Family offices' presence felt in M&A
Family offices have been involved in mergers and acquisitions for decades. And their influence, as well as their assets, are growing — with the most professionalized family offices now rivaling traditional money management firms in terms of staff size and investment activity.
Survey data from Campden Wealth and RBC Wealth Management last year estimated that the collective AUM across participating North American family offices sat at $182 billion, with the average North American family office having about $1 billion. Participants were surveyed between March and June of 2022.
Family offices seek to create and maintain multigenerational wealth for their members and where that wealth comes from can take on many forms. Some family offices are centered around operating companies that provide income for the family. Others are run by former money managers or ex-CEOs that use the family office to manage their personal wealth. Family offices typically do not take external investors, although some firms will manage multiple families' assets, and will have an individualized view of risk as well as the types of investments they are interested in.
When it comes to M&A, family offices can be investors in traditional private equity or venture funds, co-investors or direct investors. In recent years, a growing number of families have turned to co- and direct investing because it comes with lower fees than investing in a fund and provides a bit more control.
"What I'm seeing more of is the ability of family offices to come in with as big a check or sometimes bigger than some private equity firms," said Tommy Mayes, Winter Park, Fla.-based managing director and executive adviser for single-family office SunGate Capital LLC. SunGate maintains a dedicated private equity-style investment team and will make co- and direct investments across several industries. "Families have realized if they can directly invest or come in as a co-investor, they are going to have a bigger say in what the final terms are," he said.
PLAYING THE LONG GAME
Because families are managing their own wealth, they're often willing to have concentrated portfolios or invest in companies with a very long-term time horizon, sources say. Pritzker Private Capital, an investment arm of the Pritzker Group, founded by Anthony Pritzker and J.B. Pritzker, heirs to the Hyatt hotels fortune, is one example of a family office-backed investment group that makes direct investments in middle-market companies that have an enterprise value of between $200 million and $1.5 billion with a long-term horizon. Pritzker's investment team includes over 50 members and operating partners and the firm has an expertise in manufactured products and services companies.
"The genesis of how we go to market is rooted in the fact that we come from a family business ourselves," said Michael Nelson, Chicago-based managing partner and head of investing at Pritzker Private Capital. "The concepts of entrepreneurship, and growing organizations is something that Tony has lived. That understanding is the basis of Pritzker. We believe our team of investment professionals can stack up well against any private equity firm."
Both SunGate and Pritzker say that they can bring financing solutions to the table that are going to be similar in size and scope to traditional private equity or private credit but without some of the hurdles that come up in a private equity deal.
"There are caps on what private equity is willing or able to do in a fund. Due to allocation or size limits, they're only able to invest so much in a deal before they have to raise it outside the fund or pass," Mr. Mayes said. "They have issues of duration as well, where they might only be investing for three, four, or five years and not every founder is going to like that. Most family offices don't have limitations on how long they will hold an investment."
Founders often prefer working with other founders, Mr. Mayes added. If a family has a similar core competency or already owns a company in the same industry, it might make a family office stand out in a list of potential investors.
Private equity's reputation can also make some founders skeptical. "We see that sometimes sellers are worried about going with a traditional private equity firm because they have concerns about excessive leverage," Mr. Nelson said.
Prior investments can also leave a mark on founders. "We have partnered with management teams that previously had private equity ownership. For example, the management team may have retained a 45% stake. So when they are looking at the next investor, they often appreciate family office capital that much more after having the experience with private equity," said Mr. Nelson.
While the advantages of family office capital might look clear on the surface, the reality is a bit more nuanced. Family offices are far from an investing monolith. A recent report on family office direct investing from investment bank William Blair showed that 65% of family offices have a formalized investing statement.
However, the size, structure, and approach of each family office varies widely.
While family organizations such as SunGate and Pritzker have formalized investment teams, often the individual leaders of families are making investment decisions on their own without the resources of an investment team.
"We see it all," said Ryan DeVore, Chicago-based global head of private wealth management at William Blair and author of the report. "You'll see families who have a full-on data room and deal team and it's going to look and feel very much like a private equity firm. But we also work with patriarchs or matriarchs who are investing on feel — they like the owner or the company and they take a chance. That can make it difficult to make generalizations about how families move when it comes to investing."
That also means that when private equity firms are on the other side of the table from families, they view them through a variety of lenses. While some might just be significant investors in a fund, they can also be anchor co-investors or outright competitors for deal flow.
Brian Crosby, New York-based managing partner at Traub Capital Partners, an emerging private equity manager that focuses on investing in brands and consumer companies, said family office co-investors have been critical to helping them make bigger investments than they would have been able to as a first-time fund manager — but it's not always easy.
"There have been instances in the past where we have gotten very close on a process and the family has changed its mind at the last minute," he said. "On a co-investment basis that leaves us in kind of a scramble because we have to find someone else to fill that role. So we do have some scar tissue built up from that, but it's a learning curve for both sides and it's a process you can refine."
The varied approach to direct and co-investing also leads to mixed investment outcomes for family offices. Families themselves are the first to say direct investing can be challenging — it requires due diligence and ongoing management, which can be a heavy lift without a dedicated team within the family office. When economic conditions are volatile — as they are now — those challenges can become more apparent.
"We have seen some attrition back to traditional private equity," said Nels Paine, Portland, Ore.-based managing director at Paine Pacific LLC, an M&A advisory firm that also builds investment strategies for family offices. "Direct investing is a lot to take on and not everyone is going to be successful. But even with that move, the posture and influence of a family office is still going to be significant. Depending on the fund size, family offices can be anchor investors in a fund."
William Blair's Mr. DeVore added that if families can't get access to deal flow, direct investing becomes that much harder. They may have an internal investment team, but without reach into the industries in which they want to invest, finding the right deals can be challenging. In the current economic environment, it can also be difficult to make accurate valuations because of fluctuating input costs as a result of inflation, higher capital costs and supply chain issues. "We're seeing the pace of transaction activity slow down as everyone tries to understand where we are in the cycle," Mr. DeVore said.
Pritzker's Mr. Nelson said now might be the time when a lot of family offices take a very hard look at their investment strategies and make new choices. "When times are good and everyone has the same financing package, everyone can move fast. You're seeing that change significantly now," he said, adding that there is a greater potential for long-term value investing in this type of economic environment, but being successful will require heavy due diligence.
"History has shown that the best time to be investing is when others are not and family offices are well positioned to take advantage of this right now. Our time horizon is going to let us look through some of the conditions right now in ways that shorter-term investors may not be able to," he said.
Sungate's Mr. Mayes agrees: "There has been a tremendous amount of wealth creation over the past 20 years, and there are a lot of professionally managed family offices. They're going to want to put that capital to work. So it's only natural to me that we are seeing family offices play a bigger role," he said. "That said, there's a reason why being a financial sponsor is a business — there are a lot of parts to it — due diligence, origination, tax, accounting — you really have to have a dedicated team to be profitable."
From Pensions & Investments, a sibling publication of Crain Currency