December 11, 2023

Steward Partners, a Washington, DC-based RIA, needed funding to fuel its growth. As a result, it sold a $50 million stake in 2019 and another $100 million in 2021, each to a single buyer with a minority stake.

Despite offers from private equity firms, Stewart chose the family office as the buyer for both deals. Salt Lake City’s Cynosure, which represents the Eccles family and others, raised $50 million, and Tom Pritzker’s Chicago-based The Pritzker Organization put in $100 million.

“Having a family office was a no-brainer for us,” Steward Chief Executive Jim Gold said in an interview. “I think there’s a place for private equity, but a lot of private equity firms want to be major investors.” Stewart wants investors to take minority stakes.

In the private equity model, money typically goes into a company and is recovered within three to five years. . In contrast, family offices tend to have an open-ended investment approach.

“We’re looking for patient funding,” Gold said. “CYC is happy to invest for decades. So is the Pritzker Organization. It’s very patient capital. Both families are self-made, so they understand what it’s like to start a business.”

Neither deal involved a put option, Gold added, and “investors have a window to redeem their shares whether or not it’s a good time for the company.”

Both deals brought in new board members who Gold said have been instrumental in shaping corporate strategy, finances and mergers and acquisitions.

“We received a $140 million loan from Apogem, and board members were instrumental in implementing that loan,” Gold said. “This is thoughtful capital from people who understand our business and want to grow the company. Our interests are aligned.”

Growing M&A interest from family offices
Gold’s experience is not unique.

“Over the last 10 years we’ve seen a huge increase in the number of family offices looking to acquire private companies,” says Sima Griffith, managing principal at Aethlon Capital in Minneapolis. “There’s a big difference in the size of the offices and the amount they’re willing to invest, and they have different cultures and goals. Some make minority investments, others want control.”

As evidence of how much interest a deal might attract from family offices, Griffith points to a maker of industrial products that is up for sale. Aethlon has 150 buyers in its database for the company. Of the 15 firms that expressed interest, 10 were private equity firms, 2 were strategic buyers and 3 were family offices.

There are several reasons why family offices are interested in acquiring private companies, according to Griffiths. Private equity typically returns around 20 percent more than the stock market or real estate, and private equity is also an asset class that allows family offices to diversify their portfolios.

Private equity buyouts also allow family office owners to actively help the business succeed, a prospect that is attractive to many.

“They have expertise and relationships that they want to leverage,” Griffiths said.

Thomas Ruggie, chief executive of the multifamily Destiny family office in Tavares, Fla., said one of his family offices is actively looking for acquisitions in which partners can lend their expertise and create value. Another has become a part owner of a company that he wants to have a significant impact on the company’s products.

“This business is about human longevity, so there’s huge potential for profit, but it’s also about giving back and continuing to participate,” Rougi said.

Andy Busser, president of the multifamily Pitcairn Family Office in Philadelphia, believes that the ability to improve the business through direct involvement is critical to any M&A transaction where the family office is the buyer.

“The main piece of advice we would give in this situation is: make sure you invest in a company that you know very well and that you have a lot of expertise that adds value,” he said.

Basser says he’s seen a family (rather than a client) invest in something they don’t understand — and it doesn’t go well.

“They invested in a small chain of warehouses. Those warehouses weren’t useful for e-commerce because they were too small and in the wrong location. They invested in a friend’s brewery. They didn’t know anything about the brewery, and it turned out the friend didn’t either,” Basser said.

Another family, on the other hand, ran a very successful company for about 100 years, then sold it and used the money to invest in private companies, Basser said.

“They’ve had great success because they understand these businesses,” he said.

Potential downsides to family office investing
Family office funding can offer flexible timetables and built-in experts who are motivated to help the business grow – but there are also risks.

“Sometimes family offices tend to believe that they can automatically turn success in X into success in Y, but that’s not always the case,” Rudge said. “They may be underestimating the work, time and money that may be required to enter a new business. Overleveraging themselves may also be a risk. They may spread themselves too much.”

Another potential problem with family office purchases is that they are often purchased at a lower price than they are sold to private equity firms.

“We see private equity firms paying 16 to 18 times EBITDA, and family offices maybe paying 10 to 12 times EBITDA,” Busse said. “The reason why the sell side will get a lower multiple from the family office is because they will have a more flexible capital partner.”

Who should consider selling to a family office?
The most successful family office sales involve sellers who value what a family office can bring: capital with expertise and flexibility. Family offices are more likely to retain current staff after a sale than other types of buyers.

“Often, when you sell to a strategic buyer, they fire the duplicative staff,” Griffiths said. “Private equity might do the same, especially if they already own a portfolio company and want to bring those companies together. Family offices typically don’t have any repeat or experienced executives.”

Sellers who want to simply walk away with the biggest possible check and have no ongoing role in the business they are exiting may not be ideal candidates. However, those who only want to sell part of their business, or are happy to continue in a certain role, may find a family office a good fit.

Elizabeth Lilly is Chief Investment Officer of the Pohlad family office in Minneapolis, which has invested in 60 companies over the past 10 years. Lilly says they typically make roughly 30% minority investments and look for six characteristics:

• Predictable business models understood by the family office.
• Have a good management team.
• A strong partner for doing business.
• Attractive valuation. Multiples tend to vary by industry, Lily said, and Pollard has nothing to do with them, so she can’t say an ideal multiple.
• Organic business growth.
• Investing own capital in the management team of the business.

Once invested, the Pollard family is in no rush to sell. They hold the business indefinitely.

“It’s been a very effective strategy for this family,” Lily said.

“You have to be like-minded and aligned,” said Steward Partners’ Gold. “If we do that, everyone wins.”