Business owners in the U.S. can usually find ways to borrow money to fund their good ideas. That is decidedly not the case in much of the rest of the world.
“There’s always money in the U.S.,” explains José Liberti, a clinical professor of finance at Kellogg. In other countries, when owners need an infusion of cash to expand or simply survive, “It can be a nightmare because there’s no money,” he says.
This, then, presents the question at the heart of Liberti’s Global Entrepreneurial Finance course: how can businesses outside the U.S., which are mostly family-run, create partnerships so that they bring in needed capital without losing control of their business?
“Do you partner with the government? Do you partner with another family enterprise? Do you partner with an outside investor like a private equity firm, or create joint-ventures with strategic buyers?” Liberti says, listing some of the options these companies need to consider.
“The course is about the financial and strategic structure of these partnerships, so the family doesn’t lose control.”
The course also looks at the flip side: how investors in the U.S. can mitigate their risks when partnering with family businesses in countries whose laws and legal environment do not protect these investors as much as U.S. laws do.
Liberti uses a series of 10 cases over the course’s 10 weeks to teach a framework that family businesses and investors can use to determine which type of partnership to pursue and how to structure it. Here is a look at four of them:
The Castiglini brothers, through their conglomerate Cagiva, owned the Italian motorcycle company Ducati when it fell on hard times in the late 1990s. They did not want to lose control of the company; yet, a U.S. private equity company, Texas Pacific Group (today known as TPG Capital), was interested in a buyout to inject capital into the business. It would be TPG Capital’s first non-U.S. investment. And Italy, despite being a G8 country, has very weak protections for outside investors in areas like bankruptcy and taxes.
Could the family firm and TPG Capital design a deal that worked for both parties? “This case is all about how you create the structure to protect against these risks so you’re mitigating downside while allowing the family to continue to have a say in operations,” Liberti says.
The students discuss how investors “need to be much more creative” when operating in different legal environments, he explains. Crucially, they must decide if there is a way to mitigate each risk they face as an investor. “And if you cannot mitigate some of these risks, then the returns have to be very, very high to make the investment worthwhile.”
The Khemkas, an Indian family, owned a business run by a father and son. They were worried that the business was taking on too much risk in its home country and wanted to diversify geographically. They decided to expand into the beer market in Russia by investing in the Sun Brewing company.
But then, as they were planning their expansion, the ruble was devalued, and they lost access to capital markets.
“This is a very nice case about how a family partners with private investors willing to provide capital,” Liberti says. “But when you bring someone in, you need to provide returns.”
Students discuss different types of equity products that can be used in this scenario since debt markets are more constrained in this part of the world, as well as the different options the family has for how much control they want to relinquish. Of course, the father and son could have decided not to give up any control, but that would have meant scuttling their plans to expand and diversify. So, in the end, the family gave up 40% ownership and through financial engineering they were able to partner with passive investors and maintain control of the company.
“The case highlights the importance of structuring shareholder agreements to try to protect the role of the family that wants to expand,” Liberti says.
The one U.S.-based case Liberti teaches also focuses on shareholder agreements, but in a very different context. The case looks at a manufacturing company, which was not looking to expand, as it was already a large, well-established firm. “They could be a public company, but they don’t want to change its private ownership structure,” Liberti says.
But with its success over four generations the company had accrued many minority shareholders among multiple generations of family members who were not involved in running the business. The CEO decided to buy out those shareholders. This case tells the story of the disagreement between the controlling stakeholder(s) and the minority shareholders over what their shares should be valued at.
At issue is redemption rights: “I have the right as the owner to buy shares from you, and you, as the minority shareholder, have the right to dissent on the price,” Liberti explains.
This, of course, can get very tricky — as the students soon discover.
Liberti puts it this way: say he owns 99% of a company and the minority shareholder who owns 1% comes to him and says, “‘José, I don’t like how you’re managing the company.’ So I say, ‘OK, sell.’ But the company is private, so the only person who is going to buy it is me. What am I going to pay you then?” Likely as little as he is able, he explains.
“So, the case teaches different legal standards of valuation in dissenting shareholder lawsuits,” Liberti says.
In the early 2000s, as Argentina was going through a financial crisis, the cable company Fintelco needed to find a partner to shore up its finances and continue its expansion. The company struck out with private equity firms but found a strategic buyer in the American company Continental Cablevision. The goal was to create a joint venture that allowed Fintelco to expand its operations.
Yet there was plenty of risk for Cablevision in entering Argentina, which was experiencing significant economic turmoil. “That inflation erodes revenue power of companies whose revenues are denominated in local currency,” Liberti explains.
The case gets to the question of how partnerships should be handled depending on whether firms are dealing in tradable or non-tradable goods. Cable is a non-tradable good that was being sold to viewers in the local currency. “That’s where you can start having problems,” Liberti says.
“This case gets the students thinking about country risk,” he explains. “I put dollars in Argentina, but then can I take them out or not? Are there going to be capital controls? What about exchange rates and inflation? The strategic buyer needs to start seeing all these problems and decide, ‘How can we make this work?’”
When Eduardo Beffermann ’16 arrived at Kellogg, he had just left a job in asset management in the family office of the now president of Chile, Sebastian Piñera. Beffermann was eager to refine his skills in evaluating investments, so he enrolled in Global Entrepreneurial Finance with Liberti.
“The class is tough!” he says, but also extremely useful. Along with classmates from all over the world, he learned how to think through minority interests in companies that, unlike most in the U.S., have a defined majority controller, as well as how to structure shareholder agreements, and how to consider country-specific legal and political challenges.
Despite hours and hours of prep work for each case, “José always surprised us with something that we hadn’t thought about or with a different angle or perspective,” Beffermann says, “Which is very, very valuable.”
After graduating, Beffermann spent a couple years at Anheuser-Busch InBev in Argentina before returning to asset management. He is now the chief investment officer at Banchile, managing assets worth more than $17 billion.
He uses the knowledge he gained in Liberti’s class all the time — both in making investment decisions and in working with the many families who are among Banchile’s investors.
More than any specific lessons that he returns to, the biggest takeaway “was the class discussions and how to think and how to approach these cases,” Beffermann says. “I see it all the time in my job, when I have to negotiate, for instance, or with our shareholder agreements, or when I have to invest as a minority investor. I have to think about many, many angles and most of those angles were ones we discussed in class.”