Family Offices: How the Ultra-Wealthy Invest In and Buy Companies

Some of the interesting alternative investors aren’t very well known to most business owners. They aren’t nefarious, but rather they value their privacy – the same way you would if your family had more than $100M to invest. Preferring to keep themselves well-hidden, family offices work behind pseudonyms like Island Management or Metropolitan Equity Partners and only introduce themselves to the few people with whom it makes sense to invest.

Much like your own portfolio, the ultra-wealthy diversify their capital between stocks, bonds, and various investment funds. But, unlike your portfolio, a growing number of families are making direct investments in companies – either purchasing them or funding their growth.

Howard Romanow of Island Management, a fourth generation family office that owns operating businesses, explained to me that, “We went to direct investing because it’s less correlated to the rest of the market and because we can get better returns. Why did we go direct rather than investing in a private equity fund? We want to build businesses. We like building things we can own.”

Family offices can be an interesting investor for your business, but they’re different from most other potential partners in a few key ways – how they invest, how they manage your business, and how they think about reputation and their family name.

How Family Offices Invest

To understand family offices, it helps to distinguish them from venture capitalists or private equity groups. VCs and PE groups don’t invest their own capital. Instead, they raise money from pensions, endowments and the ultra-wealthy in ‘funds’. Each fund is a pool of money between $50M and $10B, depending on the size of the firm, used to buy or invest capital in businesses. And because VCs or PE funds have to raise capital on a regular basis, they need to prove to future investors that their past investments are paying off.

Family offices are different. As Romanow explained, “First, we’re not a fund. We don’t have a structure we have to deal with. There are no dollar limits or holding period limits. There’s no reality of needing to raise the next fund and we don’t have the problem of only holding a company for 5 or 6 years, often less than that. If a business owner is looking for a recap where they can hold part of the business, do they really want to sell in a couple years? We have an indefinite holding period so, as long as the business still makes sense, we keep building. Where PE groups are trying to flip, they may not be willing to invest in long term infrastructure in the company, but for us it makes sense. PE firms tend to move their winners quickly and get stuck with their losers. We don’t have those restrictions, which allows us to think about different transactions.”

While every family office is different, many groups invest similarly. Romanow explained Island Management’s investment focus saying, “We’re generally looking at controlling investments with strong management teams. We’ll look at minority investments that can become controlling over time. We enjoy the dividends. Traditionally we’re investing in manufacturing and light industry, but really we’ll look at anything. We’re pretty opportunistic.”

How Family Offices Interact With Your Business

No matter who invests in your company, things will change a bit. Obviously the level of involvement will be different based on whether you take growth capital or you sell your business, but either way the investors will want to know what’s going on. Banks will require covenants, venture capitalists like board seats, and family offices want regular communication with management.

“We don’t run the business, but we’re close enough so that we really understand the business and can add value,” Romanow explained, “Management is 1, 2 and 3 for us. We’re backing a team at the end of the day. We’re not running a business. We don’t want to have to replace a team.”

While family offices tend to be fairly involved immediately after an investment – evaluating and helping optimize parts of the business from the ground up – the focus quickly moves to only senior level interactions. Since a family office tends to have only a few professionals on staff, they don’t have the resources to manage the company by themselves.

“I think more often than not it tends to be like a partnership. We often do want the owner to keep a stake in what’s going forward. Our approach is to build consensus and get everyone on the same page,” Romanow told me, “It can be a difference between us and a PE firm who tends to be more heavy handed. Due to the long term relationships, we’re going to have to work with these guys for awhile. So at times we make slightly suboptimal decisions or take more time to get everyone on the same page, but that’s because we’re more focused on getting everyone to make the right decision than getting it done by fiat or order.”

Family Offices are Family Businesses

Like many of the businesses that they acquire, family offices are a family business. Most are formed by people who, like Oprah or Eli Broad, made their money in their own businesses. Using their expertise and capital to help other businesses is an extension of what made them wealthy in the first place.

“All family offices tend to be very different depending on the generation, how many family members, who is involved and how they made their money,” Romanow noted, “I work with the family member who is most directly involved with this effort. She will take a look at any deal we’re interested in very early on, before we get too far down any path. As compared to a PE firm, we don’t have any formal process or investment committee to go to. If we like the deal it gets done.”

But, though the process can be faster or more flexible than with other investors, the families care deeply about the same things you probably do with your own business. “We’re a family business,” Romanow concluded,”We understand loyalty to employees. How family names being attached to a firm matters. We have sensitivities that others may not have.”

As you seek to sell your business or raise capital from minority investors, it could make sense to seek out family offices if their values match your own. Having a good partners can be the difference between a moderate success and exceptional success.