Family offices are generally weathering COVID-19’s investment impacts well, with many taking advantage of 2020’s market dislocations and volatility—using the opportunity to rebalance their portfolios. Making direct investments in private companies remains an important strategy for family offices and high net worth investors, especially as public market valuation multiples look historically rich.
Family offices are typically focused on the long game with an emphasis on preserving generational wealth. These desires often dovetail nicely with the needs and wants of family-owned businesses whether they need a new brand steward to continue their legacy or patient capital to provide liquidity and balance sheet strength.
Despite the current market uncertainty, we have found that family office investment activity remains robust and represents a sizable source of potential capital for middle-market businesses.
Flexible, Patient Investors Looking to Add Value
Each family office has its unique strategy for direct investing in private companies, but a common theme is an affinity for the added level of control this type of investment affords.
- Many family offices see their direct investments as an extension of the family’s entrepreneurial spirit, generating new and exciting ways to share the historical expertise developed in the industries that originally brought them wealth.
- Shared values, applicable industry experience, and overlapping philanthropy focus make certain companies more attractive to family offices, especially in situations where the quality of the partner and vision outweigh the highest sale price.
Beyond the attraction of working with businesses where they can add value, direct investment also allows family offices to:
- Bypass private equity management fees.
- Influence their investment’s trajectory through their seat(s) on the company’s board.
- Create opportunities for younger generations to gain business experience.
Family offices often have added flexibility in their investment mandates, allowing them to take on a broad range of structures, from minority investments to full buyouts, depending on the sophistication and size of the family office team and the target company. This is interesting to many company owners who may be reluctant to execute a full sale in the current environment.
In the eyes of company management teams, the big differentiator setting family offices apart from their private equity counterparts is their patience.
- Their direct investments are often accompanied by indefinite hold periods, allowing companies to make bigger bets with a long-term strategy, like major CapEx investments to enable long-term growth opportunities, for instance.
- This is also especially key with family-owned businesses that want to keep the company within the family with the help of a passive investor focused on long-term, sustainable growth. Family office investments are not constrained by fund requirements and desire for liquidity in three to five years, making them more attractive investors than private equity for certain companies.
Opportunities in the Pacific Northwest
Based on our conversations with local family offices in the Northwest, many continue to be interested in private company investments at reasonable valuations and are actively pursuing deals.
- The Pacific Northwest historically lacks a robust private equity scene as compared to other geographies, thus ample opportunities exist for family offices to seek direct investments.
- Tom Petroff of The Agnew Company agreed, stating, “With roots spanning five generations in the Pacific Northwest, we welcome opportunities to engage with business owners and can provide thoughtful, creative capital solutions during this challenging period. Our capital is less constrained than traditional sources of equity financing and we are especially focused on business services and niche manufacturing companies.”
- Aaron Singleton of Joshua Green added, “The current environment has reinforced our belief in the long-held investment principles of the Joshua Green Corporation and thus our investment objectives have not changed. We continue to prioritize long-term direct investment opportunities in companies that provide durable benefits to the communities they serve.”
Generational Investing
As family offices mature, they often become more risk-averse and focus on capital preservation and philanthropy. Generally speaking, the families behind these investments care deeply about the communities in which they are investing. They often have deep roots in a particular geographic region and a desire to do right by the people in the area they call home.
- Long-term direct equity investments are a benefit to the communities in which the target companies operate, providing jobs and economic opportunity for the area as the business grows.
- Environmental, Social, and Governance (ESG) and impact investments have also gained momentum among the family office community, as younger generations become involved in the family’s investment process.
OPPORTUNITIES AHEAD:
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