For the last decade, private equity players have held the driver’s seat in looking at, winning auctions for, and acquiring lower middle market businesses in the United States. But early results for 2019 indicate this trend may be at an end. The family office has come to the fore and appears poised to become the dominant bidder and buyer in this market.
- Private equity funds have mandatory exit time frames imposed by their organizational documents and their agreements with their investors. A typical private equity fund has a life of about ten years so it must buy, grow, and then resell all of its investments in that time frame. Family offices, on the other hand, typically have no time horizon for re-selling. They are more often “buy and hold” acquirers.
- Private equity funds primarily invest “other people’s money”. Family offices invest their own money. While a family office will typically have a management team working for the capital provider and that has the appearance of a private equity-style management company, the management team’s relationships, compensation, career path, and rigidity of investment criteria are each vastly divergent from those of private equity funds.
- Private equity funds operate under some limitations as to the breathe of their investments - a tech fund can’t buy farmland – but they do seek diversification in very broad terms within these limitations. Family offices tend to have a narrower focus. They hew close to the Warren Buffet mantra that investors should only buy stocks within their "circle of competence." A family office that has made money in landscaping is likely only to look at landscaping businesses and if the family made its money in commercial landscaping, to only look at commercial landscaping businesses. As a result, they tend to come across to Benchmark Internationals’ clients as more knowledgeable about their business.
- Also owing to their tighter range of interest and the fact that they do not have outside investor to whom they owe fiduciary duties, they tend to move faster, perform less diligence, and produce shorter contracts. Over the last ten years, as multiple have increased, private equity funds and trade buyers have ratcheted up their due diligence to levels our clients find very painful. This is understandable as higher multiple mean more risks for these buyers. But family offices seem more comfortable with this heightened risk and rely on their expertise in the narrower industry to alleviate the risk other buyers reduce via diligence.
- Family offices also tend to use less debt in their deals than do private equity funds. Perhaps as a result of this fact, or maybe not, they tend to use their existing debt facilities to provide the extra leverage needed to put in competitive bids. As a result, the lenders due diligence is either greatly reduced or eliminated from the acquisition process. This also increases the speed to close and reduced the stress for sellers. When a private equity fund, or even a typical trade buyer, sets up a new transaction, they also set up a new lending arrangement and the bank providing the debt sends in its own diligence team to investigate the deal and the company being acquired. Double the diligence, double the fun!
- Because a family office’s money is coming from one source as opposed to many, they tend to seek out smaller opportunities than do private equity funds. There are some very small private equity funds these days and there are also some rather large family offices now. But in general, the managers at a family office are more accustomed to dealing with smaller business, more owner-operated businesses, and businesses with less data to share during the due diligence process. As a result, our clients often find them easier to work with and have more interest in working with them on an ongoing basis following the closing.
- Private equity funds often have a mechanism in place to have their “deal costs” covered by third parties. Deal costs primarily consist of due diligence costs, legal fees, and travel. It is not uncommon to see a private equity funds deal costs amount to over 5% of the transaction value. Family offices, on the other hand, have no one to turn to for their deal costs. This has two favorable results for sellers. First, they spend less on the process, making it shorter and easier. Second, their certainty of close is higher. While private equity funds can somewhat mitigate the costs of a “blown deal,” family offices only have one pocket to pull from – their own (or, in other words, their boss’s personal pocket).
- The characteristic that is probably self-evident by this point is the higher certainty of close. Family offices know the market batter, they have less bandwidth to use time inefficiently, they have more discretion, they are less reliant on banks, and they don’t want to waste their own money on blown deals. They are thus more cautious, put in fewer bids, and call things off much sooner than other buyer types. In short, if they are proceeding, they are more serious than they average buyer.
- They are harder to find. They do not have to register with the SEC. There is no secret club they belong to. They are too short-handed to attend many conferences. Many even enjoy anonymity and don’t even have websites.
This last characteristic is what makes selling to family offices tricky. Any broker can produce a Rolodex of private equity funds. In fact, an impressive one could be produced from scratch in a matter of hours. Furthermore, because their focuses tend to be so narrow, the first 100 family offices in the Rolodex would probably not be a good fit for any given business but a similar list of private equity funds would probably produce a few interested buyers in most any growing business. A broker is either into the family office world or they are not. There is no break through moment in this regard. It requires years of dedicated effort to identify and establish relationships with these hidden gems. It requires dozens of researchers and outreach efforts. It also requires having an inventory of businesses for sale that keeps these buyers interested. Brokers focused on larger deals and boutique brokers lacking global reach simply can’t devote the time and energy necessary to gain access to this strengthening pool of buyers. Only brokerages such as Benchmark International have the capability to do so and many of those with the capability have simply not made the effort.
Our family office relationships are continually growing and in 2019 these efforts have rewarded our clients handsomely. Keep your eyes open. I bet you’ll soon start to see the Wall Street Journal talking about family offices and the rise of the family office. When you do, remember that you heard it here first and Benchmark International is your gateway to those buyers.READ MORE >>