Family offices are squeezing private equity firms on deals and funds

Photo by ConstantinosZ/iStock / Getty Images
Photo by ConstantinosZ/iStock / Getty Images

A few weeks back, FamilyCapital ran a story disagreeing with a piece of research about how family offices are placing more money with private equity funds. Well, further evidence is now available to back our view. And not only that, there is growing evidence to show that family offices are squeezing out private equity firms on deals and funds.

Research done by a Chicago-based investment firm called McNally Capital, which partners with family offices to make direct private equity investments, found that 77% of family offices polled in 2014 said they preferred direct deals over private equity funds, up from 59% in 2010. The McNally research also found that 84% of the family offices polled plan to make a direct investment in a private company in the next two years.

Also, a recent article in a US publication called Mergers & Acqusitions quoted Paul Carbone, the managing partner of Pritzker Group, a single-family office, which manages the money of the Pritzker family, best known for their ownership of the Hyatt hotel chain, and one of America’s richest families.  Carbone said: “A number of families are disenchanted with the traditional PE structure and want patient capital to build long-term value. They are also are comfortable with building companies on their own as many have built their wealth through company ownership so they don’t need a private equity firm to invest for them.”

That suggests many private companies are more likely to want to work with family offices because of their tendency to see returns over a longer time period than PE groups. So, with a limited number of deals, it looks like PE firms have to fight harder to source them as competition from family offices intensifies.

But beyond the greater competition for deals is the fact that as family offices prefer direct deals they aren’t providing as much money for private equity funds. In short, they don’t like being limited partners in PE funds anymore because of their preference to go direct. Also, as mentioned in the early FamilyCapital article, the fee structure of many PE firms hasn’t helped either when trying to convince investors to part with their money. All this means private equity funds are having to work harder than ever to raise investments for their funds.

This trend appears to be backed up by new research, which found that 50% of PE managers in Europe polled by Investec Fund Finance lacked enough existing capital to fully finance their commitments, compared with around a third a year ago. Traditionally, a considerable amount of the money that went into funds came from family offices. But as families go more direct this money isn’t as readily available as it has been in the past. So, not only are family offices depriving PE firms of deals, they’re also pulling their funding.

Of course, PE firms aren’t about to give up and die. There’s still a lot of money in the sector and performance last year for many of them was the best since before the financial crisis. That will continue to attract family office money. But the family office trend to do more direct deals must be a little bit irksome to PE managers.

It might just mean they start pushing out their pay days from the typical seven year cycle to 15 and, who knows, maybe they will even start talking about patient capital.