Private equity funds want family offices with expertise

The big private equity houses want family management expertise. That’s a big factor in why PE funds will co-invest with family offices – they get not just their capital but also their expertise at running businesses. 

Blackstone’s co-investment with Kirkbi, the family office of Lego’s main owner, Kjeld Kirk Kristiansen, in Merlin Entertainments, is a good example. The PE fund, which co-invested with Kirkbi in 2005 and further cemented that deal last month, felt management expertise in running amusement parks at Lego/Kirkbi was a good reason to invest with the family office in Merlin. 

Family investors often bring unique lifetime experiences managing similar businesses with their co-investment capital

It’s probably one of the reasons why Blackstone is understood to be in talks with Comcast, and James Murdoch’s family office Lupa Systems, to buy Indian-based Zee Entertainments. Blackstone not only spreads the risk through co-investing, but also brings in expertise in running cable TV businesses from not just Comcast, but Murdoch as well. 

And, although Lupa is a billion-dollar-plus family office, it gets in on the deal probably more because of its founder Murdoch’s expertise, rather than the size of its cheque book. After all, PE houses like Blackstone aren’t scraping around for funds to do deals, nor potential co-investment partners. Institutional money is normally their first port of call. 

PE funds have been investing with family businesses and their management teams for some time. That’s nothing new. But what is new is more of this managerial expertise the PE funds want is at family offices. James Murdoch has unrivalled expertise in managing global media businesses, and that brain trust is increasingly linked to his newly set up family office. 

As businesses are sold, the expertise and knowledge of running those businesses will be transferred to family investment groups. So, family offices aren’t just being courted for their money but also their managerial expertise. 

But there doesn’t need to be a sale of a business to see managerial expertise flow over to family offices. Often it will be linked to the next generation of family owners who set up their own investment groups, with the family still owning the operational business. These next geners have expertise through being brought up with the family business, even if they haven’t worked for it.  

Some even think such deals are the new normal of the world of co-investment capital. “As families have increased their capital allocated to direct investing so too have co-investment dollars increased,” says Ryan Harris, a partner in the Chicago office of law firm Kirkland & Ellis. 

“While you could call this a trend, I do think this is more of a new normal, in that family investors are seeking strong partners to allocate increasing amounts of co-investment dollars. In their co-investment activities, family investors often bring unique lifetime experiences managing similar businesses with their co-investment capital, which meaningfully distinguished their capital from other sources of capital.”