Over the past few years, a new and very active buyer community has emerged: The Family Office. Although technically family offices have been in existence for several hundred years, their growth and acquisition activity has increased dramatically over the past 10 years or so.
We have discussed family offices a few times over the years but a recent article in Bloomberg News has shed new light on how FOGs (Family Office Groups) operate and why they have become a very active source of good buyers for potential sellers of privately held companies.
Entitled, “How New Wealth, Few Rules Fuel Family Office Boom”, the article had several key pieces of information that owners of privately held companies should be aware of.
First, until a few years ago, most FOGs did not invest directly into businesses, preferring to provide capital to equity firms to do the investing. However, over time many have realized that in order to reduce the management fees associated with investing in equity firms, that investing directly makes more sense.
This is especially true if the FOG, and the family funding it, has direct experience in the past in a particular industry. Keep in mind that many family offices were born out of a family business years and years ago. The generational expertise that they can bring to a transaction can be substantial.
In addition, the article identifies that what makes the FOG universe difficult to court as a buyer is that they are extremely secretive regarding their funds and what they are interested in investing in. However, it is estimated that they have a substantial amount of capital available.
An estimate by researcher Campden Wealth put the figure at $4 trillion globally, larger than the entire hedge fund industry. But it’s hard to say for sure. Families tightly guard the extent of their wealth and very few public records are available to track their assets. Single-family offices are generally exempt from registering as investment advisers with the U.S. Securities and Exchange Commission, and therefore don’t have to disclose their owners, executives or how much money they manage.
And there is a direct correlation between the amount of capital with FOGS and the recent dramatic growth of billionaires:
Estimated Number of Billionaires Worldwide Annually:
Data: Credit Suisse Global Wealth Databook; graphic by Bloomberg QuickTake
As the number of mega-millionaires and billionaires has exploded, the use of family offices has spread to Silicon Valley entrepreneurs, private equity stars, Russian oligarchs, Middle Eastern oil families and newly minted tycoons in Asia. There are more than 10,000 single-family offices globally, at least half of which were started in the past 15 years.
The last point that I bolded above is really amazing – at least 5,000 FOGs have been started in the last 15 years alone!
Based on conversations I have had with FOGs, unlike equity firms that usually have a timeframe of 5-7 years to “flip” an investment, FOGs have much longer hold horizons; in many cases, the family office plans to hold the investment for decades or even longer.
This can be very attractive to business owners who are interested in their company’s new owner maintaining the legacy that the family has built over the years. So the longer hold time, coupled with the expertise that a family office can bring to the table, makes them very attractive potential buyers for many owners considering their exit plans.
If you are going to approach the market without the aid of a professional M&A advisory firm, be sure to add FOGs to the buyer list you are going to be creating as they have become a wonderful option for many sellers to approach. The challenge you will face though is that, given the secrecy that they operate under, finding the optimal FOG for your opportunity will be a challenge.
Unless you have access to M&A research tools, or if you have 34K registered buyers like we have, they can be tough to find (especially if your business is operating in a narrow industry niche).
A great place to start your exit journey is by attending a Generational Equity executive M&A conference. We hold these complimentary, highly-educational meetings throughout North America and attending will probably be the best investment of your time in years. To find a conference near you, or to learn more about how to optimally exit your business, please use the following links:
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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