhat reluctant to simply pass control onto future generations.
In fact, almost every culture has its own version of an old proverb for this: “shirtsleeves to shirtsleeves in three generations.” In Japan, the expression is “rice paddies to rice paddies in three generations”; in Italy, it’s “from the stable to the stars and back again”; and in Scotland, it’s more literal: “the father buys, the son builds, the grandchild sells, and his son begs.” The statistics also back up the sayings, with it estimated that 70% of wealthy families lose their wealth by the second generation, and 90% lose it by the third.
So there are a number of challenges to mention here. Firstly, the patriarch is directly in control of their business and often chooses to be involved in every decision that takes place, regardless of how big or small it is. Therefore, there is often a lack of transparency in the decision-making process on the patriarch side, where decisions are made based on their own personal knowledge and historical information, without any real due diligence or governance.
Secondly, there tends to be a strong disconnect between the wealth creators (or the founders) and the next-generation members, with the ‘next gen’ increasingly having a different education, beliefs and business aspirations to the previous generation. As a result, we often see the patriarchs giving the next generation a small amount of capital to start from the ground and work their way up – and this isn’t necessarily the solution.
Many of these younger family members will be returning, fully qualified, with degrees from leading universities, so they already have the necessary knowledge and the skills in place to join the business at a more appropriate senior level.
It is in these situations where an experienced jurisdiction, such as Jersey, can provide the much-needed support through training, education, and governance, in order to help professionalise and internationalise these businesses, mitigate any unnecessary conflicts, and essentially help them to prevent this ‘wealth creator’s curse’.
We have seen countless occasions, where conflicts between family members have resulted in one generation not speaking to another, and before the issue can be resolved, or a succession plan can be put in place, the patriarch or the matriarch passes away, leaving the family business decimated. It’s therefore essential for corporate succession planning and estate planning to be done together – not only to preserve the family’s wealth but also to successfully grow it. A lack of corporate governance and the appropriate estate and succession planning can significantly limit growth and reduce the lifespan of the family business.
What are the emerging trends you are seeing across East Africa for family-owned businesses?
Due to the travel restrictions put in place because of the pandemic, we have witnessed the next generation becoming more and more involved in the family business decision-making process, with the patriarchs showing more flexibility in terms of control. Rather than being solely focused on immediate profit and returns, the founders are accepting the need for professionalisation and are increasingly looking ahead at the bigger picture.
As a result, we are seeing more collaboration between the wealth creators and the next generation. This has also caused an increase in the number of senior professionals being employed within family business structures, such as chief financial officers, chief operating officers or non-executive directors, etc.
Introducing professional management teams, that are independent of the family – or if part of the family, are at least adequately qualified and experienced – provides an added level of credibility to the business, particularly when seeking loans or financing from other financial institutions.
On our panel discussion recently, we spoke with two successful businesses who had opened up minority equity positions to institutional investors – besides the capital injection, these family businesses benefit greatly from upgrading their structures, processes, and overall skillset through working with partners whose teams consist of experts in the industry in which they operate.
In terms of sectors, we have already highlighted some of the key areas where we are witnessing opportunities, but one area, in particular, is technology. There is already a strong focus on fintech in some of the more developed tech hubs in Nigeria, Kenya, and South Africa for example, and this clearly presents a wealth of opportunities in terms of providing the much-needed access to finance and infrastructure across the continent.
Jersey already has vast experience in providing corporate structuring solutions for a lot of these tech companies starting up in Africa. The Island’s forward-thinking approach, comprehensive legal and regulatory framework, and its ability to offer certainty, stability, and substance have given it the international pedigree to appeal to family businesses and start-ups across Africa, helping them to grow and protect their wealth.
From a markets perspective, we are expecting to see a significant increase in pan-African cross-border activity, and this is an area where Jersey, as a neutral jurisdiction, is perfectly placed to support these family-owned businesses in reaching their ambitions.
On the governance side we can help with the internationalisation elements, but Jersey can also provide the necessary structure that gives a credible platform that is recognised across Africa for their pan-African and global ambition.
