An Emerging Trend: Family Offices Seeking Private Company Investment Opportunities
There is a growing trend of family offices acquiring or investing in private businesses and the trend is picking up steam for good reasons including but not limited to:
• Direct investing provides Family Offices with the potential for superior returns, transparency and control of their investments in private companies
• In some cases, private companies' interests can be better aligned with a Family Office as an investor or owner than with a traditional funding source
What is a Family Office?
A Family Office is an entity that provides services to either a single wealthy family or multiple wealthy families. The Family Office (FO) is generally set up by the wealthy family (a family with assets typically in excess of $100 million and often in the billions) and ranges in the number of professionals employed and services covered. The services provided by a family office are tailored to the family's needs, and can cover: (i) wealth management, (ii) investment management, (iii) private banking, (iv) accounting and tax management and (v) other services such as travel, legal, bill paying and security. The rationale for setting up a family office is centered around privacy, confidentiality, control, transparency and a consolidated team working together without any bias or conflicts of interest. FOs invest across a wide array of domestic and international public and private securities as well as real estate. Collectively, family offices are estimated to hold assets in excess of $2 trillion.
Advantages for the Private Company:
• A FO's primary objective is to preserve and grow wealth over the long term rather than selling their best investments quickly or using high amounts of debt in order to generate a high IRR of new investment funds.
• FOs are more likely to hold a good investment for many years or even potentially in perpetuity and to be an ongoing source of growth capital for the company.
• FOs are already running businesses and are sensitive to the softer issues such as company culture, succession issues, impact on the local community as well as maximizing business strategies. Most have been through up and down economic cycles and won't take short-cuts to preserve their jobs.
• The different investment objective of a FO can also manifest itself in less balance sheet leverage being employed which may be attractive to business owners who want to be sure of the future stability of the company. Many institutional investors focus on maximizing IRRs which can bring with it an interest in maximizing debt levels since the higher the leverage, the higher the return on the equity, everything else being equal. Most FOs, on the other hand, are more conservative on the use of debt in their acquisition financing.
• Finally, FOs are using their own capital and can therefore close on investments quickly without relying on bank or investment committee approvals.
When considering a sale or capital raise for a privately owned business, there are many types of traditional and non-traditional capital providers and acquirers. A well thought-out strategy for each situation must be developed to engender a successful outcome. Doing so requires evaluating which types of investors to reach out to and including multiple types of investors. This will no doubt maximize business value as well as the ongoing operating relationship. Family Offices are a good complement to a robust investment banking process.