“Tapping” the family for money is an important skill for cash-strapped young people home from school. Perhaps entrepreneurs should become similarly skilled, though in this case by “family” we mean the Family Office.
The Family Office has recently emerged as an important new source of private equity. It typically refers to a pool of capital managed by one or a small group of families who decided to control their own investments rather than leave investing to a money manager.
The actual number of Family Offices is uncertain. Capgemini, in a report* estimated the global number at 3,000 with total assets under management of $1 – $1.2 Trillion. It is generally believed both the number and assets under management are now higher given the well-documented increase in net worth of the world’s wealthiest people.
Unsurprisingly, concentrations of Family Offices are found in the word’s money-centers such as London and New York. Certain locations, notably Singapore, have designed regulations to attract them.
Profile of the Family Office
Because they represent individual families, there is no typical Family Office, but generalizations may be made. The source of funds is most often the sale by an entrepreneur of a family business, followed by persons who have had a successful career in finance, such as in private equity.
In a survey done by the Family Offices Group** about half of Family Offices sought to make total investments in a company between $500K – $5M, 40% between $5M – $25M, and 10% above $25M. They tend to focus in industries where they have some expertise, such as the industry of the entrepreneur behind the Family Office.
The Offices themselves are expertly run, managed by professionals who would be found in any top private equity firm. Some professionals have decided to make a career managing Family Offices.
Advantages of Family Offices
Because of their nature as family-run organizations, Family Offices as an investment class offer sellers of company stock a number of advantages when compared to other sources of funds.
By focusing on industries they know, Family Offices possess a wealth of contacts, expertise, market and other knowledge they can bring to support the growth of a business. They can thus be excellent additions to a multi-party capital round or sale of a business where the executives stay for several years more.
Quicker Investment Decisions and Closings
As they are investing their own rather than third party funds, do not have an investment committee seeking consensus among diverse people, and are usually investing in their area of expertise, Family Offices often have the confidence to make faster decisions whether to invest, and whether to close following the due diligence.
Aligned with Management
The investment style of Family Offices is to invest in a management team, and support them, but leave them to run the business. This is in contrast with many private equity funds and strategic investors that come with their own managers to install and portfolio businesses to combine or leverage.
Longer Time Horizons
Without a fund carrying a termination date, or limited partners hungry for cash returns, Family Offices have the luxury of extended time horizons. This allows a company to adopt long-term strategies, and to wait patiently for the best offer or most appropriate time to sell the business.
Unlike many private equity investors, Family Offices look for returns from operations rather than debt retirement or other forms of financial engineering, and thus use much less leverage. This practice makes for a healthier balance sheet that can weather a downturn, and support adoption of long-term growth strategies.
When raising capital, or seeking to sell a major stake in a business, consider Family Offices a possibility. Like other investors, they seek deal flow, so if you meet their initial criteria, you are certain to receive a warm welcome.
By: Steve Gaynor, Mansi Srivastava
* “The Global State of Family Offices” Capgemini 2012
** Richard Wilson, the Family Offices Group