Business

PPC has created a compelling model for a 21st-century family office

All too often family offices nurture successful businesses, only to encounter difficulties in finding sufficient capital, and advice, for the later stages of their development. 

Some families will do their level best to meet the challenge. Others who sell to private equity – or a strategic buyer – end up losing control while an IPO leads to life in a goldfish bowl.

Paul Carbone, managing partner of Pritzker Private Capital, sets out to offer a middle way to families keen to rethink a corporate strategy, work with their peers and access inexpensive long-term debt from the capital markets. 

Carbone is coy over its returns but it raised $2.7 billion for a pooled fund in July, so it must be doing something right. It currently has thirteen companies on its platform. Since 2016, it has pulled off a total of 80 deals, including the acquisition of businesses by platform companies. There have also been a small number of exits.

Some (family offices) are wondering how to find a safe port in the storm and wonder if they are over-committed

Carbone says: “What we try to do is bring institutional capability, and access, to the family business world. For example, we have strong relationships with a number of lenders and advisers. 

“We are often helpful to our companies, as they think about structuring their balance sheets for growth and add-on acquisitions. We can bring discipline around budgeting, strategic planning and governance.”

Advice on why, and how, a company should use new approaches, such as technology and ESG tools, form another part of the discussion. 

PPC has been operating for nearly twenty years under the wing of chairman and CEO Tony Pritzker, a member of a Chicago family which inherited a fortune from the development of the Hyatt hotel chain from 1967 by his father Donald. Other members of the family have made their mark in philanthropy, the arts, politics and commerce. 

Tony Pritzker set out to emulate his father by developing companies with growth prospects, finessing the strategy by negotiating joint-venture deals with other family offices. He initiated the strategy at Pritzker Group, which remains active in private equity and venture capital. In 2019 PPC’s strategy had developed sufficiently well for the business to split away, while retaining support from the family. 

PPC typically invests in mid-market family businesses with an enterprise value of $200 million to $1.5 billion in the manufacturing, service and healthcare sectors. It acquires minority stakes in companies, often alongside founders and other family offices with a shared philosophy. It can provide companies with equity finance of up to $400 million, with the potential to deploy $750 million. 

It opts to back US platforms although many of its companies are developing abroad. One deal in October, for example, saw Plaskolite – a thermoplastic business owned by the Dunn family since 2018 – buying a global plastics business 80% owned by Kibbutz Gazit of Israel.   

Paul Carbone joined PPC nearly ten years ago and became president and managing partner.  This followed his 18-year stint at Robert W. Baird, where he became managing director of private equity, following ten years at Kidder Peabody, where he was senior vice president in M&A.

During his early career, after Harvard Business School, Carbone started to see drawbacks in the private equity model, due to the way it backs companies and sells them less than five years later. This approach enriches its general partners and other investors, but it marks a contrast with family offices that like to nurture their businesses for the long term, if not forever.

Carbone says:  “Let’s say a company is owned by three successive traditional private equity firms, each time for five years. Compare that to our partnering with the same company for 15 years. With our partnership, the company would have no disruption from selling every five years and no short-term thinking about how the company implements its plans. I am convinced that with our model, using family capital, the company would end higher up the mountain – better, more competitive and generate more value.”

Paul Carbone

Carbone points to recent data which shows that 50% to 60% of companies sold by private equity firms end up being acquired by funds led by its general partners: 

They’re basically taking a company that, in their traditional, time-bounded model, they would normally sell. They are jumping through hoops and implementing complex structures to synthetically duplicate what families do already – hold businesses for the right duration.”

You have similar problems with venture capital, where backers expect to turn a reasonably quick profit. The vast majority of listed companies fall short, due to the quarterly reporting cycle and investor short-termism. Chief executives can only expect a few years at the top, their remuneration is skewed accordingly. 

