Selling off the family silver…the rise of the direct deal

Are family businesses selling off their silver? Well, according to a couple of private equity specialists, they are. But the good news is that there are plenty of takers – and they’re mostly other family businesses.

It’s difficult to put any figure on how many family businesses are selling equity stakes in their businesses, but some say it’s rising rapidly, albeit from a very small base. “Family businesses are looking at raising capital, and selling a stake in their business is an increasingly popular way of doing this,” says a London-based private equity specialist, who runs a boutique specialising in such deals. “Buyers are inevitably other families because of the size of these deals – typically between $10 million and $100 million – but also because they get the ‘family’ side of the deal.”

Another reason family businesses are interested in these deals is that they aren’t been sold as typical private equity-type investments, whereby fees are paid before any return. Many private equity investors, whether wealthy, or less wealthy, became annoyed by the fact that payouts in private equity were mostly way in the future, whereas the people running the private equity companies became very rich in the meantime.

The industry appears to be addressing these issues by taking more skin in the game. “We are willing to take a carry on the upside of the deal, when the equity is sold, or in relation to an agreed formula of the performance of the business,” adds the private equity specialist.

The Canadian group Alaris Royalty Capital is a good example of another private equity group willing to pay the long run when it comes to returns. It is tailor-making its investing strategies to suit family businesses. “Our structure was really made for family businesses – businesses that are never for sale,” says Steve King, chief executive of Alaris.

King says that Alaris works by taking investing back to its basics by emphasizing dividends. “We are generating returns strictly by way of dividends. Unlike private equity, we don’t need to return our capital to anyone. This means we can stay with a family or entrepreneur as long as they want, and if that’s 50 years that’s absolutely fine.”