The Role of Family Offices in the Private Equity World

We all know the story about the impact Private Equity (PE) had on our economy and specifically closely held businesses. It has allowed for great wealth development for former owners, creation of platform businesses that can roll up many competitors, access to large pools of capital, changes in corporate governance, and outside management control.

Private Equity Uncertainties

With all the benefits of PE comes a certain reality. This reality is sometimes difficult for closely held business owners to get comfortable with in which they cede control of their businesses to the potential highest bidder. Some of these owners feel they have lost control of their creation, left the employees too much to the whim of only hard financial decisions, lost the ability to impact the real future of the business and maybe, just maybe, lose their sense of identity. The PE firms also have a certain hold period that they try to adhere to leading to the eventual sale of the previously purchased company in typically no longer than five to seven years.

Creation of Family Offices

As an alternative to a majority sale or complete sale to PE there is a different approach.

In the last few years the advent of the Family Office has mitigated some of the concerns that closely held business owners have regarding selling their businesses.

Family Offices are private wealth management advisory firms that serve high net worth investors. Family Offices can  be set up for a Single Family Office (SFO) or Multiple Family Offices (MFO). These Family Office’s provide for a wide range of services, including:

  • Investment Management which would include cash management
  • Charitable Giving Advice
  • Tax and Financial planning
  • Risk Management
  • Legacy Planning (assistance with trust and estate services)
  • Family Education
  • Accounting Services and Record Keeping
  • Lifestyle management.

No two Family Offices are exactly alike. Each Family Office is customized to meet the needs of each family. There is an expression that goes as follows, “If you have seen one Family Office you have seen but one Family Office.” Each Family Office is unique to the family it serves.

In fact, the genesis of many Family Offices’ was a sale of their former closely held businesses. So wealth was created that now needs to be put to work for the benefit of the current generations as well as future generations. Most Family Offices have a built in long term view of their investment horizon since they are concerned not with a return for a short period of time but rather over generations.

Family Office Vs. Private Equity

Given the background of Family Offices they offer reasonable alternatives to classic Private Equity.

Family Offices have greater patience with their investment hold period. This allows the Family Office to take a minority position in a closely held business as opposed to the almost universal requirement of Private Equity firms to buy control. For example, a Family Office may buy a 33 percent ownership in the closely held company with the option to buy additional ownership over time at a predetermined formula. Since the Family Office is in a minority position they will likely require a board seat, protective rights so they are no worse off than the majority owner, distribution terms equivalent to the majority owner, and certain protective voting rights. All of these terms are worked out in advance of buying partially out the majority owner. The goal is to align business priorities amongst the ownership group to allow for the best long term view of the company taking into account future growth, management, capital needs, industry requirements, and corporate governance. The prior ownership group gets to keep the majority of their business, maintain their business identity, take “money off the table” and “derisk” themselves of some financial exposure and can continue to operate the business knowing they have a good partner in place.

Often Family Office can assist the closely held businesses with access to additional management talent, third party governance protocol, and additional growth capital for expansion and banking relationships, tax and entity financial planning, and the experience of having done this before in the past.

Let’s Discuss Your Options

Closely held business owners should consider the realistic alternative of utilizing a Family Office as their business partner in lieu of a complete sale to Private Equity to provide for a potentially safer and more manageable long-term outcome. For more information on this topic, contact our Family Office experts today.

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