The Robinson family were entrepreneurial from day one. Eager and canny, the first generation built up a solid food processing company whose brands won hearts and gained the trust of consumers throughout North America.
Their brand was their family business, their capital was their family business – both inextricably linked. The second generation soon followed and before long the needs of the larger family would morph, yet the direction of the company remained true: grow, and if opportunities arose, diversify over lifetimes.
The business thrived, and it wasn’t long before major players in the food processing sector began to take notice of the Robinsons. Acknowledging this interest, and with an increasing appetite for liquidity, the family decided to sell a minority stake in its enterprise to help finance other interests.
The family’s pursuits widened, and eventually they cashed out entirely. To their good fortune, the family stumbled upon an opportunity to purchase a group of distilleries whose signature products had a virtual lock on lucrative craft segments in the North American alcoholic beverage market.
Life was good, until the 2009 financial crisis that is, when the family was approached to help bail out an insurance giant that the federal government had helped prop up. The Robinsons parlayed funds from the disposal of their food processing business into the ailing insurance company, taking a 30% stake.
But the spirits market got rough. Competitors copied the Robinsons’ signature products and began undercutting them on price. The Robinsons decided to sell.
Although they still possessed other operating businesses, a natural foods franchise for one, the Robinsons were 80% liquid. The remaining with 20% of their fortune was invested in the insurance group, and a food and beverage logistics business.
The ramifications of liquidity event can be far-reaching for families, particularly for those who hope to leverage the “family brand” in a way that reflects their values and redirects their wealth back into meaningful or tangible business projects.
In the wake of a liquidity event, a family may use or set up a family office to manage its wealth, simply because it sees few alternatives. In the Robinsons’ case, the influx of liquidity created not so much a disincentive to build a new business but rather a disinterest among the family members because the “family brand” was its food processing empire and the family distilleries, both of which it had sold.
The insurance company was not really part of their brand capital the way the food and beverage concerns were. Now worth more than $2 billion, the clan struggled to hitch its family brand to a tidy yet faceless bank balance.
What exactly is brand capital, and how can a family isolate and exploit this important yet seemingly ephemeral resource? The quick answer is not what it is, but what it isn’t. In the case of the Robinsons, a highly liquid family, its brand capital was its former core business. Its family members, former suppliers, clients and consumers could identify family with product and product with family.
Why? Because it’s not only feasible but conceptually possible to associate physical assets with a brand. Do that with cash? It’s a stretch.
It’s important to remember that a key consequence of a liquidity event is that money has no brand attached to it because all the assets are liquid. But brand capital, although intangible, can have incredible value when unlocked and developed.
It is not unusual for families to look to wealth managers after a liquidity event. Private equity funds are common financial instruments for family businesses, but most funds by their very structure are too short-term oriented for families seeking patient capital. And given their average returns of 6% in the past decade, several family offices have withdrawn in favour of direct investing, often with other like-minded families.
Indeed, in the past five years the increasing number of entrepreneurial families exiting private equity and public markets has created larger and larger liquidity pools, so much so that family office capital now competes directly with private equity.
Since direct investing fits comfortably with the transgenerational desires of families to transmit their wealth over long-term horizons, eliminate management fees, and retain control over their investments, it’s no wonder families seek out like-minded families as co-investors.
Additionally, the returns are more attractive. A lead investor family may have a majority stake and competencies in a specific business but little appetite to contribute all the capital. They may be seeking an acquisition or a corporate development project and require capital with similar “family views” – long-term perspectives that often surpass 50-year horizons – as well as capabilities and competencies.
Enter the co-investor family. This is an effective way of creating a pool of capital that has the right mix of money, capabilities and governance supports.
The question is: How? A family like the Robinsons, with plenty of capital but a diminished brand, must start from scratch. In order to find the right investment, the right co-investor, they have to develop their brand capital.
The most successful investors of our times have brand capital in spades. Think Berkshire Hathaway and Warren Buffet or the entrepreneurial Pritzker family. Both are perceived as entities that attract strong partners to high-quality investment opportunities.
Companies seeking capital call on them – or they themselves attract competent investors to deals – because of the irrefutable credibility and potency of their brand capital. Simply put, they are associated with quality deals for reasons that range from their exceptional due diligence capabilities to enviable track records in generating high returns.
In the case of the Robinson family, the shortest path towards defining its brand capital began with identifying the family’s marketable competencies. What were they good at?
Their knowledge of food production didn’t count because that expertise evaporated with the sale of the family business. It’s difficult to be an expert in food processing if you are no longer in the food processing business.
Yet some talents never disappear. An enterprising family can possess sophisticated expertise in putting money behind sharp senior management teams or the acumen to evaluate potential international management groups.
With regard to the Robinsons, because of their historic orientation towards food and beverage retailing, their ability to understand such markets put them at a significant advantage to distinguish themselves as a valuable entity capable of assessing risk around domestic and foreign retail operations.
A direct investment in, say, a heavy manufacturing business would not make sense because the family would not necessarily relate to it and, worse, put them in a weak position to measure the risks and opportunities around that type of business.
It may seem esoteric, but it is critical that a family pinpoints what it stands for and what it values before igniting its brand capital. Do they want to be known as aggressive New York-style investors or as investors who are supportive, growth-oriented partners with a long-term horizon and innate appreciation for patient capital?
It is vital for a family office to have a vision and mission statement. Families can start there, for example, by resolving to be ethical, impact-oriented or environment-friendly investors, supportive of management and so on, in a purposeful statement that rallies all family members.
The key question a family must answer is this: Ultimately, what do we want to be known for?
To an extent, the answer will have an on impact how a family governance plan is perfected and stress-tested. The family has to be committed to staying invested in the business for a long period of time. The family governance system must ensure the family stays together.
Once a family identifies, isolates and defines its core business strengths in detail, and maps out its characteristics to the extent that it knows who it is, what it wants, and what it is good at, only then can it go to the marketplace – not necessarily to buy a business but to begin positioning itself a good co-investor that can learn from other co-investors.
An enterprising family wielding its newly-minted arsenal of brand capital would not initially lead a deal. Often, they would have neither the internal resources nor experience to do so. But their sought-after asset is their know-how of the industries in which they have been involved. Such know-how must be defined. Possessing special competencies that others seek counts.
The Robinsons developed an efficient logistics network throughout North America and know the markets intimately. Their knowledge of supply and demand trends stateside and in Canada make them a strong candidate with a lead investor in an operating company seeking depth domestically and looking to establish a beachhead in Canada.
Because the Robinsons understand the Canadian market, they’ve already distinguished themselves as experienced and knowledgeable co-investor candidates who can unlock international trade. Before long they will start developing their brand through these types of investments, co-investing with others, and achieving success in their investments, to a point where they can start building their own team and ultimately leading deals where they attract other co-investors to join them.
The concept of families investing in families and families partnering with other families is not new. In Latin America, many families have invested with other families or have been partners in each others’ businesses for decades.
What is new is the growing number of single-family offices looking to make direct investments in private companies and partnering with the existing owners of family companies.
To do so, it often starts with strong brand capital. And the stronger a family’s brand capital, the more chance it has for success.