As wealthy family businesses look to secure their legacies for future generations, family office investment vehicles are becoming a growing source of deals for advisers. Jo Russell finds out what makes them a different breed of investor.
The one statement that can safely be made about family offices is that they are on the rise. According to a PwC survey, 50% of private offices globally have been created since 2012. Beyond that, the waters get muddier. Offices range from £10m to the billions in terms of assets, and from single-office to multi-office, multi-jurisdictional setups. Asset-wise, they can be diverse or focus on core expertise.
Holly Smith, family office M&A leader at Deloitte Private, explains that, in textbook terms, family offices are “private organisations established to manage the comprehensive financial and non-financial affairs of ultra-high-net-worth (UHNW) individuals and families”. Their core purpose, she adds, “extends beyond mere financial management to encompass family legacy, core values, privacy and the coordination of diverse services”.
The rise in family offices isn’t wholly down to the wealth accumulated by entrepreneurs over the last two or three decades. Tax and regulatory complexity has prompted UHNWs to bring in more financial expertise to keep their affairs in order, which has, in turn, kick-started the professionalisation of family wealth.
One part of that new approach has been taking an interest in private markets as an asset class. According to Preqin, the number of family offices exposed to private markets has risen by 500% in the last decade.
“There used to be a small portion of the market that thought that family offices had deep pockets and would buy anything,” says independent consultant and family office expert Catherine Grum. “And there certainly were some deals that family officers regretted with the benefit of hindsight. But they’re a lot more sophisticated now. They know more and have more support when it comes to doing deals”
Family offices are becoming more defined, and bringing in expertise to help them
PwC partner Natalie Martin agrees: “Family offices are becoming more defined, and bringing in expertise to help them. Professionals from private equity, legal, accountancy, and tax backgrounds are helping them feel more confident in making deals. Consequently, we have seen the deal flow coming to them.”
The increasing formalisation of family office investment structures goes hand in hand with the increase in direct investment, says Tim Day, managing director at BDO: “That professionalisation brings enhanced perspective and advice on how to get money to work and how to source and structure direct investments. Private markets are a great way to grow and preserve wealth if done in the right way.”
Private capital appeal
Family offices’ growing interest in PE comes as no surprise to Humza Khan, Grant Thornton director, mid-market private equity sponsor coverage. “Returns on private equity are averaging around 15%-16% globally, compared to about 9% for the S&P 500. More money is going into PE and, guess what, family offices are following that trend.”
Beyond the simple statistics, private markets appeal to some of the more unique traits of family offices, explains Martin. “Families tend to have a very long-term investment horizon, without the need for quick cash. The private markets allow for that stable growth, and less of the volatility you might see through the public market.”
The attraction is mutual – there are clear benefits for companies teaming up with family offices rather than institutional investors. Importantly, families can be relied on to bring operational experience to the table.
“They have run businesses themselves. They know what it means to have introduced technology transformation to a business too soon or too late, or the value of someone who has been in the business for years,” says Khan. “They have a greater understanding of the emotional side of running a business than institutional investors.”
Steve Rigby, CEO of Rigby Group – one of the largest and more well-known family businesses in the UK – agrees that it’s the personal touch that appeals. “If I’m dealing with someone’s life’s work, that is a privilege and something to be respectful of. A lot of people will open the door to me that wouldn’t to private equity. We won’t leverage as high or take as much risk, and we’ll be more accommodating of those bumps in the road that always happen.”
Alignment with the management team is key. “Founders are with us because they want equity not debt, and the right amount of money at the right time,” says Jeremy Middleton, CEO and founder of family office Middleton Enterprises. “We can align with the founder and exit when they want – or, better still, not exit. In practice, the best returns on a business are to hold and compound over the long term rather than sell.”
“Family offices are pleasant to deal with because they can be flexible,” says Jon Moulton, former faculty board member and founder of family office Perscitus. “We can do a deal in an afternoon if we choose to – and we have done. Another great benefit is not having to worry about reporting to institutions. We are not under pressure to support difficult valuations, which is a common sport in the VC industry.”
Family quirks
Given the diverse range and nature of family offices, there is no one-size-fits-all playbook for the types of deal they invest in or the approach they take to those deals.
