Family Offices: An Alternative to Private Equity?
by John Leighbody
In our previous newsletter I outlined a number of the difficulties that may arise in dealing with private equity firms and what you might realistically expect when you are in discussions with them. I received a number of questions in response, most of which centered on what alternatives are there to private equity.
An excellent alternative to private equity is the Family Office. A Family Office is established to oversee the investments of very wealthy families, and may also take care of personal issues such as opening summer and winter homes, managing aircraft, accounting, tax issues, mortgages and other details surrounding wealth. The Family Office concept has been around for years, dating back to European aristocracy, and then was utilized by the Rockefellers, Carnegies, and Mellons, to name a few.
Why would these families make an investment in a privately held business? These types of investments are considered alternative investments and are part of a family's over-all investment portfolio. Like private equity funds, they do have criteria that a company has to meet, but their goals are different. The private equity fund is in the investment for five to seven years and is looking for the exit and a significant return. The Family Office is looking for a return on their investment annually and does not have a short horizon in terms of equity return.
Think of it this way: where can you go in today's market and make a return of 8% to 10% or higher without the risk? Trust me, Family Offices do their home work and due diligence on their investment, but the process is not as arduous as it is in the private equity world. Also, Family Offices are not normally as 'hands-on' from a management perspective, but in most cases they would want a board seat and be kept up with what is happening with the business and industry.
There is no panacea when it comes to raising capital, but if you are a business owner with a profitable company who is seeking to sell part of your business, recapitalize, expand, or take out minority shareholders, don't rule out investigating the Family Office as an alternative.