About 250 such family offices in the U.S. are currently on the prowl to make controlling investments in privately held businesses, said Ward McNally, an adviser to family offices through his McNally Capital and whose family founded mapmaker Rand McNally. Targets generally earn $3 million to $50 million annually before interest, taxes, depreciation and amortization.
The challenges and risks are many, according to experts. Chief among them is luring managers from high-paying private equity funds to run their operations. And of course an acquisition can turn south, denting the family fortune.
But in certain ventures, families can receive dividends to generate income for relatives over generations, McNally said. There are also ways to structure deals that can lower a family’s estate-tax exposure.
Exit Pressure
Unlike private equity firms, families don’t feel the pressure from investors to sell within 10 years to cash out, said Hagan, managing partner at his family’s investment firm Hagan Capital.
“Fund managers may force exits at times,” he said. “We can hold for decades.”
Non-financial considerations play a role, too, said David McCombie, whose investment firm arranged the meeting in Miami. Some want to give children or grandchildren a starter role in running a business. Others use direct investments to echo their interests or values.
Blue Haven Initiative, the family office of Liesel Pritzker Simmons, an heiress to the Hyatt hotel fortune, and her husband Ian Simmons, has used its portfolio to fund businesses in renewable energy and financial services firms in sub-Saharan Africa, such as Ethical Electric and M-KOPA Solar. These investments “address specific social and environmental challenges,” said Lauren Cochran, Blue Haven’s director of private investments.
Kensington Capital Holdings focuses its direct investments in technology, health care and consumer. Principals Daniel and Jon Gay are sons of Robert Gay, a managing director at Bain Capital for 15 years before founding his own investment firm.
“Families are focused on five-, 10-, 15-, 20-year return parameters,” Blackstone’s Studzinski said. “They’re not focusing on the next 12 months.”