Private capital investment has emerged as an increasingly popular alternative asset class for family offices seeking diversification and attractive risk-adjusted returns. While private equity funds have historically been the go-to choice, more family offices are now pursuing direct investments in private companies. The control and flexibility afforded by investing directly in private companies offers family offices a way to put their capital to work while achieving portfolio objectives.
However, sourcing, evaluating, and executing acquisitions of private businesses requires differentiated capabilities compared to other investment approaches. Success depends on a disciplined strategy tailored to the family office’s investment mandate, risk tolerance, and return targets. This article will outline key acquisition strategies family offices employ to source deals, conduct due diligence, structure deals, fund buys, and create value in acquired private companies. We’ll also review notable challenges family offices face in this arena and how leading family investment firms are overcoming them to utilize private company ownership as an impactful allocation.
The rise of the family office has been a defining trend in private wealth management over the past decade. As ultra high net worth families accumulate vast fortunes, they are increasingly seeking more control and customization over how their capital is managed rather than relying solely on private banks or asset managers. This has led many wealthy families to establish their own family offices, essentially private investment firms dedicated to advancing multi-generational financial interests.
Currently, it’s estimated there are over 10,000 single family offices globally managing upwards of $6 trillion in assets. The largest and most sophisticated family offices can have well over 100 employees with expertise spanning investments, tax, trust administration, and even family governance. With much more flexibility over asset allocation than traditional wealth managers, many family offices have expanded into alternative investment categories like private equity, venture capital, real estate, and private debt.
In particular, direct private company investments have attracted family office capital and interest. By acquiring or investing directly in private companies, family offices gain more control compared to blind pool private equity funds with chance to drive strong returns. It also allows them to put capital to work directly in underlying companies compared to just being limited partners. With the stellar rise of many private technology companies, there is no shortage of attractive opportunities.
Of course, possessing ample capital and a willingness to explore alternatives does not always easily translate into successful private company investments. It requires building specialized teams with skills in sourcing, evaluating, executing and managing private deals. Family offices new to this arena often struggle translating their capabilities in public equities or other liquid assets into the opaque realm of private capital. But the frontier beckons for those equipped to tap into the information advantages, flexible capital, patient timeline and operating expertise that family offices can uniquely provide.
The question then becomes…how exactly should family offices approach deploying capital into private company acquisitions? What strategies and best practices separate successful family equity programs from those who flounder? Let’s explore some of the most critical elements.
Sourcing attractive private company investment opportunities requires tapping information pipelines family offices often lack exposure to. While public stocks trade on transparent exchanges, the world og private company deal sourcing relies more on networks, intermediaries and proactive reach.
Many family offices leverage their connections and business relationships as a starting point for deals. Referrals from operating executives, deal professionals and fellow family office peers can unearth interesting prospects before the run full sale processes. Relationships when middle market investment banks expand their family office coverage can also feed opportunities.
Though complete acquisitions appeal to many family buyers, minority stake investments aligned to a private company’s growth can also match objectives. Unlike private equity funds with rigid return hurdles, family offices boast a more flexible mandate. Taking influential minority stakes reduces risk while providing exposure to upside through equity appreciation, dividends or options to increase ownership over time.
Family offices willing to source off-market deals can gain advantage over auctions attracting competitive buyer pools. In these cases the seller may prioritize fit and strategic vision over the highest bid price. Moving quickly to engage owners of private enterprises in known industries or geographies of interest can pay off for family offices confident in their valuation range.
Casting a “wide net” strategy ensures family offices see the full spectrum of potential targets. Attending conferences, mining databases, subscribing to research providers, visiting startup incubators, and hitting the pavement to gather intel from operators and intermediaries in fertile hunting grounds for deals all expand possibilities. The most successful family equity programs leave no stone unturned tracking down the hundreds of prospects needed to ultimately land a handful of deals each year. They take a proactive approach and lean into their deal networks rather than waiting for opportunities.
With so many options, setting clear investment parameters, priorities and risk metrics prevents wasting efforts on false positives. Well defined ideal target profiles help family offices filter prospects efficiently. Resources focus only on best fits while developing the proprietary deal flow and connections needed to directly access promising private companies rather than competing against other buyers.
