Last week, we attended ACG New York’s ‘Family Office Luncheon’ event. Here are five of our top takeaways from the panel, which focused on ‘Best Practices on Deal Sourcing for Single Family Offices.’
Prepared by TresVista Financial Services
- Investment Philosophy: Family offices continue to emerge as a viable source of private investment for family and/or founder owned businesses given the nature of their patient capital and indefinite hold periods. Depending on the strategy, family offices typically target an investment range from $10 mm to $250 mm across a wide variety of industries. “We typically come-in with lower leverage than traditional private equity as we are not held to the same IRR threshold,” said Michael Landerer from Dorilton Capital. Family offices tend to invest in the business for the long term and offer numerous capabilities to help the business grow while being less focused than traditional Private Equity on short-term cash flow maximization and a 3-5 year exit horizon.
- Deal Sourcing: “At Freemark Partners, we spend an enormous amount of time and resources on building meaningful relationships with sell side intermediaries and we then complement these efforts by engaging with a handful of select buy-side firms to facilitate direct company outreach based on internally developed investment theses. We know that intermediaries and sellers have lots of options today and we pride ourselves on responding quickly, pursuing only a handful of promising deals each year, and offering permanent, patient capital.” said JJ Hearty, a Principal at Freemark Partners. A select group of family offices now rival traditional private equity firms when it comes to sourcing and execution as they continue to lure away top tier talent from private equity firms to manage the entire lifecycle of a deal. These efforts often include working with both traditional sell side and buy side intermediaries as well as participating in industry conferences and tracking specific companies. A continued focus on building relationships with professional advisors such as attorneys, accountants and wealth management teams as well as industry experts will also lead to differentiated and valuable deal flow.
- Investment Process: “At Freemark Partners, we run a focused diligence process to understand what makes a business tick and what sets it apart from its competitors. At a high level, we focus on analyzing the company’s differentiation, competitive positioning, gross margins and the return on capital employed,” said JJ Hearty. At Waypoint Capital, “We engage a full team of third party advisors to support our due diligence and submit a memo with our findings to the investment committee,” said Philip Edmunds.
- To do, or not to do a Deal: “The only issue that would always cause us to walk from a deal is if the counter parties mislead us in the due diligence or negotiation process,” said Philip Edmunds from WayPoint Capital Partners. A subset of family offices also tend to shy away from deals where the seller is purely economically motivated and will have no vested interest in the company going forward.
- When to Exit a Deal: Family offices have a wide range of timelines for their investments. “Our ideal holding period is forever,” said JJ Hearty. For those Family Offices who are open to selling their investments, it is common practice to stay in close contact with sell side advisors and analyze market trends, precedent transactions and various other industry-specific metrics prior to selling a business.