Earlier this year, private equity practitioners were reminded just how much difference ultra-wealthy families can make in private equity. In January, the Brenninkmeijer family, heirs to Europe's C&A retailing empire, committed €495m to become the tent-pole for Englefield Capital's €660m debut fund. At the same time the family were putting the finishing touches to their participation in the €1.5bn spin-out of MidOcean Capital from Deutsche Bank.
Elsewhere, the market watched with interest as the Halley family, who control Carrefour, another European retailing juggernaut based in France, were backing Marks & Spencer's chairman Luc Vandevelde's new private equity project Change Capital with a €300m cornerstone investment and another €700m set aside for co-investment.
Why knock ourselves out visiting pension fund after pension fund when we can take a single cheque from a discreet family group?
Not that the industry needed much reminding. Family groups were the backbone of private equity at its inception, and continue to exercise great influence over funds, deals and careers.
Family groups, from the Basses of Texas to the Agnellis of Turin, helped private equity become the sophisticated and powerful industry it is today. Part of their influence lies in the investment professionals that work for family offices. These people, having learned how not to lose money in private deals, often go on to fruitful careers elsewhere in the industry. More importantly still, family offices can be very significant providers of capital – just ask the partners at Change and Englefield.
Solving the problem of raising money for a first time fund by teaming up with a wealthy family is attractive to GPs, especially in the current fundraising climate. Why, some managers ask, should we knock ourselves out visiting pension fund after pension fund when we can take a single cheque from a discreet family group and be done with the whole bother?
Englefield, led by former Warburg Pincus partner Dominic Shorthouse, secured the Brenninkmeijer windfall after having spent some six months in fundraising mode that included Merrill Lynch acting as placement agent. Rather than piece together dozens of LPs though, the firm chose to close the fund quickly with family money instead.
Godfathers of private equity
The Brenninkmeijers and the Halleys join a long list of influential families, without whose presence the modern private equity industry may not have evolved they way it did. According to Michael Fisch, a managing director at New York-based American Securities Capital Partners, the modern private equity industry's origins date back to the late 1940s, when ultra high net worth families provided capital to promising companies that couldn't find funding anywhere else. “Families created the industry by bootstrapping companies,” Fisch says. “There was no pension money, and no one [else] had any cash after World War II.” Fisch's firm was founded in 1947 by William Rosenwald, son of Sears, Roebuck & Co. executive Julius Rosenwald, as a way to invest the Rosenwald family's wealth.
Today, affluent families are attracted to private equity for the same reasons that appealed to them in the post-war years. As fortunes grow, family heads often want to diversify their assets beyond core, and often mainstream, holdings.
This leads many to set up their own offices for private investments where the mandate is very much one of pro-active and imaginative investing. As a result, these offices have proved a fertile ground for identifying and nurturing some of the most talented investment professionals in the industry.
Family offices are great places to cut one's teeth, say private equity investment professionals who have worked in them. The thoroughness required in making decisions is exacting and rewarding, according to David Uri, a partner at Pegasus Capital Advisors, who worked at EXOR America from 1993 to 1997. EXOR is the investment office of the Agnelli family, which built its fortune through the Fiat automotive group in Italy.
Uri says that while family groups can act quickly on investment decisions, they tend to be conservative investors. “This was not investing limited partner money, it was investing near-and-dear capital,” Uri says. “We weren't satisfied just sitting on boards. We had to have daily communication with portfolio companies.”
These offices have proved a fertile ground for identifying and nurturing some of the most talented investment professionals
The list of people who have started their own private equity firms after working at a family group is long and impressive. David Bonderman, founder of Texas Pacific and John Grayken of Lone Star Funds both worked for Oak Hill Capital Management, formerly known as Robert M. Bass Group, the investment vehicle managing the billions of dollars that Robert Bass' father had made from Texan oil. Alberto Cribiore, the founder of Brera Capital, got his start working for the Agnellis at EXOR America. Prakash Melwani, a founding partner of Vestar Capital Partners, formerly worked with the Bass Group and N.M. Rothschild and Sons.