Once a family office identifies promising acquisition candidates, the next crucial step involves evaluating opportunities through a rigorous due diligence process. Separating high potential investments from those doomed to underperform hinges on examining details beyond just a seller’s rosy projections.
Thorough due diligence dives deep into both quantitative and qualitative factors: poring over financial statements, researching market dynamics, interviewing management teams and assessing potential risks. Family offices evaluate metrics including historical revenues, profitability, cash flows, capital expenditures against business plans…do the growth forecasts seem reasonable? Detailed operations analysis examines suppliers, systems, and cost structure for red flags.
Founders and key employees undergo background scrutiny assessing talent, experience, vision and incentive structures. Do management incentives align with the family office’s goals? What risks exist in leadership transitions? Feedback from customers, vendors and industry sources proves invaluable in understanding strengths, weaknesses and competitive threats. Site visits, expert consultant assessments and competitive benchmarking complete the mosaic.
An attractive prospect on paper might reveal underlying flaws upon closer inspection. Others in fragmented industries with potential rollup plays deserve premium valuations despite current financials. Weighing risks like customer concentration, regulatory shifts or dependence on a star employee can determine whether a risk profile aligns with return targets. Using comparable public and private deal multiples helps gauge appropriate offer levels.
For family offices new to direct deals, the due diligence process marks a critical learning curve. Specialized support from internal or external finance, operations and industry executives pays dividends navigating the intricacies of deal exploration surfaces. Those efforts not only guard against problem deals, but also prepare the family office to add maximum value post acquisition.
Once satisfactory due diligence confirms a private investment merits investment, structuring deals to align with family office priorities becomes critical. Several key considerations guide family equity programs in crafting terms best suited to their objectives:
Funding deals once secured require tapping capital resources. Evergreen family office investment funds provide reliable pools of committed equity for private deals without limiting timelines. Fund lifespan matching multi-generational objectives differs from 10-year PE vehicles pressuring short-term flips.
Flexibility funding acquisitions or growth also proves advantageous. Family offices can move swiftly, restructure based on milestones and alter course without bureaucratic fund processes. However, even substantial family office capital has limits requiring prioritization.
For larger buyouts or capital intensive plays, co-investment maintains prudent diversification. Pooling resources with trusted partners provides the means to back valuable scale-ups while mitigating concentrated risk. Third party debt financing also generates leverage targeting higher returns, though typical family office conservatism watches debt loads warily.
Carefully balancing deployment capacity across projected investments and follow-ons maps capital to projected needs. Periodic fundraising aligned to investment pace further sustains programs avoiding capital overhangs or gaps that can torpedo deals.
After crossing the acquisition finish line, executing value creation initiatives takes priority. Instilling financial discipline, upgrading systems and bolstering management transform family-backed companies.
Operational improvements identify cost savings, efficiency gains, risk management overhaul and incremental revenue drivers. Benchmarking against industry leaders uncovers performance gaps, while lending family office functional expertise aids adoption of advanced practices.
Growth projects prompt capability upgrades improving the talent bench. Direct family assistance recruiting key hires or forging customer connections accelerates plans. Effective governance via board directorship or advisory councils works constructively with leaders, ensuring accountability to targets.
Exit considerations guide decisions to maximize outcomes for all stakeholders. IPO journeys, private equity sponsorships or sales to strategic players each follow tailored roadmaps over multi-year journeys. Keeping end goals in sight shapes near-term priorities and cohesive value building efforts.
Pursuing private company investments allows family offices to deploy capital strategically while securing influence over attractive assets. But sourcing viable deals and creating value requires focus beyond traditional investment approaches.
By building networks, evaluating opportunities thoroughly, structuring deals creatively, funding acquisitions flexibly and driving post-purchase improvements, family offices can translate patience and permanent capital into strong risk-adjusted private market returns.
For family offices looking to begin or expand this allocation, countless promising roads exist. Start with minority stakes, niche segments or add-on purchases aligned to capabilities and risk tolerance. Consult an advisor to map an expansion strategy matching your family’s unique objectives. Contact us today to know more!
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