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Why partnering with a single or multi-private family office is the optimal way to access private equity capital today

By : Ziad K. Abdelnour| 1 March 2011
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There is no doubt that the private equity business is today under tremendous pressure.

In fact, our extensive research at Blackhawk Partners; as recent as January 15 of this year, has found that most private equity firms expect the fundraising environment to remain very difficult and still experience significant downward pressure on fees. While a great number of the managing partners at the private equity funds surveyed are looking to raise capital, the great majority of them expect the process to be increasingly challenging; and this includes a number of $1 billion+ funds already in business, not just the new funds in formation.

Enters the private family office….. What is a private family office?

It is basically a private company that manages investments and trusts for a single wealthy family. The company’s financial capital is the family’s own wealth, often accumulated over many family generations. Traditional family offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the traditional family office include property management, day-to-day accounting and payroll activities, and management of legal affairs. Family offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning. A family office can cost over $1 million to operate, so the family’s net worth usually exceeds $100 million. Recently, some family offices have accepted non-family members. More recently the term “family office” or multifamily office is used to refer primarily to financial services for relatively wealthy families.

Single-family offices are an exceptional source of funds for many private equity firms as well as entrepreneurs. In general, single-family offices have significant money to invest in private companies. Single-family offices tend to have long-term investment horizons and are comfortable with the dynamics of investing in these companies, as that’s how their own fortunes were often made. Well over half of the surveyed single-family offices are investing in private equity capital, primarily through funds. However, there’s a growing trend for these family offices as well as ultra-affluent investors to invest directly in companies, often alongside their peers.

Family offices interested in aligned investment opportunities are likely to commit substantial monies to private equity deals or funds they understand well. Such investments tend to represent a substantial portion, if not the majority, of their investable assets. They find this approach much more appealing than a diversified portfolio.

While the wealthy have always co-invested in private equity deals, we’re seeing a strong surge in this approach which entrepreneurs all around the globe should start seriously consider partnering with.

In fact, single-family offices and individual ultra-affluent investors are today increasingly teaming up to invest in everything from start-ups to providing mezzanine financing and even select smaller management buyouts. As a result, many single-family offices as well as an increasing number of ultra-affluent investors are forming highly selective private equity investment clubs. When one of them comes across an interesting deal, the “members” of their club and occasionally friends of members each get a chance to kick the tires and see if they believe the firm in question would be a good investment. While private equity funds are still in demand by single-family offices and ultra-affluent investors, the opportunity to invest directly alongside others who are putting their own money on the line is especially appealing. In this scenario, it’s very clear how committed each investor is to the deal….and this is exactly the model we follow at Blackhawk Partners.

One of the more insightful research results was that nearly 40% of the single-family offices investing in private equity are seeking deals that are well aligned with the way they created their fortunes. This means they’re inclined to invest in funds that are similar to the businesses that produced their wealth. These are business ventures they understand well. Therefore, if a single-family office made its money in banking and has a high level of alignment between its source of wealth and its philosophy, the single-family office tends to be predisposed to invest in banks or funds that invest in banks.

The fact that the fee structure is more appealing compared to a fund is also proving attractive to the super-rich and entrepreneurs seeking capital alike. By and large, the management fees and carried interest of a fund are somewhat minimized and, in some cases, even non-existent. When the parties co-invest, they’re keenly focused on the success of their investments, as that’s how they’re going to profit. Another consideration is being able to work with people who have an in-depth knowledge of a specific field such as healthcare, Internet technology or manufacturing.

The single family office or ultra-affluent investor sourcing deals usually has a deep understanding and a very well-established network in a particular field. For example, one family office out of the Far East whom we know very well and have done lots of business with invests extensively in biotech firms. The founding family made its fortune by creating a biotech company that it eventually sold to a major pharmaceutical firm. This is an area it knows exceptionally well, and it also knows all the key players. Today, it is part of a small number of family offices that shares deals with us on a global basis.

A significant consideration for those single-family offices and wealthy individuals investing directly in private equity opportunities is their ability to evaluate the deals. They need to be able to conduct their own due diligence and analysis of each company seeking money that crosses their radar. Such expertise is in-house for some single-family offices and wealthy investors. For other super-rich private equity investors, the use of boutique private investment banks is the solution. Either way, what we’re seeing is an expanding interest in individual deals that’s likely to lead to more and more single-family offices as well as ultra-affluent investors investing directly in promising private companies.

So my recommendation for all entrepreneurs out there with good ideas and strong execution capabilities is maybe to start seriously considering this path rather than looking to raise their own fund or going through the excruciating path and layers of bureaucracy when dealing with your “classic” private equity funds.

As deal sizes have grown and valuations have escalated, so-called club deals involving consortia of financial (and, sometimes, a combination of financial and strategic) investors are becoming the norm.

This phenomenon and its complexities have been widely reported, and commentators have provided sound advice as to how to avoid the pitfalls of club deals to make them work more efficiently. In this context, the trade press has also reported on the increasing frequency with which private equity firms rely upon co-investors to complete large transactions, and the challenges of involving co-investors directly in the deal-making process. Less frequently discussed, however, is the growing use of so-called “side car” or “over-allocation” funds to meet the need for additional equity capital to complete larger acquisitions; and this is exactly where private family offices can also come in handy; for the private equity funds as well.

Side car funds bring with them several technical complications and are not a panacea for the challenges of today’s mega-deal marketplace. They can, however, provide an attractive alternative to fund sponsors and private equity funds alike seeking to reduce their participation in club deals, and especially for those who do not believe they have a mix of LPs that are ready, willing and able to provide the necessary magnitude of co-investment capital within critical time constraints. Side cars work best for mid-sized funds looking to top-up their availability of unfunded capital. Under all circumstances, the decision to proceed with a side car fund-raise should be made in consultation with experienced counsel. With a little luck, elegant solutions can be found that maximize the flexibility available to the fund sponsor while ensuring a healthy alignment of interests with private family offices whose loyalties have been well-earned.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

Comments

  1. Alastair GrahamAlastair Graham

    Accurate insights – we research single faily offices internationally from London and are finding an increasing number allocating a major portion of their money to direct private equity deals. This is an important source of funds for SMEs with bank lending still weak.

  2. glen masteyglen mastey

    This article is dead on! I am down here in Dallas and work with many of the well known and not so well known FOs. Becoming a “Deal Source Machine” will give you instant credibility with them. Showing them a deal and investing along side them and you are “in the family”!

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