Marc Lasry, a founder and managing partner of Avenue Capital Group, worked for Robert Bass ten years ago. “The Bass group turned it into a business, where they hired specific individuals to lead specific groups,” he says. “It was a leader in hiring people for the private equity side of their investment business.”
Families know the game
Family offices, which often invest in private companies themselves, have a number of distinct advantages over other types of investors in private equity. They have access to a steady source of capital, so family offices will focus on investing instead of fundraising. And temperamentally they are well equipped to back private equity firms. As Lasry says, family groups tend to be entrepreneurial. They are typically comfortable with the risks associated with investing in a company, because they have taken risks with their own businesses, and so convincing a family to come into a deal can be easier.
Another distinct aspect of having a family in your LP group is that they are typically not looking to generate outsized returns through their private equity investments. They already are rich. Therefore not to lose money is often the most important objective of their investment strategies.
Whether this is such good news for venture funds as opposed to large buyout funds is debatable therefore. “[When I was] working with a family organisation, the important element was about generating good returns, but also about wealth preservation,” Uri says. “We weren't going to make the family wealthy, we were there to preserve wealth and generate an attractive return.”
Because returns aren't the highest priority, the investment style of family offices tends to be more conservative. As direct investors themselves, Uri points out that because families aren't focused on returning cash to limited partners, they can afford to hold a portfolio company even longer than would usually be seen in a private equity fund.
Family offices often bring more than just capital to a fund
Therefore with a direct investment family offices tend to make absolutely sure that a target company is worth holding for a long time. “We did an incredible amount of analysis on companies and took a longer macro view, because the assets we looked at were not two-to-four year holds,” Uri says of his time at EXOR. “These were assets that the family would be satisfied owning for five to ten years. It's a different discipline.”
When families lose money, they also feel they lose prestige, notes David Gellman, a managing director at FdG Associates, the New York-based firm that invests the money of the Fishers and the de Gunzburgs as well as other wealthy individuals. “Losing money hurts the family reputation,” Gellman says. “The family's personality and business ethics and reputation imprint the firm and set the tone for how you conduct your business.”
Family offices often bring more than just capital to a fund. They usually have first-class connections in the industries in which they grew their wealth. An example of this would be the Halley family's interest in Change Capital, a fund focused on the retail sector.
In other cases though, families deliberately diversify away from their core industries. The Agnellis used EXOR as a way to invest outside their Italian homeland and away from the automobile industry. Says Uri: “That was the mandate, and it did very well. It generated attractive returns, but it was just a vehicle to deploy additional resources. This was never a core business of theirs.”
Demanding but welcome investors
When families invest in funds, their preference for longterm, conservative investments might not make them attractive limited partners to everyone. They are also prone to demanding preferential treatment when coming into a fund.
“Family groups are willing to use the clout that large amounts of money brings to identify top-tier talent and then back them at a level that either results in lower-than- thanmarket fees and carry or gives them some ownership position in the general partner,” says Kelly Deponte, a partner at US placement services firm Probitas Partners. “For a general partner, the trade-off in this sort of situation is reduced economics for the certainty of a quick closing and the chance to focus on investing rather than fundraising.”
In the case of Englefield Capital, whilst terms of the deal have not been disclosed, market sources say the firm had to make some concessions to persuade the Brenninkmeijer family to take such a large commitment to the partnership. But in the current fundraising environment, even the most independent-minded GP might appreciate the charms of a family partner. As Deponte puts it, “the reality is that this is 2003 and the impetus of institutional investors in private equity is not the same.”
Over the years, as private equity became more institutionalised, family groups' prominence has shrunk. “When I started at EXOR America in 1993, we had $1.5bn to invest, which was enormous,” Pegasus Capital's Uri says. “Today, there are in excess of 50 private equity firms with over $1bn, so the landscape has changed.”
The tradeoff is reduced economics for the certainty of a quick closing and the chance to focus on investing
But although the influx of institutional investors and the formation of so many well-funded private equity firms have meant that family groups have slipped into semi-obscurity over the years, few of these often obsessively private entities are likely to complain about that.
