From Passive to Active: Family Offices as Investors in Private Equity

Andrew Bozzelli, Managing Director at Livingstone, recently took part in the From Passive to Active: Family Offices as Investors in Private Equity panel featuring Harris Eisenberg (moderator), Katten Muchin Rosenman LLP; Andrew Code, Promus Holdings, LLC; Molly Simmons, The Pohlad Companies; and Bill Spizman, RSM US LLP.

Considered a ‘new force on Wall Street’ by the Wall Street Journal, family offices continue to proliferate. Having experienced success in selling companies to, and for, family offices, it was great to discuss continued developments in the rapidly evolving family office landscape with well-respected panelists. Primary takeaways include:

Continued Professionalization alongside Growth. It’s no secret most well-known family offices have professionalized themselves by bringing on highly-qualified, senior investment professionals. As the organizations continue to develop, often growing from one worker to entire teams, family offices increasingly operate much like traditional funds (e.g., junior investment professionals, investment committees, compensation plans, etc.) with the added benefit of doing so under the radar.

Family Office Buyers are Flexible. We often hear about the successful transactions led by family offices, now however, family offices are finding and executing on new investment opportunities by partnering or co-investing with other family offices, independent sponsors, and funds. Their lack of traditional investment mandates enables them to be flexible on type, size, structure, and hold period, etc., resulting in them being more active than what’s often publicized or known. Flexibility amidst increasing regulation is inherent to the family office model, explaining why roughly three dozen hedge funds have converted into family offices since 2011.

Family Offices Will Be Aggressive in Formal Sale Processes. Don’t be fooled, family office buyers are prepared to get aggressive on all fronts within a formally-managed sale process. For the right business, family office buyers will pay top dollar (primarily driven by their differentiated, target IRR profile and undefined hold period), accelerate diligence, eliminate financing contingencies, and close quickly. The professionalization and flexibility discussed above only enhance this dynamic.

Increase in International Family Offices. Rising wealth in the Asia-Pacific region, concerns within the Eurozone, and the overall global nature of investments requires family offices to manage operations outside their country. This has caused a proliferation of international family offices either hiring US investment professionals outright or setting up formal US operations in search of carving out a slice of middle-market US acquisition opportunities.

Ultimately, tracking the number of family offices isn’t easy, since they don’t have to register. A study by accounting firm, EY, indicated there are more than 10,000 globally, with about half of them being set up in the past 15 years. Chicago-based consultancy Family Wealth Alliance LLC, has estimated the U.S. has 3,000 family offices with more than $1.2 trillion in assets. CapGemini estimates the European and Asian markets add an additional $4.9 trillion to the mix.

Overall, the future looks bright for the continued growth and activity of family offices in US private equity.