Are family offices missing out on secondary market direct deals?

Here’s an interesting thought. In their rush to do direct deals themselves, family offices might be excluding buying an interest in a secondary sale of a minority, or even majority stake, in a business, despite the fact that such acquisitions could prove very lucrative and rewarding.

Secondary direct sales are ones that involve investors, most likely to be limited partners in a private equity fund, wanting to sell their stake in a business. The motivation for this is likely to be driven by limited partners seeking to realise liquidity of their initial investment, and/or limited partners looking to more actively manage their portfolio.

Most family offices wanting to build a portfolio of minority, or majority stakes in companies, want those stakes to be as pristine as possible – in other words, not touched by private equity. Often it fits into family offices’ idea of long-term investment inasmuch as they want to find companies not interested in private equity, but buy into businesses that see an opportunity to work with a long-term investment partner, rather than a “short-term” private equity investor.

And, with trust between some family offices and the private equity world somewhat stretched in recent years, how can family offices trust that they are getting a good deal from a secondary market transaction? There are also some questions about the often murky world of the secondary private equity market, which further erodes confidence in the market. 

But the secondary market in direct deals is increasing, and there may be opportunities in this world that are being missed out by family offices. Deals, for example, where a family office can provide a better alignment of interest with the company than perhaps the private equity group had in the past.

Given that many of secondary transactions are being driven by limited partners’ desire to realise liquidity, might it not make sense for a family office to buy that stake, particularly as they can often be more long term in their investment horizon? And, that just might serve the interest of the business – on reflection – more than the short-term private equity holding.