Private equity groups await family business deal boom

Private equity groups are likely to see a big uptick in deals involving family businesses in the next few years, as many companies sell to avoid succession issues, or soon after the next generation take over.

As Family Capital has reported this week, the so-called “great wealth transfer” will be a big impetus for private equity acquisitions of family businesses. And where family businesses aren’t selling out completely, next generation owners are likely to be more partial to selling off parts of their business to external investors. 

What I’ve noticed is that more families are concerned about where interest rates and valuations will be a few years from now, which has been driving family businesses towards us.
— Steve King, Alaris

Some big deals done between private equity groups and family businesses since last December include the sale of the 128 year-old family-owned US-based department group Belk to Sycamore Partners last December, and the sale of  Fuerst Day Lawson Holdings, a more than 100 year-old family-controlled UK-based commodities group, to Highlander Partners last February. Generational ownership changes and succession issues often prompt a sale, although the above two deals weren’t necessarily linked with these reasons.

Steve King, chief executive of Alaris, an investment group that has bought a number of family businesses, says his firm has seen an increase in deal flow over the last year. “What I’ve noticed is that more families are concerned about where interest rates and valuations will be a few years from now, which has been driving family businesses towards us.”

There are also more investments groups like Alaris willing to provide a ‘patient capital’ approach to acquisitions. “The profitability, stability and long-term focus of family firms are attractive to private equity and they are finding ways to offer ‘patient capital’ through new funds,” says Carrie Hall, a partner and family business leader Americas for EY. “It is interesting to hear some of the more established and well known funds talk about their interest in family businesses now when it used to be all about the five to seven year timelines and initial public offerings.”

When they sell their businesses, families are sometimes disappointed with the returns they get from the financial capital they make from the sale
— Professor Marc-Michael Bergfeld, Courage Partners

Nevertheless, despite the greater enthusiasm to do deals, some analysts reckon that families selling up often regret the move. "When they sell their businesses, families are sometimes disappointed with the returns they get from the financial capital they make from the sale,” says Professor Marc-Michael Bergfeld, a professor at the Munich Business School and managing director of the family business consultancy Courage Partners. “They often find they are back to square one and realise they've sold parts of their identity at the same time."

He adds: "Families often don't think through all the consequences of the sale of their business. Investing the proceeds and allocating financial capital, even if done together with highly skilled service providers, requires a whole different set of capabilities than running or controlling an operational business."