Sequoia Capital, a long-established venture capital firm, is restructuring its business so that it can, theoretically, own its investments for longer. Under Warren Buffett, Berkshire Hathaway invests in businesses for the long term.  But short-term viewpoints have become well-entrenched.

If a family wants to grow a successful business over the long term it does need to achieve governance and financial discipline. Carbone isn’t in the business of ordering his affiliates around but PPC does not shrink from suggesting ways forward. To reinforce the view it also has a seat on the board at companies it backs. 

Helping families to refinance their businesses is one of its specialities: “We often find family businesses have traditional debt structures, with a syndicate of banks which require amortization for short duration debt with multiple covenants. We have tried to help these companies tap the institutional market, to extend the duration of their debt, reduce their amortization and be bound by fewer covenants. By doing so, we help improve their free cash flow and give them greater flexibility for organic, or inorganic, growth.”

This kind of opportunity plays a big part in striking deals with other family offices: “What they really love is it helps them grow,” says Carbone. 

The presence of PPC, and other families, on a share register also adds to corporate credibility. PPC has access to a range of financial providers and it encourages portfolio companies to think deeply about budgeting and strategy.

PPC’s recent deal with Monogram Foods began with a chance dialogue four years ago between its founder Karl Schledwitz and Paul Carbone: 

“He wasn’t interested in selling. He recognized that he’d built a very attractive business that still had significant runway. But he wanted a partner who could help him execute the next phase of the company’s growth. And he picked us, as much as we picked him.”

An individual called Andrew Seamons had been involved in Monogram for many years. He also served as chief investment officer to the Haslam family, owners of the nationwide Pilot Flying J service stations and helped to bring the three sides together. Personal recommendations matter a great deal in the family office world.

Another deal, the recapitalisation of Energy Distribution Partners, a propane fuel delivery business began out of a long-standing relationship between Carbone and the Steans family, owner of Concentric Equity Partners, an EDP investor.  The Steans and the Pritzkers each knew the Duchossois family, owner of several businesses who came in as a third backer. 

Carbone has come across other families interested in the effective deployment of capital: “We’ve co-founded a network of sophisticated deployers of family capital who are using alternative structures and approaches to deploying their family capital.”

Some baby boomers are now old enough to consider moving on. And PPC is in a good position to secure deals because of its empathy with family objectives, and its reputation as a patient owner. 

PPC has forged partnerships for its US affiliates in Europe, Asia and Australia. In January it upped its investment in packaging company ProAmpac alongside GIC, Singapore’s sovereign wealth fund. In July its ProAmpac business bought UK-based Ultimate Packaging whose founder, Nigel Tonge, said: “As a family-owned business, it was important for us to select a partner who shared our values.” ProAmpac has just acquired an Irish packaging company from a company backed by Williams Industries of the Caribbean, led by Ralph “Bizzy” Williams, whose approach is similar to a family business.

This year has brought another spate of deals for PPC and its portfolio companies. This reflects the growing development of co-ownership and the impact of the pandemic. Corporate founders contemplating retirement generally like the new owners of their businesses to look after the interests of their family.

Family offices are currently split over US economic prospects. Carbone says:  “Some are wondering how to find a safe port in the storm and wonder if they are over-committed. Others say adversity can deliver opportunity and start considering whether they need to find partners with capital and capability to help them take advantage of that opportunity.”

He adds: “We’re seeing a terrific flow of businesses looking for a partner and capital. Many are seeing meaningful growth in their businesses. But they also are experiencing many challenges including the pandemic, tax issues, supply chain disruption, input costs and general uncertainty about the future.

Every family’s decision about what they want to do with their business is different and is driven by different motivations. 

“In aggregate, we are seeing a remarkable number of family businesses who want to explore change sometimes after multiple generations of the same approach to ownership, financing and growth.”

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One response to “PPC has created a compelling model for a 21st-century family office

  1. Great model for the future of FO Private Equity Capital ! Congrats to Tony , Paul and the team at PPC !!!
    François de Visscher
    http://Www.devisscher.com

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