Private equity firms were reluctant to make deals in the first half of 2012, as the number of deals dropped 15 percent from last year. [1] A lack of large deals could create negative repercussions going forward, as firms address the need to deploy the large amount of cash that they have built-up. Firms currently hold about $1 trillion in cash, $200 billion of which will be handed back to investors if firms are unable to find large deals within the next year. [2] The increased need to find large deals will lift multiples for the larger target companies, providing less upside potential going forward. [3] Although well priced deals may be harder to find for some of the major private equity firms, some wealthy investors are beginning to seek out alternative ways to invest their capital. A growing number of wealthy families are beginning to make direct investments in companies, rather than investing in large private equity firms. [4]
As wealthy individuals look for new ways to invest after experiencing a period of low returns, some wealthy families have begun to hire top Wall Street talent to manage their investments.[5] Between 2006 and 2010, the share of private equity investments in multifamily investment portfolios rose from 3.8% to 10%. [6] Moreover, the current environment is ripe for investors who want more control over their investments because of the pressure some of the major funds are facing. [7] Not only does the idea of being closer to their investments appeal to wealthy investors, but it opens the door to numerous investments that may not be readily available when investing in large private equity firms. Investing in a family office allows investors to make investments with longer time horizons. Managers within family offices have found success in making long-term investments in a few platform companies with the aim of growing the companies through smaller acquisitions. [8] This holding company approach is just one example of the ability of family offices to be flexible in the type of strategies they employ.
Although family offices usually do not have the same amount of resources at their disposal as some of the major private equity firms, the resources they do have are streamlined.[9] The number of individual investors in any given family office is relatively small, with some offices starting out with only one family. [10] At the same time, some managers are drawn by the opportunity to work closely with clients, while being relived of worrying about marketing or spending time doing client development and have left large investment houses to work with these family offices. [11]
Running a family office also has the advantage of flexibility when it comes to the type of investments that are available for managers to consider. [12] Simply put, the size of many of these family offices allows managers to consider a broad spectrum of investments that may not be as appealing to many of the large private equity firms. Many of the family offices are able to invest in young, promising startups because they are dealing with a smaller pool of money. [13] In fact, some family offices seem to focus mostly on young startup companies, almost acting as a venture capital fund. [14]
As the industry continues to face challenges, investors continue to adjust their actions to seek out better rates of return. For those who seek greater control and a more personal atmosphere, investing in a multifamily office is an attractive alternative to investing with a major firm. At the same time, managers in family offices will also benefit from the small amount of investors they will be communicating with and the greater flexibility in the investments that are available to them. With the advantages of size, flexibility, and greater control, it is easy to see why family offices have become a favored alternative for wealthy investors and managers alike.
[1] Mohammed Aly Sergie, Survey Says: PE Flat in First Half, Eyes Carve-Outs in Second, Wall St. J. Blog (July 2, 2012, 4:57 PM) http://blogs.wsj.com/privateequity/2012/07/02/survey-says-pe-flat-in-first-half-of-2012-eyes-carve-outs-in-second-half/.
[2] Andrew Ross Sorkin, More Money Than They Know What to do With, N.Y. Times Dealbook (Oct. 1, 2012, 8:42 PM) http://dealbook.nytimes.com/2012/10/01/more-money-than-they-know-what-to-do-with/.
[3] Id.
[4] Azam Ahmed, Family Investment Funds Go Hunting for Wall St. Expertise, N.Y. Times DealBook (Apr. 4, 2012, 3:50 PM), http://dealbook.nytimes.com/2012/04/04/family-investment-funds-go-hunting-for-wall-st-expertise/.
[5] Id.
[6] Steven R. Strahler, Families Jump Into the PE Pool, Crain’s Chicago Business (May 28, 2012) http://www.chicagobusiness.com/article/20120526/ISSUE02/305269999/families-jump-into-the-pe-pool.
[7] Id.
[8] Id.
[9] Ahmed, Supra note 3.
[10] Strahler, Supra note 6.
[11] Ahmed, Supra note 3.
[12] Id.
[13] Id.
[14] Id.