Family Office Investments: Hidden Powerhouses Behind Many M&A Deals

Founders looking for M&A deals should also take the time to explore family office investments as a viable opportunity. Entrepreneurs turn to private equity firms or potential collaborators when looking to make a strategic exit.

But, family offices are a viable option for transforming the business landscape and a valuable part of the startup ecosystem.

Family office investments also go by “private investment offices,” “strategic philanthropy advice,” or “private company services.” These organizations maintain their privacy and discretion and typically don’t give out information about their family clients.

Reaching out to them for funding or a partnership deal is an excellent strategy. North America has an estimated 1,682 private company services in 2024, the highest worldwide. Experts expect the industry to grow to $138.01B; by 2029, it will have touched the $233.11B mark.

When scouting around for these investors, you may not get much information about their core sectors of focus or strategies. They may not disclose their growth approaches or their criteria for approving pitches.

However, you can research the projects they have backed in the past. You’ll also look into the strategies previous sellers used to connect with them

Statistics indicate that such offices could have assets worth around $6T under management, which is accelerating quickly. Family offices may enter into M&A deals and acquire viable companies similar to private equity firms.

Or, they may invest capital to support acquisitions with the objective of earning rich profits.

Understanding Family Office Investments

A family office is a privately owned company or an independent organization that wealthy families may start. The objective behind setting up this office is to manage the personal and professional assets the family owns.

Members can use the separate entity to hire a full professional staff to handle investments and enter into contracts.

The agency also executes other tasks like entering into leases and performing any finance-related activities for the family. But without divulging their identity and limiting risks and liabilities.

Private company services agencies have a full wealth management team of experts on board. They hire top professionals in areas like litigation, insurance, law, taxation, real estate, banking, and more.

The team has the essential talents and skill sets to manage not only finances but also other aspects.

Some agencies handle the family office investments for a single or extended family. However, others may offer financial services to multiple families. They also assist with hiring secretaries and personal assistants, chefs, and other service providers.

Organizing vacations, maintaining properties, and managing healthcare and education for younger members are part of their job description. Making philanthropic contributions and leveraging other tax-saving options is another service they offer.

In recent years, more private investment companies have been investing capital in startups or buying them out entirely. They may also focus on mission-driven companies to align with their philanthropic objectives.

The agencies have top-notch corporate development executives who have experience with strategic investments that will ensure maximum profitability. They use their expertise to manage the billions of dollars placed at their disposal.

Family Office Structure for Asset Management

Family office investments typically include assets like commercial real estate, artwork, venture capital investments, hedge fund investments, and antiquities. They may also own public equities, bullion, debt, private equity investments, and collectibles with the potential to appreciate over time.

Managing this diverse asset portfolio needs experts, which is why the office may invite external consultants and advisors for assistance. Family members who have the expertise may exercise an active interest in their investments, providing guidance and direction.

Angels are another class of investors who may establish family offices while remaining personally involved in the agency’s activities. The firm’s Chief Investment Officer (CIO), investment manager, or Chief Financial Officer (CFO) typically handles acquisitions.

The family may appoint a Chief Executive Officer (CEO) to lead an executive team (or C-suite) to oversee asset management. They also set up benefits, incentives, and profit-sharing plans to reward the team.

Private office agencies may also have owners sitting in on board meetings to direct investments. Since their objective is to create wealth, they may want to leverage their networks, contacts, expertise, and public personas.

This is why founders should take advantage of networking opportunities. Here, they can connect with entities who own or run private company investments. And get capital or a viable M&A deal.

Typical Sectors Family Offices Target

American family offices in recent times typically target verticals like biotechnology, media and telecommunications (TMT), tech startups, and disruptive technologies.

They are also exploring areas like artificial intelligence (AI), machine learning (ML), software-as-a-service (SaaS) startups, digital infrastructure, and eCommerce.

Considering high interest rates, the focus is shifting from real estate. And US families with ultra-high net worth are exploring investment options in high-growth sectors with potential for significant returns. Interestingly, private office investors are also displaying interest in cross-border M&A deals to buy foreign startups.

Particularly in club deals where multiple private equity firms combine their assets to acquire viable startups. Statistics indicate that 90% of family office investments and deals are geared toward small and medium startups.

Why More Family Offices Are Entering into M&A Deals

Historically, high-net-worth families would invest some of their wealth in real estate, venture capital, and private equity firms. Although they also acquired companies for investment, they executed these deals through third-party entities.

Typically, families entrusted their assets to and relied on agencies to manage assets and generate profits to build more wealth. However, this approach came with several downsides.

For instance, they lacked control over their assets and wealth and needed to pay high fees and compensation.

Families also had to deal with low flexibility when investing or disinvesting. In recent times, these families have started creating their own agencies or in-house offices to overcome the cons.

Alternatively, they may retain the services of large consultancy firms explicitly geared to assist such high-net-worth investors.

