How Family Offices Are Investing Directly in Businesses

There's a potential new investor for business owners seeking to get to the next level.

For decades, corporations, public market investors and private equity firms with deep pockets got the attention of business owners seeking new investors or an influx of capital. But a new trend is proliferating. Over the past few years, family offices that traditionally have acted as limited partners have been investing directly in businesses, cutting out private equity firms, bypassing the associated management and performance fees, and buying larger pieces of companies. And that means a potential new investor or buyer for business owners seeking to get to the next level.

Direct Investment: The Family Office’s New Frontier

While this shift has led to increased competition for private equity firms, it also is causing investment banks to consider family offices as an option when a company is interested in being sold or raising growth capital. Here’s what you need to know about the rise of family office investing:

A longer-term approach. As patient capital providers, family offices are content to hold investments that are performing well, while looking beyond short-term fluctuations. The tendency to hold companies for a longer period of time may be appealing to management teams who may own equity in the company and wish to stay in place after an acquisition.

A shot of support. They also use their personal experiences and expertise to help support the companies in which they invest – typically attractive to founder-owned businesses.

Preferred middle-market options. In terms of investment size, family offices can compete against other private equity firms within the middle market. In 2014, 77% of investors polled by McNally Capital said they preferred direct deals over private equity funds. That same year, 84% of family offices said they planned to make a direct investment in a private company within the next two years.

A Fruitful Framework

As companies consider moving away from private equity firms, the family office-direct investing model is enjoying great success. Spearheading the trend is Pritzker Group, which has been investing family money directly into companies for 14 years and has acquired four platform companies in 2015. Focusing on manufactured products, services and healthcare investments, Pritzker Group is best known for creating the Hyatt hotel chain and the Marmon Group, which was bought by Berkshire Hathaway for $4.5 billion in 2007.

“We have increasingly expanded our dialogue with family offices as we recognize the popularity of the family office-direct investment model,” said David Clark, head of the Financial Sponsors Group at Raymond James. “Over the past 12 months, we have sold three businesses to family offices and continue to include them in our processes as they often represent a unique fit for our clients who are looking for a more patient, long-term capital partner.”

Private equity firms may still be an attractive option, however, particularly for companies with strong growth prospects. To combat the competition, these firms are moving toward an industry-specific structure that allows them to develop the expertise needed to be more strategic in the way they acquire, support and grow companies.

But while private equity firms’ track record in generally achieving fast returns has allowed them to remain in the majority*, family offices will continue to grow and should be considered a viable option for companies thinking about selling or raising private funds.

Sources: Mergers & Acquisitions, New York Times, McNally Capital

Past performance may not be indicative of future results. Investing involves risk including the possible loss of capital.