Steward Partners, an RIA in Washington, D.C., needed capital to fuel its growth. So it sold off $50 million in equity in 2019 and another $100 million in 2021, each to a single purchaser who took a minority stake.
Though it had offers from private equity firms, Steward chose family offices as buyers in both deals. Salt Lake City's Cynosure, which represents the Eccles family among others, took the $50 million position, and Tom Pritzker's Chicago-based The Pritzker Organization invested $100 million.
"To us, a family office was a no-brainer," said Steward CEO Jim Gold in an interview. "I think that private equity has a place, but many private equity firms want to be the majority investor." Steward wanted an investor to take a minority interest.
In the private equity model, money typically goes into a company and comes out within three to five years. . A family office, by contrast, often has an open-ended approach to its investments.
"We were looking for patient capital," Gold said. "Cynosure is happy to invest for decades. Ditto The Pritzker Organization. That's very patient capital. Both families built something from nothing, so they understand what it's like to build a business."
Neither deal involved put rights, Gold added, "where the investor has a window to redeem their equity, whether it's a good time for the company or not."
Both deals did come with new board members, who Gold said have been helpful in devising company strategy, finance, and mergers and acquisitions.
"We got a $140 million loan from Apogem, and the board members were instrumental in putting that in place," Gold said. "This is thoughtful capital from people who understand our business and want to grow the firm. Our interests are aligned."
Growing M&A interest from family offices
Gold's experience isn't unique.
"We've seen a huge increase in the number of family offices looking to purchase private companies in the last 10 years," said Sima Griffith, managing principal of Aethlon Capital in Minneapolis. "There's a broad range in the size of the offices and the amounts they're willing to invest, as well as different cultures and objectives. Some make minority investments, and others want control."
To demonstrate how much interest from family offices a deal might attract, Griffith pointed to an industrial-product manufacturer that's for sale. Aethlon had 150 appropriate buyers for this firm in its database. Of the 15 that expressed interest, 10 were private equity companies, two were strategic buyers and three were family offices.
Family offices are interested in buying private companies for several reasons, Griffith said. Private equity returns are generally around 20% higher than those of the stock market or real estate, and private equity is also an asset class that lets family offices diversify their portfolios.
A private equity purchase also lets family office owners get their hands dirty by actively helping a business succeed, a prospect that many find appealing.
"They have expertise and relationships that they want to leverage," Griffith said.
Thomas Ruggie, CEO of the multifamily Destiny Family Office in Tavares, Florida, said he has one family office actively looking for a purchase in which partners can lend their expertise and create value. Another has become part-owner of a company where he hopes to have a significant influence on the firm's product.
"The business is in human longevity, so there's extreme profit potential, but this is also about giving back and staying involved," Ruggie said.
The ability to improve a business through direct involvement is something that Andy Busser, president of the multifamily Pitcairn family office in Philadelphia, sees as vital to any M&A deal in which a family office is the purchaser.
"The main advice we give in those situations is: Make sure you're investing in a company that you understand really well, and you have a lot of expertise you can bring to add value," he said.
Busser said he's seen a family (not a client) invest in things that they don't understand — it didn't go well.
"They invested in a small chain of warehouses. The warehouses aren't useful for e-commerce because they're too small and in the wrong places. They invested in a friend's brewery. They don't know anything about breweries, and it turns out the friend didn't either," Busser said.
On the other hand, Busser said, another family ran a very successful company for about 100 years, sold it and used that money to invest in private companies.
"They had good success because they understood those businesses," he said.
Potential downsides to family office investment
Family office money can come with a flexible schedule and built-in experts who are motivated to help a business grow — but there's risk involved, too.
"Sometimes family offices have a tendency to believe that they can automatically transfer success at X into success at Y, and that's not always the case," Ruggie said. "They might underestimate the work, time, money that might be needed to go into a new business. Overleveraging themselves can also be a risk. They can spread themselves too thin."
The other potential problem with family office purchases is that they typically involve a lower purchase price than a sale to a private equity firm.
"We've seen private equity firms paying 16 to 18 times EBITDA, where a family office might pay 10 to 12 times EBITDA," Busser said. "The reason the seller will take the lower multiple from the family office is that they will have a much more flexible capital partner."
Who should consider selling to a family office?
The most successful sales to family offices involve sellers who value what a family office can bring: capital with a side of expertise and flexibility. Family offices are also more likely to keep existing employees on after the sale than other types of buyers.
"Often when you sell to a strategic buyer, they get rid of duplicate employees," Griffith said. "Private equity might do that, too, especially if they already have a portfolio company and want to fold the firms together. The family office doesn't typically have any duplication or a bench of seasoned executives."
Sellers that want to simply walk away with the largest possible check and no ongoing role at the business they're exiting probably aren't ideal candidates. Those who want to sell just part of a business, however, or who are happy to stay on in some capacity, may find family offices a good fit.
Elizabeth Lilly is chief investment officer for the Pohlad family office in Minneapolis, which has been involved with 60 companies over the past 10 years. They typically make minority investments of perhaps 30%, Lilly said, and look for six characteristics:
• A predictable business model that the family office understands.
• A good management team in place.
• Strong partners running the business.
• An attractive valuation. Multiples tend to vary by industry, and Pohlad is industry agnostic, Lilly said, so she's not able to state a single desirable multiple.
• Organic business growth.
• A management team that invests its own capital in the business.
Once invested, the Pohlads are in no rush to sell. They hold the business indefinitely.
"This has been an extremely effective strategy for the family," Lilly said.
"You have to come in with like-mindedness and alignment," said Gold of Steward Partners. "If we do that, everyone wins."
