I can’t get in touch with Alberto Palatchi, the owner of Pronovias, to ask him personally whether he’s happy with the price paid for his family business. But I suspect he’s not too unhappy. Because, for family businesses like Pronovias, there’s never been a better time to sell.
Pronovias is a Spanish bridal fashion group that announced last week that it was being bought by a private equity group called BC Partners for a reported €550 million. If that figure is right, that’s more than 10 times the company’s so-called annual EBITDA (earnings before interest, taxes, depreciation and amortization) of around €50 million in 2016. Ten-times in the world of private equity is a good price for the seller - and a high price for the private equity house.
My guess is that Andrea Buccellati, chairman of Buccellati, a high-end Italian jewellery maker, might have been happy with the price his family was paid for an 85% stake in their near 100-year-old family business. Although terms of the deal, which happened at the end of last year and closed this week, weren’t disclosed, the buyer, a Chinese conglomerate called Gangtai Group, isn’t short of cash.
One suspects the owners of Nirvana Health Group, a family-controlled healthcare group based in New Zealand, weren’t too unhappy with the price paid in July by an Australian private equity house for a 50% stake in the business, either.
Setting aside other reasons that may or may not have contributed to these sales like succession difficulties and global growth issues, the demand to buy businesses like Pronovias, Buccellati, and Nirvana Health Groups is symptomatic of the huge appetite from investors to buy into mid-sized family businesses. And investors are willing to pay premium prices for these companies. That’s because of the simple law of demand and supply. And in the family business world, there’s too much demand for their companies and not enough supply.
Buyout funds are overspilling with money right now - and they’re desperate to find deals like those above. Recent figures suggest 2017 might break a record for funds raises by private equity houses. Already in the first seven months of this year, $184 billion has been collected, according to Preqin, the financial data group. If the present rate of fund collecting continues, and industry observers say there is no sign of a slowdown, then 2017 is likely to smash the record of $249 billion collected in 2007.
Add record levels of shadow capital - direct investment by family offices, sovereign wealth and pension funds, and university endowments into privately controlled businesses - into the mix and that’s just adding to more demand. According to research group Triago, shadow capital accounted for around 28% of total private equity fundraising in 2016, up from 22% in two years, and its highest level on record. Triago says shadow capital continues to increase this year, although off somewhat from the pace achieved in 2016 because of a slowdown from sovereign wealth funds. But you can bet family offices are filling some of this gap.
Then there is demand from the corporate sector to buy businesses - and many times their targets are family businesses. US, Asian, and European corporate cash holdings are at record levels. And some of that money is going to be used to buy businesses. So, corporations are competing with private equity houses, family offices, pension funds, etc, to buy private businesses.
For investors, the appeal is obvious. The returns on these businesses, whether through funds, or direct investments in them, is, in many cases, better than what’s available in public markets. And family businesses often have extra appeal, compared with their non-family counterparts in private markets.
The family bit of a family business suggests they have a business model that’s been proven over sometimes multiple generations - many of them have real durability. Investors like that. Not only that, family businesses are often asset backed - they have real assets backing their businesses. And investors like that as well.
Of course, all this demand isn’t been met with the supply. Most family businesses aren’t willing to sell to investors - no matter how much investors are willing to pay and/or how nice they are to them in the form of promises like never selling their stakes. They’re happy with their business models, have very little debt, and continue to innovate, often through the efforts of the next generation.
Many don’t like private equity houses, and even if they don’t mind long-term oriented investors like family offices, they don’t feel they want to sell even a small minority stake to them. Why bother with outside minority shareholders when you don’t have to, they argue.
That just adds to the frustrations of buyout specialists and other investors like family offices and competing corporations. They’re unable to source deals - and when they do, they’re having to pay higher prices for them, which eventually feeds through to less return on their investments.
Maybe sooner or later these higher prices and lower returns will ease the demand. After all, that’s what happens in free markets, there is a return to some sort of equilibrium, or at least that’s what’s meant to happen. But for the moment, there’s never been a better time to sell a family business.
Just one problem - few are willing to sell.