Recent events have shown that private equity is still an attractive area for families with money to invest and an entrepreneurial itch to scratch. Expect more of them to come into this industry in the near future and make some big bets.
Family groups have been among the most important long-term providers of capital to funds both large and small in the private equity market. Following is a list of some of the more influential families, as chosen by industry experts.
Despite the recent death of patriarch Giovanni Agnelli, the Fiat family's contribution to private equity through the EXOR family office goes on, especially in Europe. EXOR's American operations closed in the late 1990s, but not before launching the careers of such industry luminaries as Brera Capital founder Alberto Cribiore, Joseph Haviv of ProtoStar Partners and Pegasus Capital Advisors' David Uri.
Texas mainstay Oak Hill Capital Management invests Robert Bass' inherited oil fortune. Oak Hill has employed some of the most influential people in US private equity, including Texas Pacific's David Bonderman, Avenue Capital's Marc Lasry, and Lone Star Funds' John Grayken.
The German family, which runs fashion retailer C&A in 11 European countries, recently sponsored former Warburg Pincus partner Dominic Shorthouse's debut fund, Englefield Capital, with a €495m commitment. Through its Swiss-based holding company Bregal, the group also invested in the spinout of Mid Ocean Capital from Deutsche Bank in February.
During the 1980s and 1990s, Otto Happel made a vast personal fortune by growing and selling GEA, the energy technology company founded by his father. The German billionaire controls Luserve, a Swiss holding company, which represents a number of very rich private clients. Based in Luzerne, Switzerland, Luserve is an active participant in private equity, predominantly investing in the asset class through funds of funds.
Ingvar Kamprad, founder of Swedish furniture retailing giant Ikea, is active in European private equity through a number of initiatives that are co-ordinated by Inter-Ikea, a financial subsidiary of the group. Among Inter-Ikeas's engagements is a sizeable commitment to the Triton Fund, an independent, Jersey-based €600m European private equity fund that is also backed by private bank Sal.Oppenheim and several German and Swiss insurance companies.
Prince Phillip of Liechtenstein
LGT Capital Partners AG manages capital in private equity and hedge funds on behalf of this member of the royal family of Liechtenstein. Castle Private Equity AG and Castle Alternative Invest AG, two divisions of LGT, invest the prince's money as well as third-party capital.
The Hyatt hotel family is involved in private equity through direct investments and fund investments through the family's business office.
The owners of a significant percentage of German automobile company BMW make private equity investments through New York-based Auda Group, which also allocates to hedge funds and real estate. This group now manages third-party capital as well. Auda currently has six funds of funds, a direct investment fund, and a secondary program.
The members of this sprawling family invest their Standard Oil fortune in early stage companies through New York-based Venrock Associates. The family's investment management company, Rockefeller & Co., recently teamed with Frank Russell Co. to provide ultra high net worth individuals investment management services, including private equity fund of funds.
William Rosenwald, son of Sears, Roebuck & Co. executive Julius Rosenwald, founded New York-based American Securities Capital Partners in 1947 to invest the family fortune. In 1988, the firm opened up to outside investors. The firm now has more than $1 bn in committed capital and recently helped establish ICV Capital Partners, which invests in minorityowned or inner-city businesses.
The Anglo-French family, which has been a dominant force in European finance for more than two centuries, oversees NM Rothschild & Sons Limited, Rothschild & Cie Banque, Rothschild North America and their regional affiliates. The family also runs a global private equity sponsorship organisation called Continuation Investments. One prominent Rothschild spin-out has been dominant distressed specialist, WL Ross & Co., which went independent in 2000.
The Swedish banking family behind investment vehicle Investor AB backs Stockholm-based Investor Capital Partners, New York-based Investor Growth Capital, and partly owns Nordic buyout firm EQT.
The three sons of media empire Ziff-Davis founder William Ziff, all under the age of 40, have an active private equity arm to invest their inherited fortune: New York-based Ziff Brothers Investments. The firm's investments include Asian fund Olympus Capital, as well as investments in numerous venture capital funds.