By Justin Abelow, Houlihan Lokey
For years I have been telling my clients that in the M&A markets, family offices are like great books: more talked about than experienced. Everyone wanted to discuss family-office buyers, but the impact of these buyers on the market for corporate control was almost nonexistent.
But things are changing — and fast. A new class of family offices with deep roots in the world of complex transactions is emerging and threatening to upend old verities. As this occurs, newer types of hybrid asset managers are swelling the ranks of long-term holders, changing the calculus for sellers of middle-market businesses.
First, some history is in order. Family offices have been important on Wall Street since the Rockefeller family pioneered the concept when luxury yachts plied the waters off Bar Harbor.
While estimates vary, about 10,000 family offices operate worldwide, controlling north of $2 trillion of assets. But the vast bulk of family-office holdings have been in liquid securities, real-asset classes and other investments.
While some sources grew giddy citing the size of family-office holdings of private equity, the statistics were misleading because they
- sometimes included family office holdings in the original business from which the family drew their wealth;
- usually included minority investments — including venture investments, and,
- almost always included limited partnership stakes in private equity funds (sometimes together with associated co-investments).
LP investing allowed for material diversification without the need to build sophisticated and expensive transactional capabilities.
Family-office buyers participated in the deal market, and we at Houlihan Lokey did our fair share of selling to them and, more rarely, selling on their behalf.
But you could count on two hands the number of family offices able to transact in the M&A market. If you took out firms associated with the Pritzker family, you wouldn’t even need to use both hands.
Family offices were poor candidates to be disintermediating or replacing traditional PE capital in the deal markets.
So what has changed?
First, the deal partners at the larger PE firms have successfully generated wealth on a dynastic scale. Outlandish birthday parties have been thrown, butlers have buttled, and Nantucket and Palm Beach real estate has been lavished upon in-laws.
Many of these newly megarich have established family offices to safeguard wealth for future generations or to oversee vast philanthropic efforts. It is only natural for them to build sophisticated transactional capabilities that can mimic the feats by which they created their wealth.
These office constructs have begun to seep down-market, with mid-market fund partners setting up their own offices, often staffed by trusted lieutenants recruited from the office’s flagship vehicle. This has resulted in an influx of family-office transaction capability into the market.
The second relevant trend is the coincident rise of alternative vehicles designed to approximate the family office’s long-term holder status.
A handful of outlier private equity firms have enjoyed longer fund lives than their peers. American Securities and Lindsay Goldberg are two examples, and each has found success in partnering with family-owned businesses seeking longer-term partnerships.
Now other types are emerging, including “core” private equity pockets raised by the likes of CVC, Blackstone and Carlyle and designed to hold investments for 20 years or more.
Hybrid structures like that developed by Cranemere Group have also been introduced to marry private-equity-style transaction expertise with the longtime holds and conglomerating economics of a family holding company.
A third trend might also be on the horizon: the blurring of lines between family offices and PE firms resulting from family office investments in private equity GPs.
One recent example is the announced purchase of a minority stake in AEA Investors by RDV, the DeVos family office. This represents a homecoming of sorts for AEA, now a fairly “regular way” institutional alternative-asset manager but originally a high-net-worth investment club backed by families like the Mellons, Rockefellers, and Harrimans.
Taken together, these trends amount to a sea change. As a result, long-term holders can be expected to play a more material role in the market for corporate control, and certain companies and business models that had been immune from purchase by alternative-equity investors can be expected to be put into play.
If those family offices of the past were indeed like those seldom-read literary masterpieces, it is time for sellers to form a book club.
Justin Abelow is a managing director in Houlihan Lokey’s financial sponsors group, co-head of the PE practice and a member of the firm’s management committee. He can be reached at email@example.com and +1 212-497-4206. Photo courtesy of the firm. Statements and opinions expressed herein are solely those of the author and may not coincide with those of Houlihan Lokey.