Partner Content: Why family offices should invest in MBOs

Management buy-outs should make sense to many family offices. After all, the owners of family offices often made their money around building successful businesses. They have a gut connection with real businesses. 

But MBOs aren’t easy to access. That’s because these companies are already successful businesses. They aren’t tech startups that are often desperate for capital from investors but have little, or no track record of their success as businesses. 

Businesses considering an MBO are making profits. Their owners know they have something valuable, rather than just an idea like so many startups. Their managers want the best long-term partner to replace the existing owners. They want to continue their success. 

But family offices aren’t likely to have access to most MBOs. A family office needs to be known by the corporate finance firms that advise owners and managers on MBOs. And most corporate finance executives will rely on institutional money when considering MBOs. The big institutions have a track record in backing MBOs, which few family offices have achieved. 

We aren’t just another private equity firm. The difference at Rockpool is that each deal is available to registered investors. This makes us responsive to investors in a way that no fund can ever be. Our approach to MBOs avoids those drawbacks, like fees and loss of control

This helps to explain why so few family offices get direct access to MBOs. Instead, most end up going down the easy route and investing in private equity funds. This approach is undoubtedly an effective way of getting exposure to MBOs. Still, the lack of control, poor transparency, and the cost of management fees go against the grain for many family offices.

For a family office that knows it wants private equity exposure, there are two alternatives: go big or cooperate with others—going big means hiring a team of five to 10 professionals and setting out on a five to 10-year journey. That’s very expensive and risky. Cooperating is more attractive for most family offices as it cuts the cost and the risk.

Rockpool is one of the pioneers of this cooperating approach. We have a team of 10 investment professionals who are constantly talking to corporate finance firms to get access to the best deals. We have also demonstrated consistency and reliability in the MBO world for many years. 

We aren’t just another private equity firm. The difference at Rockpool is that each deal is available to registered investors. This makes us responsive to investors in a way that no fund can ever be. Our approach to MBOs avoids those drawbacks, like fees and loss of control.

Through the Rockpool hybrid model, investors aren’t limited partners in a fund, but nor are they taking huge direct investment risks and paying for the enormous cost such approach involves. 

The Rockpool cooperating approach allows investors, if they want, to be passive, but also active through their discussions with our investment representatives, who attend every board meeting of the businesses involved in MBOs. Investors can influence board decisions of these businesses.  

There are many reasons to invest in MBOs, not just because these businesses are viable and profitable. These businesses are also easier to value, because they have profits, not just revenue, customers, or click-throughs. They are also more liquid because hundreds of private equity funds are looking to buy businesses with track records. They also offer shorter hold periods and fewer distressed cash calls than venture. 

Returns for investors are also stellar. At the top, equity investors of a Rockpool MBO investment are looking at six times their initial investment over five years. A family office investing in 10 businesses over two years under an equity/loan structure can expect a return of 2.5 times their initial investment. 

There might be fewer tax breaks than in a PE fund, but tax should never lead an investment decision. 

And family offices potentially have a big advantage when it comes to MBOs. Entrepreneurial managers want investors who think long term, who aren’t constrained by fund periods, who think like business owners. That’s pretty much the definition of a family office.

Our hybrid approach also can appeal to the next generation of a family office owner. It’s a great way of gaining access to real businesses and limiting the risk of direct investment. 

All in all, there has never been a better time for family offices to take advantage of the growing MBO market. And Rockpool’s hybrid approach is arguably the best way to access them and achieve very attractive returns against any benchmark. 

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