“We invest in businesses we can be proud of,” says Middleton. “Our focus on SMEs in the early stages of profitability plays to my own experience, and I think this is where there’s an unmet need. If you can break out of marginal profitability and become a scale up, that is a huge positive factor for the economy and employees.”
Middleton seeks out companies with established concepts in sectors with tail winds. The low-cost gyms sector is one such example. Having looked at a number of smaller businesses, Middleton first invested in OneGym, which is based in the North East, in May 2022. Subsequent investment rounds, bringing the total to £5m, have enabled the founders to de-risk and expand the business – from four units to 13.
For some family offices, it is the people factor – the founders and their philosophy – that will trump sector-specificity. Buzzacott corporate finance partner and head of M&A Meera Shah recalls when Pentland Capital – known for its investments in the consumer and sports brands sector, perhaps most famously JD Sports – provided Series A investment into digital transformation experts Elemental Concept. “It wasn’t a natural fit,” she says, “but they liked the founders and they have a brilliant relationship rolling forward a couple of years.”
Cultural fit and aligned values between the family office and a target’s management are critical
Rigby’s approach is different. “My focus is on the quality of the business,” he says. “We usually start with a strong thematic business model and then look for high-quality companies. The team is a secondary consideration, as we can work together to develop and grow the business.”
Personality and purpose also play a significant role in investment strategy, as Deloitte’s Smith explains: “The cultural fit and alignment of values between the family office and the target business’s management is critical. What’s more, the family’s overarching purpose – including sustainability, social impact, or philanthropic goals – heavily influences M&A decisions.”
Finally, explains Moulton, the size of the deal can be an important factor. “We get good deals because we are below the threshold for most venture capital so there is less competition, and more attractive options. We see very few companies looking for £20m that don’t have half a dozen buyout firms already chattering away at them. That makes the odds against completion quite high and the prices unlikely to be bargain level.”
Direct to business
Institutional private equity’s annualised fee and carry typically subsumes around one-third of investment value, according to some estimates. This has made directly investing into target companies a more attractive proposition for many family offices.
However, for offices lacking the time, bandwidth or desire to make direct investments, a number of new PE funds, such as Northcote and Founders Private Capital, have opened in the last couple of years, says Day. “Typically, new funds have launched with funds of around £100m-£150m, of which funding has and can come from family offices. The trade-off from fees is the returns profile, where 20%-25% IRR is generally higher than a family office would look for if they were direct investing.”
Family offices are very good at being flexible, at co-investing as equals and pooling their expertise
Co-investment, or club deals, can also be attractive. PwC research shows that club deals accounted for 69% of global family office investments. “Family offices form long-term relationships with other family offices, investing with trusted partners doing deals in the same sectors,” says Martin.
Khan says the added attraction of club deals is the ability to draw on different skillsets: “If one family office originates a particular investment but lacks sufficient expertise, they will co-invest alongside a family office that has more expertise. They are very good at being flexible, at co-investing as equals and pooling their expertise.”
But club deals are not to everyone’s taste. “We generally don’t co-invest with other parties and certainly wouldn’t want to invest where there is another financial institution as the lead partner,” explains Middleton. “Along with some other business angels in the North East, we were early investors in the now very successful Atom bank. But we didn’t have enough control, and the shares have been diluted, so they’re worth no more than when Atom was founded.”
Introductions tend to come through existing networks – often other family offices
Foot in the door
Given family offices’ propensity for loyalty and discretion, advisers may find it tricky to break into that world. “It is difficult to proactively target family offices because they’re private by design and also not keen on that sort of sales approach,” says Grum. “I have seen people working the room with cards and everyone shrinking away. Introductions tend to come through existing networks – often other family offices.”
Building trust is critical. “Beyond technical expertise, family offices look for advisers who understand their unique, multi-generational perspective and patient capital approach,” says Smith. “Discretion is paramount, and advisers must be able to integrate financial advice with complex family dynamics and legacy planning.”
For Buzzacott private client partner Rakesh Dabasia, the challenge of getting that first family office advisory engagement is offset by the straightforward methods they adopt. “The experience is more direct, more flexible in approach, and faster in terms of the end goal,” he says. “They are fairly clear on what they do and don’t want, often saying: ‘We are not looking for x, but would be open to anything else.’ The lack of formal process is refreshing.”
