Most wealthy families will have been enjoying exotic holidays in recent weeks, but their investment offices have remained busy: for instance Bregal Capital, steward of the Brenninkmeijer family fortune, bought software business proALPHA in August. That followed some notable family office deals in spring, including Fleming Family & Partners’ acquisition of UK energy efficiency business FIT and a Wheatsheaf Investment-led £13 million fundraising round for clean water company Ostara.
To Mike Reid, managing partner at Frog Capital, such deals illustrate how family offices as a whole are starting to rethink their private equity strategy. “Over the last 10-15 years the limelight has been taken by the rise of private equity. But the credit crunch has reminded us how influential large family business and wealth is.”
That’s proving particularly true in the current investment climate, he argues. As LPs become increasingly reluctant to stick to the traditional passive investment model, they’re seeking more visibility and more control over how their money is ultimately deployed – and gradually building up their capacity to do deals directly, industry sources suggest.
“Families are definitely more reluctant to go into blind pools,” said David Barbour, co-head of private equity at FF&P. “And there is certainly a great deal of talk about co-investments and direct investments.”
There are a variety of reasons for this evolution, including a general reduction in the returns achieved by traditional funds, the greater transparency and perceived lower risks of direct deal-making, and the ability to better control the outcome of investments and acquisitions. John Rompon, managing partner at McNally Capital – a Chicago firm that provides investment advice to families – suggests more pragmatic factors are also at play.
“You could fill a room with estate planning lawyers and they’re not going to come up with a better way to transfer wealth over generations than by acquiring companies. There is simply no more efficient way to transfer a large amount of wealth than through corporate acquisitions.”
In addition, he argues, the asymmetry of information between private equity funds and investors has drastically reduced – families can now access a lot of the information they need on lenders, debt levels, company balance cash flows and multiples. This has lifted many of the barriers that prevented them from doing direct deals, he suggests.
“If you look at the balance sheets of most family offices, you’ll notice that the assets that are most underleveraged are their knowledge, network and experience. Investing in funds does not leverage any of these three things. Investing in private companies does.”