Are Family Offices Different from Other Buyers of Middle Market Companies?

By Generational Equity


Family Offices, that unique set of business buyers that are hybrids of several other models, including Private Equity (PE), High Net Worth Investors (HNWI) and Ultra High Net Worth Investors (UHNWI), have become (as we have examined in other Insight Posts) an established and growing buyer group for middle market companies.

Unfortunately, most business owners are completely unaware of this segment of the buying community and this is unfortunate because, for many entrepreneurs, Family Offices (FO) offer a really fantastic alternative as buyers.

Because of their growth as a buying class, our friends with Axial recently released an article covering this unique set of buyers. Entitled, “Seven Ways Family Offices are Different from Other Buyers of Lower Middle Market Companies”, it is full of interesting points that truly show how unique and special they can be for owners of middle market companies.

Here is how Axial summarized their findings:

Like most other institutional investors in recent years, family offices have shifted a significant share of their assets from the public markets to private equity, real estate, and other nontraditional assets. Unlike pension funds and endowments, however, affluent families have not been content to invest through private equity funds. They are at least as likely now to invest directly in middle market companies. 

A 2021 survey by Citi Private Capital Group found that nearly half of family offices have more than 25% of their overall portfolios in direct private investments. The Family Office Exchange (FOX) found that the overall share of assets devoted to direct private equity investments by family offices increased by 50% from 2014 to 2018.

Until just a few years ago, most Family Offices were content with making indirect investments via PE firms. However, as Axial puts it, “They (Family Offices) hate paying fees. Because of this, the appeal of direct investing is that it avoids the management fees charged by traditional private equity funds.”

Here are a few other unique features that Family Offices possess:

They have a longer time horizon

This is really an important distinction that many of our clients find very attractive. Unlike PE firms that generally have a mandate to “flip” an investment in 5-7 years’ time to generate a return for their limited partners, most Family Offices do not operate under this same restriction. In fact, many plan on holding the investment forever.

This appeals to a number of our clients, especially those that are in the 3rd – 4th generation of family ownership: The legacy built by the family will continue and grow under the Family Office.

As pointed out in the Axial article:

“Our family has been phenomenally successful since the patriarch took over the business 50 years ago, and now they are thinking about the next generation and making sure their wealth grows with their expanding family,” says Michael Barnes, vice president of Walnut Ridge, the investment office for the Kanfer family, which owns Gojo, the maker of Purell. “We have much more flexibility than traditional private equity firms because we’ve got no artificial timelines that drive a need for liquidity.”

Again, if you are concerned about preserving and growing the legacy you have created in your company, Family Offices may be perfect for you.

They want to be involved after writing the check

Since most Family Offices invest in industries that they have been involved in (often since their inception generations ago), they can provide not only capital for growth, but also advice, guidance, and key contacts to amplify your firm’s long-term expansion/profitability.

These are all things important to consider if your company has reached a plateau and needs an infusion of talent/money/direction to reach the next level.

“They (Family Offices) are operators at heart and think they can generate outsize returns by investing in the lower middle market, being involved, serving on boards, and digging deep,” Barnes says. “It’s also, quite frankly, what they enjoy doing, and they figure why not get some enjoyment out of the way they invest their money.”

Getting access to deal flow can be a challenge for Family Offices

And this is where Generational and its team of award-winning dealmakers and valuable proprietary databases come into play. Frankly, this issue is not unique to Family Offices, quite a few Private Equity Firms suffer from this problem too. In fact, unless they have a dedicated business development team out looking for deals, often these great buyers with lots of capital to invest have very little access to sellers (especially qualified sellers).

We do!

Through our unique process, we take business owners that want to exit and help them create buyer-ready businesses for buyers like Family Offices who are looking for companies to invest in.

The great news is that we have over 35K registered buyers in our proprietary DealForce database that have told us specifically what they are looking for in terms of industry, size, location, and a myriad of other criteria, so that we can match our clients up with qualified, driven buyers like Family Offices.

We are very unique in the world of middle market investment banking because of this.

So, the evidence (and our decades of experience) are clear: Family Offices have become key players in the middle market the last 10 years, and this will only continue to grow.

But wait…

The critical questions for you, especially if you are going to market your company without the benefit of a middle market investment bank, include: Can you find Family Offices operating in your industry? Can you create documentation that they require in order to review your opportunity? Why are those Family Offices active in your industry as buyers? What specific traits are they looking for in targets?

These are tough questions for most entrepreneurs to answer because historically Family Offices have been very private regarding their activity. Since most revolve around a specific family, they do not tend to want to attract attention to their wealth and investments.

Again, this is where Generational can help. As mentioned, we have over 35K registered buyers in our proprietary databases who have told us exactly what they are after. In addition, we invest a significant amount annually to have access to databases that augment our internal sources, giving us a tremendous information base that we bring to our clients.

If you are interested in attracting Family Offices (or any other buyer for that matter) to your company, you need to reach out to us and start a dialogue on how to exit your company optimally. Each client’s situation is unique, and our services are tailored to meet them.

To learn more about Generational and our proven middle market investment banking services, please use the following links:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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