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Are family-owned businesses the key to de-risking overseas investments?

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Greg Harvey will deliver a paper on the role of family-owned enterprises in delivering healthy returns at the Agrimoney Investment Forum.

More details on the Agrimoney Investment Forum can be found here.

When it comes to emerging markets, even contemplating investing capital in the agribusiness supply chain can strike real fear into apparently hardened individuals, says Greg Harvey, chief executive of Interflour.

The rewards may be great, but for many western businessmen, the risks are too high.

"I'm not being critical. There are a lot of good reasons for people feeling that way.

They are used to operating in the relative security of developed economies and have high expectations of corporate governance and transparency.

"The fear of the unknown – of sovereign risk, of failure, of corruption, of not being able to get their money out – there are a lot of bad stories out there.

It's not surprising that the risks can appear to outweigh the potential rewards."

Valued partner

The nub of the problem is that potential investors, and very often their advisers, lack the knowledge and experience required of these emerging markets and their cultures to strike a better balance between risk and reward, says Mr Harvey.

The value of having a local family-owned enterprise as partner to help de-risk aspects of the investment cannot be overstated, he adds.

"In my experience, FOEs in emerging economies are mostly well established, often in the second or third generation of ownership.

"They tend to be commercially solid and trustworthy, with good corporate governance. Their banks, accountants and legal representatives tend to be global companies, and their board members and investors are generally highly educated."

Interflour Group was set up in 2005, from the Western Australian wheat-exporting co-operative CBH together with the family-owned Salim Group, Indonesia's country's largest flour miller.

The 50-50 joint venture buys around 1.5m tonnes of wheat a year, mostly from Western Australian farmers, with annual sales of around $500m.

As well as his role as chief executive at Interflour, Mr Harvey also travels across south-east Asia and sub-Saharan Africa on behalf of Salim Group, seeking out opportunities for further joint ventures with local partners.

Matching interests

Mr Harvey believes this model was serve western investors well, though it would need some change of mindset.

"Don't assume your interests are the same – make sure they match at the outset," he warns.

The first thing is to recognise that most partnerships with family-owned enterprises are just that – 50:50 joint ventures.

"Western companies typically expect over 50% to 100%, but they would do well to look at the Japanese, who recognised the value of partnering with family-owned enterprises a long time ago," says Mr Harvey.

Exit strategies must be thought through. "Don't assume you are aligned on this. FOEs tend to have patient capital – they are in this for the long term," he warns.

"Anyone looking for a five-year investment followed by an exit either needs to make this very clear up front, or think again. The true value lies in the long term."

Investors should also be prepared to relinquish more responsibility than they might be used to, he adds.

"There are differences in governance. Be prepared for management to have a much greater dialogue with shareholders – the board of directors is more supervisory and less decision-making in nature than in western companies."

Strong growth

The time is right for corporate and private investors to get involved in emerging markets, Mr Harvey believes.

Consumption of grains, red meat protein, dairy products and edible fats and oils are set for strong growth due to rapid urbanisation, the emergence of a new middle class and higher disposable incomes.

How many will take the opportunity remains to be seen. But for those prepared to reach out and strike up new relationships with a trusted partner, the risk to reward balance looks to be shifting in their favour.

By Agrimoney.com

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