Washington, DC-based RIA Steward Partners needed capital to fuel its growth. So the company sold $50 million in shares in 2019 and another $100 million in 2021 to a single purchaser who each acquired a minority stake.
Although there were offers from private equity firms, the stewards chose Family Office as the buyer in both transactions. Salt Lake City-based Cynosure, which represents the Eccles family, among others, took the $50 million position, and Tom Pritzker’s Chicago-based Pritzker Organization invested $100 million.
“It was natural for us to set up a family office,” Steward Chief Executive Jim Gold said in an interview. “I think there is room for private equity, but a lot of private equity companies want to be majority investors.” The stewards wanted investors to get minority stakes.
In a private equity model, money typically enters a company and exits within three to five years. . In contrast, family offices often take a no-holds-barred approach to investments.
“We were looking for patient funding,” Gold said. “Sinosure has been happy to invest for decades, and so has the Pritzker Organization.
Neither transaction included a put right, “where there is room for investors to redeem their shares, whether it’s a good time for the company or not,” Gold added.
Both transactions added new directors, who Gold said helped shape corporate strategy, finance and mergers and acquisitions.
“We have a $140 million loan from Apogem, and the members of our board of directors have been instrumental in delivering on that,” Gold said. “This is thoughtful capital from people who understand our business and want to grow the company. Our interests are aligned.”
Growing interest in M&A from family offices
Mr. Gold’s experience is not unique.
“Over the past decade, we’ve seen a significant increase in the number of family offices looking to buy privately held companies,” said Sima Griffiths, managing principal at Acelon Capital in Minneapolis. “The size of offices and the amount of money they want to invest vary widely, and they have different cultures and objectives. Some companies make minority investments, while others seek control.”
To illustrate just how much interest the deal will draw from family offices, Griffiths cited an industrial goods maker for sale. Acelon’s database contained 150 of his potential buyers for the company. Of the 15 companies that expressed interest, 10 were private equity firms, 2 were strategic buyers and 3 were family offices.
Griffiths said family offices are interested in buying privately held companies for several reasons. Private equity returns are typically about 20% higher than stock market and real estate returns, and private equity is also an asset class that allows family offices to diversify their portfolios.
Private equity acquisitions are also attractive to many as they allow family office owners to get their hands dirty by actively helping their businesses succeed.
“They have expertise and relationships that they want to leverage,” said Griffiths.
Thomas Ruggie, CEO of Destiny Family Offices, an apartment complex in Tavares, Fla., said there is one family office that is actively considering acquisitions where partners can lend their expertise to create value. Another became a co-owner of a company who wanted to have a big impact on the company’s products.
“This business is about the human lifespan, so it can be very profitable, but it’s also about giving back and staying involved,” Ruggie said.
Andy Vasser, president of Pitcairn Family Offices, an apartment complex in Philadelphia, believes that the ability to improve business through direct involvement is essential for M&A deals where Family Offices are buyers.
“The main advice we give in those situations is to make sure you are investing in companies that you understand well and have a lot of expertise that you can leverage to add value,” he said.
Vasser said he’s seen family members (not customers) investing in things they don’t understand, and it hasn’t worked.
“They invested in a small chain of warehouses that are too small and in the wrong location to be useful for e-commerce. They invested in a friend’s brewery. It turns out they knew nothing about the brewery and neither did the friend,” Vasser said.
Meanwhile, another family ran a very successful company for about 100 years, sold it, and used the money to invest in private companies, Mr. Vasser said.
“They understood this business, and it was a huge success,” he says.
Potential Downsides of Family Office Investing
Family Office Money incorporates flexible schedules and professionals willing to help your business grow, but it also comes with risks.
“Sometimes family offices tend to believe that success at X automatically translates to success at Y, but that’s not always the case,” Ruggie said. “They may underestimate the work, time and money required to take on a new business. Overutilizing themselves can also be a risk. They may overextend themselves.”
Another potential problem with buying a family office is that the purchase price is usually lower than selling to a private equity firm.
“We’ve seen private equity firms paying 16 to 18 times EBITDA, while family offices can pay 10 to 12 times EBITDA,” Vasser said. “The reason sellers receive lower multiples from family offices is that they can get a more flexible capital partner.”
Who Should Consider Selling to a Family Office?
The most successful sellers to family offices are those sellers who focus on what family offices bring: the capital with the expertise and flexibility. Family offices are also more likely than other types of buyers to retain existing employees after the sale.
“When you sell to strategic buyers, they often lay off duplicate employees,” said Griffiths. “Private equity may also do so, especially if they already have portfolio companies and want to consolidate them. Family offices typically don’t have duplicate people or experienced executives.”
A seller who receives the highest possible check and simply wants to exit without having an ongoing role in the exiting business is probably not the ideal candidate. However, those who only want to sell part of their business, or who are happy to continue in some capacity, may find a family office to be a better fit.
Elizabeth Lilly is Chief Investment Officer of the Pollard Family Office in Minneapolis and has worked with 60 companies over the past decade. Lilly said they typically have a minority stake of perhaps 30% in her and are looking for six traits in her:
• A predictable business model that family offices can understand.
• A good management team is in place.
• A strong partner to run your business.
• Attractive valuations. Lilly said multiples tend to vary by industry, and Pollard is industry agnostic, so he can’t say a single desired multiple.
• Organic growth of business.
• Management that invests its own capital in the business.
Once invested, the Pofrados are in no hurry to sell. They hold the business indefinitely.
“It’s been a very effective strategy for our family,” Lilly said.
“We have to be like-minded and united,” said Gold of Steward Partners. “Then everyone wins.”