For New Sellers: Family Offices – What They Look for When Buying a Company
Nov 8, 2023
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Explore the investment strategies and decision makers of family offices. Learn about their approach to evaluating potential investments and the advantages they have over venture capital firms. Discover the level of disclosure and privacy maintained by family offices. Gain insights on the different types of family offices and their focus on profitability and growth potential when buying a company.
Family offices prioritize preserving capital while seeking consistent returns and often invest in industries where they have expertise and are comfortable.
Privacy and security are paramount for family offices, as they manage vast amounts of wealth and prefer to work with trusted professionals.
Family offices are increasingly interested in investing in private equity through the secondary market to have a say in company operations and avoid risks associated with the public market.
Deep dives
Family Offices as Potential Buyers
Family offices are one of the major buyers in the middle market, making up about 20% of activity in lower middle market deals. They are formed to represent the interests of wealthy families and have a variety of services to offer, including making investments. Family offices are often involved in investing in private companies and can potentially buy a middle market company. Understanding what a family office is and how they work is essential for business owners looking to sell their company in the middle market.
Family Office Investment Strategy
Family offices often have a conservative investment strategy, focusing on businesses or industries where they have expertise and are comfortable. They prioritize preserving capital while also seeking consistent returns. Rather than using debt, family offices are more likely to invest in private companies using their own funds or by seeking capital from investors or their network. Investment decisions are typically made by the head of the family office, who may be heavily involved in industries where they have accumulated their wealth.
Secrecy and Security in Family Offices
Privacy and security are paramount for most family offices due to the vast amounts of wealth they manage and the potential risks associated with being targeted by hackers or malicious actors. Family offices tend to keep a low profile, rarely having websites or making public disclosures about the family members or investments. They prefer to work with trusted professionals, such as banks and advisors, who can provide discreet services and ensure the security of their information and assets.
Family Offices' Interest in Private Equity Secondary Market
Family offices are increasingly showing interest in investing in private equity through the secondary market. This involves buying shares in companies that are already established and not accessible through the primary market. Family offices are attracted to this investment option because it allows them to enjoy cash flow and growth from established companies before they go public. Studies have shown that investing in private companies while they are still private yields higher returns compared to buying shares in the public market. Family offices value the opportunity to have a say in the company's operations and avoid risks associated with investing in the secondary market.
Family Offices' Shift Towards Direct Investments
Many family offices are now considering direct investments as a way to gain more control and potentially higher returns. With the resurgence of the private equity market, family offices see the opportunity to access private companies and benefit from their growth before they go public. Some family offices have the expertise in-house to conduct thorough research and valuations, while others outsource due diligence to legal and merger and acquisition firms. By investing directly, family offices can potentially avoid the complexities and risks associated with investing in the secondary market. They prefer industries where they can have a say in the company's operations and look for businesses that have the potential to make a significant impact in their respective industries.
In a return discussion of family offices, Alejandro Levy takes a deeper dive into the nuances of the family office and how they structure their investment strategies. Since family offices are major buyers of middle market companies, it’s important sellers understand what they look for in an investment and who the decision makers are within a family office. The discussion includes direct investments, investment trends in the secondary market, and the differences between family offices and independent sponsors.