Statistics indicate that family office investments comprised close to 10% to 15% of acquirers purchasing lower to mid-market startups in the last five to ten years. In the coming years, more than 50% of private investment offices will be looking for more such opportunities.

They will be offering capital directly to deserving startups. Here’s why:

Having More Control Over the Investment Structure

Modern-day family investors are more sophisticated and tech-savvy and have a better handle on the economic landscape. Many of them are experienced angel investors or have built and exited startups of their own.

Such individuals would prefer to direct the operations of the companies they acquire to build value. Investing capital directly instead of through private equity firms allows them to evaluate and select viable projects to back personally.

They enjoy complete transparency, which is not possible if they assign their wealth to a private equity firm. PE funds only accept limited partnerships where investors have no say or voting rights over their internal operations.

Keep in mind that, in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here), which I recently covered. Thiel was the first angel investor on Facebook, with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Eliminating Expensive Fee Structures and Earning Higher Returns

Partnering with a PE firm typically involves paying a 20% performance fee and a percentage of the profits. Investors also pay annual management fees of around 2% of the total capital investors divert to the fund. Considering the high volume of funds invested in the funds, the fee is not lucrative.

For instance, the payable management fee for a $3B fund could add up to $60M per year. Clients must pay this fee even if the fund has not been successful in generating profits. At times, the management fee earnings can be higher than the performance fee.

While PE firms function according to the two-and-twenty fee structure, they are also subject to the hurdle rate. This rate ranges from 7% to 10%, which depends on different criteria like the firm’s size, age, credibility, and strategies.

Investors can also agree on the hurdle rate according to the firm’s track record of delivering profits to clients. Accordingly, if the firm generates only the hurdle rate in earnings during a given year, it cannot claim a portion of the profits.

Direct investments can eliminate overpayments to managers when they aren’t performing per client expectations. Building a team of expert consultants to guide acquisitions and investment is surely a time-consuming exercise. However, the end results deliver more viable returns.

The costs of conducting due diligence, researching startups, completing transactions, and managing companies are much lower than paying management fees. This factor is especially true in the case of family office investments higher than $500M.

Lowering the total costs of investing directly translates into higher returns and profits for investors. On the flip side, the risk of losses is also higher. When PE firms invest multiple investors’ capital, risk distribution becomes an advantage.

Flexible Investment Tenures

As a rule, private equity firms remain invested in a startup for five to seven years. However, this time frame is hardly adequate for the fledgling company to stabilize, scale, and generate profits.

When family offices directly invest in new companies, they are open to staying vested for extended periods. These time frames may range from 10 to 12 years or more. It is not unusual for these private companies to maintain their investment for decades or even across generations.

This wealth-building strategy gives them the flexibility to execute unique approaches to promote the companies they purchase. Direct family office investments also leverage the flexibility to alter or pivot growth strategies according to the evolving business landscape.

This extended vestment period works well for the startup and investors since both can plan their exit strategies more effectively. Founders can also take advantage of flexible M&A terms and conditions that family offices are willing to offer them.

Since family office investors are individuals looking for interesting projects to back, you should know how to send your pitch deck to an angel group. Check out this video, where I explained how to do that.

Getting Board Seats to Guide the Company

As mentioned in the foregoing sections, family office investors are typically veteran entrepreneurs and experienced executives. They are well-versed in running companies and interested in lending their advice and expertise toward building their investments.

Direct private company investments allow them to leverage their expertise. They pick projects and founders that have potential and guide them toward exceptional success.

Veterans ensure rich profits from the startup and attain their financial goals. At the same time, they may also want to nurture a particular industry for altruistic purposes.

Entrepreneurs should leverage this interest and consider family office investments for backing, especially if those targeting mission-driven or disruptive sectors.

Attaining Financial and Philanthropic Objectives

Traditionally, family offices would adopt investment approaches to generate more wealth with the objective of supporting philanthropic activities. For instance, to support ESG causes like environment, social, and governance.

They would set up foundations to back founders building ESG startups and divert the profits toward further altruistic causes. However, this trend is also changing. Private investors are creating a balance between building wealth and supporting charitable causes.

Founders who can demonstrate this balance have a better chance of getting an M&A deal that is mutually beneficial.

The Takeaway!!

Family office investments play a crucial part in encouraging entrepreneurs and positioning themselves as growth promoters. The generational wealth they own is enabling radical shifts in the economic landscape.

Their substantial dry powder allows them to selectively evaluate each investment option before diving in. The focus is on verticals that can grow their legacy wealth. This is why they are likely to assess the long-term impact of each investment and pick options with the best prospects.

Founders looking to enter into strategic collaborations or sell their companies should explore family offices. If they work in high growth, ESG, and disruptive sectors with the potential to earn rich returns, they have a fair chance of being successful.

Not only can entrepreneurs hope for capital, extended time frames, and networking opportunities, but they can also get valuable guidance.

Approaching the right investors can ensure long-term success, scalability, and profitability for their startups. Particularly if they work in sectors that interest their investors.

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