Stressed out sextuginarian and septuginarian entrepreneurs are saddled with succession issues, as are their quadregenriarian and quinquagenerian brethren. A 2013 survey of privately-held small- and medium-sized private enterprises conducted by Shanghai Jiaotong University found that 70% will face succession issues within the next five to ten years, and less than 20% of next-generation heirs and heiresses are willing to take on the responsibility for running their companies. Stress is compounded as founders are forced by necessity to increasingly focus on margins, rather than simply growing at any cost.
Despite these challenges, businesses selling majority stakes to financial sponsors have been rare. Our ability to gain control has been a key differentiator of our investment strategy, and is made possible because of the willingness we have demonstrated to be actively involved in the operations of our businesses. We position ourselves as industry insiders, rather than financial investors, with the collective experience of running businesses from the startup to mature stages. This gives us the ability to help build better businesses, particularly in areas where we have existing expertise. We have done so while closely aligning interests with the founding shareholders of our businesses, whom we encourage to retain a large minority stake. We believe that our proposition to owners and founders will prove to be an increasingly compelling solution to the stress and succession issues plaguing stakeholders.
Transitioning to a Professional Management Culture
The challenges first generation entrepreneurs face in terms of stress and succession are compounded by the risk of maintaining strong performance as businesses navigate the challenge of expanding distribution beyond their traditional home base, or expanding product offerings. Tackling these challenges requires management skills that often are difficult to attract into small platform or family-controlled situation.
We believe a key driver of value creation is to integrate modern management practices with a focus on rigorous decision-making, business planning, budgeting, goal setting and controls. This allows us to move companies from a founder-led to a professionally managed culture, with the necessary incentives to focus on quality growth. Critically, it also allows us to put compensation levels in line with company performance. Through this process, we are confident that we can help businesses increase management efficiency, reinvigorate growth, and mitigate the principal-agent problems that many entrepreneurs face when trying to integrate professional outside managers.
Driving Smarter Growth
With a stronger management platform, we can leverage our operations team, collective experience and shared resources to execute ambitious business plans. Some recent examples are as follows:
– In our beverage business, Joysun, this allowed us to oversee the recent launch of our ready-to-drink products, which we believe would not have been possible without Lunar’s active engagement and oversight.
– In our Baby businesses, this led to the decision to divide the business along product lines, which in thinking as business owners, rather than simply financial investors, has allowed us to increase management bandwidth and more clearly align incentives. We believe that Yeehoo’s improving margins, Peekaboo’s progress and IPP’s restructuring will make that clearer in the coming year.
– At Yonghong, our snack foods business, instilling a new management culture allowed us to oversee a rapid expansion of distribution channels post-integration of our acquisition while increasing investment into product development. As a result, we are now on track to command a majority of the shelf space in Walmart for our category, with updated products that will appeal to a younger generation of consumers.
Virtuous Cycle
We have always had a deeply held belief that being actively involved in operations is the best way we can drive value creation and build better businesses. We are increasingly confident that this value proposition will be a profitable one, especially for the founding shareholders we partner with. We can help run businesses better, preserve legacies, and ensure the hard work necessary to benefit all stakeholders, including allowing legacy shareholders to profit handsomely in line with our success. We also believe that this approach may generate greater financial returns versus the traditional growth capital path for many of the founding shareholders we partner with. By continuing to demonstrate our operational achievements, we are creating a virtuous cycle where we can build better business, generate more value for stakeholders, identify other opportunities, and demonstrate a compelling value proposition to future partners.
