Family Offices – A New Power Player

Verit Advisors’ view is that patient capital, in the form of family offices, is getting serious about taking on traditional private equity. Increasingly, family offices are building their own direct investment operations to compete directly with private equity funds, mainly in middle-market deals ranging from $50 million to $1 billion in size. This is a good thing for business owners. Family offices have longer hold horizons, as they are not beholden to investors targeting quicker returns or funds governed by fund lifecycles. In addition, family offices are often willing to work with existing management and maintain founders’ interests.

 

Over the last decade, the family office industry has grown rapidly as the number of billionaires and wealthy individuals continues to increase. Heavy fees, lack of transparency, and misalignment of interests are frequently cited as reasons for family offices moving to setting up their own direct investing rather investing in private equity or hedge funds. The Family Office Exchange, one of the nation’s leading family-office research outfits, recently published that 81% of the 118 family offices surveyed have hired staff to invest directly in private firms. According to Steven Thayer, a partner at Handler Thayer LLP, which provides legal services to family offices, “After the Great Recession of 2008, people really started paying attention to what was going on… Family offices didn’t want to cross their fingers and hope that the outside investors were making the right investments. They really wanted more control over the investments that were being made.”

In a market with an overabundance of capital, family offices represent a new power player. Robert Casey, Senior Managing Director of Research at Chicago-based consultancy Family Wealth Alliance, has estimated that the U.S. has 3,000 family offices with more than $1.2 trillion total in assets. Family offices typically provide acquired companies with a longer hold period and a more patient capital source, allowing management to pursue growth objectives without the threat of another near-term sale. They understand management and founder aspirations and have more flexibility to work towards making them a reality, as they are not beholden to investors to deliver a return within a certain time frame. These attributes, along with an ability to close deals with lower reliance on debt, have allowed family offices to become a major force in today’s marketplace.

To illustrate, the Reinmann family (through its family office JAB Holdings) recently acquired Keurig Green Mountain for $13.9 billion, a 78% premium over where the Company had previously traded; additionally, the family also acquired Panera Bread for $7.5 billion, a 20.3% premium. These are just the latest acquisitions in a consumer products empire that includes such brands as Jimmy Choo shoes, Krispy Kreme, Einstein Brothers, and Peet’s Cofee & Tea. For Panera, the attraction of going private was the ability to be able to concentrate on long-term strategies and growth rather than quarterly results. Mr. Schaich, Panera’s founder, recently said of the transaction, “For the last 20 years, I’ve spent 20 percent of my time telling people what we’ve done to grow and another 20 percent of my time telling people what we’re going to do to grow. I won’t have to do that anymore.”

The Pritzker Group, headed by Anthony Pritzker and J.B. Pritzker, is another firm that exemplifies this growing family office trend. Starting in 2012, the Pritzker family decided to shift its focus to private equity and building out its buyout operations. Since then, the family has acquired a total of seven companies in five years. And the Pritzker’s are certainly not the only family to recently move in this direction. Hedge-fund manager William Ackman, Google co-founder Sergey Brin, Dell founder Michael Dell, billionaire brothers Charles and David Koch, and Oprah Winfrey, just to name a few, all have family offices. According to PitchBook, family offices did 97 deals in the U.S. in the past five years, compared to 56 in the previous five. However, these numbers are most likely vastly understated, as family offices are not required to, and often do not, announce their transactions.

Wall Street has taken notice. Morgan Stanley, J.P. Morgan Chase & Co., and Goldman Sachs have all appointed senior bankers in recent years to cover family offices. Middle market banks are also recognizing this growing trend, and so are increasingly including family offices in their deal outreach efforts. Private equity firms including Carlyle, Blackstone, and CVC Capital Partners, in attempt to compete with more patient capital, are raising longer term funds. The family office trend has captivated the financial press as well. One such article we recommend is the insightful analysis linked here from Barron’s.

Family offices have become a new power player and are increasingly taking on traditional private equity. The increase in competition bodes well for middle market businesses owners as family offices provide patient capital with longer hold horizons and understand both founder and management objectives.

As always, it is Verit’s vision to bring a fresh approach and customized solutions to advise private business owners on ownership transition.