Many business owners assume that when the time comes, they will sell their company to a private equity firm or strategic buyer.
However, there is another option.
Family offices are becoming a force to be reckoned with in mergers and acquisitions, giving institutional investors and private equity a run for their money. They are casting aside their traditional image and positioning themselves as innovative and agile investors who are playing an ever more important role in capital markets.
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What is behind this trend? Some put this down to the professionalisation and increasing sophistication of family offices over the past decade. This is certainly a factor, but perhaps even more important is the fact that 80 per cent of family offices continue to draw wealth from active businesses.
This makes most family office owners entrepreneurs, and it is perhaps no surprise that they are seeking to drive long-term value through deals, not just via more mainstream financial investments.
While there is ample data on the role of family-owned businesses in the global economy, which account for more than 70 per cent of global GDP, the role of the family office on the other side of M&A deals is less well known.
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Family offices are by nature private, but we do know from a PwC survey in 2021 that the family office deals that were disclosed represented 10 per cent of the entire deals market, amounting to $227.6 billion in value (up from $36.4 billion a decade earlier).
So what type of deals are family offices participating in?
In 2022, a PwC and Family Capital study gave a detailed picture of direct investments undertaken by the 5,200 family offices, showing that there are geographical and cultural differences.
European family offices, for example, tend to favour investments in their home continent; this is also true for US family offices, while Asian and Middle Eastern family offices are more likely to look further afield. Early indications are that this looks set to change as geopolitical tensions escalate. I spoke to one Hong Kong-based entrepreneur who said their office was looking for deals almost exclusively within Asia.
In a competitive market, with lots of dry powder sitting on the sidelines, how are family offices succeeding in outmanoeuvring institutional investors for the good deals? After all, in most cases, they do not have the clout of the more established private equity firms.
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Their main competitive advantage is speed and agility compared to the more cumbersome processes their institutional counterparts have to follow – although Chris Hawley of Rothschilds pointed out to me that while they can be agile, it does not necessarily mean that they always are!
They can certainly be flexible and are not constrained by fund prospectuses or regulation, and are often able to flex deal structures to meet a seller’s needs.
Another advantage is that they have patient capital and are able to commit for decades in some in-stances. Lastly, they are not motivated by purely financial criteria and will have other considerations, whether strategic, personal or ethical. One family office told me it had bought a business as a way to give members of the rising generation relevant experience.
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Family offices are painfully aware that doing direct deals is a big resource commitment. To make successful acquisitions, they must build the right team of experts to manage them. They also require the full suite of resources, including legal, accounting and tax. For this reason, many family offices are choosing not to go it alone, favouring ‘club’ deals where investors join forces. These now account for a third of all family office deal activity (compared with just 4 per cent a decade ago).
Another popular halfway house is co-investing.
The distinction here is that the family office’s investment is made in parallel with a private equity partner, not via its fund. The primary advantages of co-investing for family offices are that they can leverage the PE firm’s resources and proprietary deal sourcing, and it also reduces their overall fees.
Over recent years, more than 40 per cent of the world’s family offices have co-invested in businesses on a regular basis. While co-investing reduces risk and costs, the compromise is that they do not achieve full control over a business.
What does this mean for entrepreneurs and private investment firms?
When they decide the time is right to exit a business, they should make sure family offices are on their prospective buyer list. One word of caution, though: a family office’s investing style may not always be a good match.
Many family offices prefer investing in companies for which they can play a proactive and involved role. This is great if you are looking to exit, but business operators looking for growth capital might find their new partners are too interventionist and they may be best advised to look elsewhere.
This article first appeared in Spear’s Magazine Issue 96. Click here to subscribe
