Family Business Director

Corporate Finance & Planning Insights for Multi-Generational Family Businesses

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Shareholder Liquidity


Capital Budgeting Capital Structure

Private Equity Investors Learn What Family Shareholders Have Always Known

Since the turn of the century, pension funds have increasingly turned to private equity investments in a bid to earn higher returns.  As detailed in a recent Wall Street Journal article, pension funds have boosted private equity allocations from just 3% of their portfolios in 2001 to 14% in 2023.

The strategy was generally effective as average private equity returns over the past 20 years (as calculated per the MSCI index) outpaced the S&P 500 by over 4.0% per year (14% for private equity, compared to 9.7% for the S&P 500).  For those inclined to do the math, the difference between earning 14% per year and 9.7% per year over 20 years is fairly dramatic:  at 9.7% per year, $100,000 grows to approximately $637,000, but at 14% per year, that same $100,000 mushrooms to $1.37 million.

So while the private equity bet has paid off in terms of return, pension funds and other private equity investors are beginning to feel the risk that helped generate that extra return.  Over the long run, returns follow risk, and private equity funds have provided outsized returns by taking outsized risks, the most significant of which are higher levels of financial leverage and accepting illiquidity.

What most family shareholders already knew – and pension fund managers are learning – is that illiquidity is a real risk.  If you want the incremental return associated with that risk, you have to bear that risk. 

Family shareholders bear the risk of illiquidity.  On the one hand, that can be an attractive feature so long as the incremental risk is rewarded with incremental return.  On the other hand, as we can see in the secondary market for private equity interests, shareholder liquidity needs don’t always align with corporate liquidity opportunities.  Investors accessing liquidity “ahead” of schedule pay the price in the form of selling at a discount.

So what can family businesses and family shareholders do to manage the burden of illiquidity?  Five things come to mind.

Dividend Policy

Dividends, Shareholder Signals & Present Value

As market and financial data for 2022 continue to roll in, we are beginning to prepare for our annual benchmarking study. One early finding is that investors clearly distinguished between companies that pay dividends and those that don’t.  Across the size spectrum, investors favored dividend-paying stocks in 2022. While it was a down year across the board, the average return for companies that paid dividends was less negative than those that did not.  In this post, we explore two potential reasons for this outcome and the lessons for family business directors.

Shareholder Engagement

Is Redemption a Four-Letter Word?

As recently noted in the Wall Street Journal, large public companies are announcing share repurchase programs at a record pace.  Like many issues, what is straightforward for public companies becomes a bit more complicated for family businesses.  Two factors in particular increase the degree of difficulty for family businesses.  First, the motivation for redemptions can be complicated by personal relationships.  Second, price is not a given as it is for public companies. We discuss both of these in this week’s post.

The Family Business Director To-Do List

Share Redemption / Liquidity Programs

In last week’s post, we explored how family businesses can use periodic share redemptions or ongoing liquidity programs to promote shareholder engagement and satisfaction.  This week’s to-do list includes important tasks for family business directors to complete whether planning for a one-time share redemption or establishing a family shareholder liquidity program.

Who’s In and Who’s Out?

There are many reasons family members may want to sell shares: desire for diversification, major life changes, funding for estate tax payments, starting a new business, or funding other major expenditures. What is the best way to provide liquidity to family shareholders on fair terms without sparking a run on the bank?

Shareholder Redemptions in Family Businesses

Are They Good or Bad?

Over the weekend, the New York Times published an opinion column by Chuck Schumer and Bernie Sanders in which the senators decried the increasing prevalence of stock buybacks among the country’s largest publicly traded companies. Reading the column made us think about shareholder redemptions for family businesses. Do shareholder redemptions hurt or help family businesses?  Of course, that question does not have a simple answer.  Not all shareholder redemptions are created equal, so in this post, we’ll outline three possible redemption scenarios and identify what attributes suggest whether a given shareholder redemption will help or hurt a family business and its relevant stakeholders.

Consulting Services

Family Business Advisory Services

Mercer Capital provides financial education services and other strategic financial consulting to family businesses