Flying the nest
Last year’s sale of airport business Regional & City Airports (RCA) exemplifies Rigby Group’s buy-and-build and patient equity approach. RCA first acquired Exeter airport in 2013, followed by Norwich, Coventry and Bournemouth airports. “We looked at a number of airports in the UK, which were going through an interesting period where they were quite unloved,” says CEO Steve Rigby. “They made sense as part of a grouping but less so individually.”
The tasks were manifold. “Aside from the complexity of insourcing all of our services – from security, baggage handling and car parks to fuelling and cargo – we also acquired, developed and managed a property portfolio of £130m with around 140 tenants.”
The eventual sale – which didn’t include Coventry airport, which is now earmarked for closure in June this year – was delayed by two years, due to Covid. “The pandemic was devastating for that sector. It meant that it ended up being a 12-year rather than a 10-year journey, but if something takes longer than it is supposed to, that is our issue,” Rigby says. The sale of RCA to ICG, a FTSE 100 private equity house, was Rigby Group’s third major buy-and-build sale over £100m and its second over £200m, securing 2.7x money.
Horses and courses
Staff within a growing family office often end up having responsibility for areas beyond their initial expertise. “Sometimes, the first person brought on board is an investment head, but with a particular investment specialism,” says Catherine Grum. “To an extent, they then have blinkers on, making decisions and building teams based on their background and experience. Without the right kind of governance and engagement, the family office can unintentionally end up building a model that doesn’t suit the family’s objectives.”
A corporate entity with a similar-sized balance sheet will usually remain focused on its core product or service; the internal team will be experts in their particular roles. But a family office might be much more diverse in its assets, says Grum: “The team typically wear multiple hats. The head of the family office discussing an M&A opportunity may well have a background in private banking, for example. Understanding that, and how best to tailor support and help as an adviser, is a real skill – and one that will lead to a more effective outcome and better long-term relationships.”
While a family office will often have commercial and operational experience that can be directly applied to due diligence and strategy, they may need to augment their financial, legal or ESG skills base.
Legacy shifts?
Family offices comprise multiple generations, often with differing viewpoints and experiences. “The next generation will be pretty good investors, but they may have different preferences to me,” says Jon Moulton. “I still enjoy the individual company deal, my son is keener on funds, where he thinks he can get more or less the same returns with less risk and effort.”
Different times call for different approaches, and coming generations may well be more gifted at running money than running companies. For Steve Rigby, several questions are never far from his mind: “Do I have the energy to carry on doing it myself? Do I want to bring in professional leadership? Or am I best placed to utilise funds to deliver that mechanism?” he asks. “We’re leaning towards the latter. However it’s done, the job is to ensure the asset pool is greater at the end of your tenure than at the start.”
For Moulton, whether that will happen through a family office set-up is not a given: “The chances of this family office lasting another 30 years are fairly low. Economies will go up and down, families may fight, tax situations may change. There are plenty of reasons that would render the structure no longer desirable.”
The bigger fund
Caledonia Investments is the main investment vehicle for the Cayzer shipping family, who continue to own a majority share in the company. Founded some 40 years ago with around £400m on the balance sheet, the office has moved from being opportunistic and network-driven to taking a far more professional line. Focusing on deals of around £100m equity cheque, originated from the investment advisory community, Caledonia looks more like an institutional PE house than a family office.
“Our scale does make us different. I’m a member of a family office WhatsApp group alongside more than 1,000 different family offices,” says Sophie Bell, (pictured above) head of origination at Caledonia Private Capital. “Most are playing at the £5m-£15m equity cheque and we are almost 10 times bigger than that.”
However, the fundamental hallmarks of the family office remain present. “Often we get lumped in with PE, but we are different based on our flexibility, management incentive plan and risk appetite,” she adds. “When advisers understand that, it opens up more conversations around the businesses they are selling, and helps get us wider access to deals.
“I can go to a management meeting and say that I can offer something different than an institutional PE house might, based on the balance sheet, and the flexibility.” It’s a proposition that tends to resonate with boards, she adds: “We often win on hearts and minds with the management team.”