Other trends we expect to see are an increasing number of young family members taking a prominent view and family businesses becoming more pan-Africa focussed. We will also see the Middle East increasingly being used as a gateway to support these ambitions.
What priorities are family-owned businesses taking into consideration as they recover from the pandemic?
One of the priorities we envisage for family-owned businesses will be the need for financing and their ability to tap into capital through demonstrating that their business is run in a professional manner with the appropriate due diligence and governance in place. This is becoming increasingly clear as more and more African family-owned businesses are turning to private equity deals as they look to grow and expand their footprint.
Aside from the need for introducing independent professional management teams, businesses will also need to explore and diversify their product and service offerings and ensure they can successfully expand beyond the local markets and tap into, not only the regional and pan-African trading blocks but ultimately the global market. Again, this is where Jersey can play a vital role in supporting these businesses with their cross-border activity and provide them with a tried, tested, and credible platform to achieve their ambitions.
Again, reiterating the earlier point around the need for succession planning and governance, family business structures will need to be reviewed to ensure they remain suitable for ensuring communication, transparency, and effective decision-making within the business. Focusing on all the above will not only help to increase turnover and improve profits, but it may ultimately ensure the survival of the business.
Kenyan family business Chandaria Group has put down strong roots in the region, becoming the largest producer and distributor of fabric, hygiene products, and paper in East Africa. Ownership of the group is shared between Mahesh and his two sons. The issue of governance is not, however, neglected by the family, which is aware of the need to bring in outside expertise and insight as the company becomes a multinational. They recently opened the board of directors to external, independent members with voting rights, and called in on the strength of their expertise and experience.
The Ramco Group is a conglomerate of more than 50 companies operating within East Africa with a focus on six sectors: print, hardware, manufacturing, office supplies, services, and property. The Group started from humble beginnings as a hardware store in Nairobi in 1948 and has since expanded into Uganda, Tanzania, and Rwanda and now employs more than 4,000 people with an annual turnover in excess of US$300 million with an aspiration to become a billion-dollar company.
Has there been any government support for family-owned businesses (FoB)?
Not only did we see support from governments, but we also saw the public and private sectors working together to come up with some great initiatives, which was very impressive to see. An example of this was in Nigeria, where the Nollywood film industry and sports industry came together not only to raise financial support but also to raise awareness regarding social distancing and other COVID-related measures. Together with the private and public partnerships, we also saw international support through development finance institutions (DFIs), where British and US DFIs, for example, stepped in to support the public/private sector initiatives.
From a Jersey perspective, we are currently working with the governments of Switzerland and Kenya on the repatriation of proceeds of crime and corruption, which will ensure the return of stolen assets to Kenya. Under this agreement, the repatriated funds will go towards the COVID-19 recovery. This includes the procurement of essential medical equipment and supplies, and supporting health infrastructure, where there is limited funding, high risk of infection, and limited bed capacity. It will also contribute to strengthening healthcare worker capacity and enhancing home-based care.
In terms of government efforts on the ground, Kenya has predominantly focused on economic stimulus measures thus far, cutting the MPC policy rate and reducing cash reserve ratios. There are also industry-specific packages (such as the US$5 million available to the tourism industry), and bank fees for money transfers between bank accounts and mobile wallets have been waived. The VAT cuts, from 16% to 14%, have now been removed – perhaps a little prematurely given that most businesses are still struggling to remain afloat amidst a third wave of the pandemic in Kenya.
In South Africa, we saw the Disaster Management Tax Relief Bill (2020) and Disaster Management Tax Relief Administration Bill (2020) tabled in parliament. These bills provided for tax measures to assist with alleviating cash flow burdens on small to medium-sized businesses arising as a result of the COVID-19 pandemic and lockdown. Tax relief measures introduced included a delay of remittances of the “Pay as You Earn” (PAYE), without triggering penalties or interest, a delay in the remittances of provisional payments of income tax, and an acceleration of certain employment tax incentives.
The Central Bank of Nigeria also set out a number of measures to tackle the impact of the coronavirus, including establishing a fund to support the country’s economy, targeted at households and micro and small enterprises. Interest rates were also cut, and a moratorium has been announced on principal repayments for CBN intervention facilities.