Source: Jeff Golman from Forbes
Family offices are leaving ‘the nest’ to fly on their own in M&A. Trends indicate that financially sound families with in-house expertise tend to prefer exercising more control over their investments, hence the relevance of family offices; in the last five years, 97 acquisitions were recorded by U.S. family offices as opposed to only 56 in the five years preceding.
Currently, JAB Holding Company, Thyssen-Bornemisza Group (TBG), McNally Capital and Pritzker Group are among several key examples of active family offices in M&A. The Reimann family, who owns JAB, bought Panera Bread for $7.5 billion last month, a continued trajectory of their many vast acquisitions. In the last five years, the global coffee empire has acquired Peet’s Coffee, Caribou Coffee, Keurig Green Mountain and Krispy Kreme. In April of this year, TBG, a Swiss-based family office purchased the weather information provider DTN for $900 million. McNally Capital acquired Dedicated Computing in January 2017; using this purchase to further promote their agenda of collaborating with businesses utilizing ‘the power of direct family capital.’ Along the same lines, the Pritzker Group, which focuses on the middle-market, describes family offices as providing a unique and attractive advantage for sellers to choose. When referring to what will happen to their sold businesses, Pritzker explains: “…sell to us and we will invest in its employees and in its future.”
Alternative investments have gained more acceptance among family offices in recent years, as they seek options to enhance the yield on their portfolio with the current low-interest rates. They consider ownership of companies as means to do this, while still maintaining a reasonable risk profile. Family offices are able to circumvent high fees by making those investments directly – and in some cases, that means bidding against private equity firms to buy whole businesses.
There are several reasons that a family office would choose to pursue direct investments. First, having the industry expertise to do so, they would rather have a more hands-on role in their investments; family offices offer this firsthand interaction. Secondly, family offices have more flexibility with fee structures. Finally, they can avoid the volatility in the public markets, and take advantage of the fact that returns are typically better in private companies than they are in the public market.
For entrepreneurs or owners of family-run businesses looking for a major liquidity event, while hoping to retain a minority stake in the company, the family office acquirer offers an intriguing and highly differentiated alternative to institutional private equity investors and strategic buyers. For instance, family offices are not bound by the need for an exit in five to seven years, and may better align interests with an entrepreneur. They also may be more willing to keep management teams in place. However, a defining feature of family offices is their preference for long-term investing and their ability to manage ‘patient capital.’ Since family offices do not satisfy outside investors with a near-term internal rate of return, or cash on cash returns, they tend to offer more flexible deal structures. Family acquirers can shape a deal to fit a seller’s tax plans or trust arrangements, for example, much as the Pritzker Group allowed the Duchossois family to keep a minority holding in Milestone AV Technologies in 2013. Similarly, the Pritzker family’s Marmon Group was acquired by Buffett over six years.
Family offices can be as competitive as PE players because their required IRR is generally lower than institutional capital. In addition to attractive economic terms and deal structures, family offices provide other strategic benefits as well. Sellers can get a long-term partner with industry expertise, given that most family offices invest in sectors where they generated original wealth. Under this scenario, the investor often brings experience, strategic insight and key relationships that can have a direct impact on the company’s bottom line.
The amount of family office acquisitions has been trending upward over the past decade, and with the significant number of attractive, entrepreneur-owned assets still remaining in the market, we can expect this activity to continue to grow, creating new opportunities for business owners considering a sale.