Here’s an interesting launch of a new private equity firm that appears to have the interests of family offices and family businesses in its sights.
Called Auxo Investment Partners, the firm wants to appeal to long-term wealth creators and at the same time align its interests with those of investors. When it comes to taking stakes in companies, Auxo says it wants to bridge the “troubling gap in the private investment marketplace” between the short-termism of private equity and the lack of expertise from investors like family offices to help build a business.
In a press release accompanying its launch, Auxo says it aims to help businesses achieve: “their full potential for current and future generations of owners, employees and communities by making long-term investments and providing expert operational and strategic support”. And it adds: “The firm doesn’t set predetermined timeframes for its investments. For certain businesses, the firm will take a perpetual approach - with no timeframe at all for a sale or other event - as it builds a portfolio of long-term holdings”.
This approach could prove popular with family businesses looking for financing opportunities from providers willing to stay around a while. Family businesses have typically avoiding private equity investors because of their short-term approach to holding an investment, which can be as brief as three years. Another deterrent for family businesses using private equity finance has been the leverage that often comes with such deals. This can mean stakeholders like employees and the community play little role in the ambitions of private equity investors to maximise profits.
Auxo wants to take a stewardship approach to its investments and also its investors. And here’s where family offices might be interested. Auxo says founding partners (i.e. outside investors/limited partners), “will participate in all economic benefits generated by Auxo, including carried interest and fees, with a priority position ahead of the management partners (i.e. the general partners)”. Also, company financials and management compensation will be fully disclosed to all founding partners.
In the years following the financial crisis of 2008, family offices have become increasingly wary of becoming limited partners in private equity funds because of a lack of transparency and little alignment of interest between the returns received by those setting up the fund and outside investors like themselves.
OK, family offices might not like the fact that they will face a potentially more savvy competitor when it comes to sourcing and investing in private companies, but more competition can only be good for all investors. If the model catches on it will also force family offices to raise their investment game.
Auxo looks like it’s a good example of the private equity world adapting to a more of a long-term and skin in the game approach to investing. That can only be a good thing.
And here’s another advantage - Auxo is based in the relatively out of the way location of Grand Rapids in Michigan - away from the big financial centres, where sometimes the power of the short-term deal is all too alluring.
If it works, Auxo might just be the blueprint for others to follow.