Family offi ces are getting serious about private equity. They are steadily building their own buyout operations and making direct investments in private companies, often competing with traditional private equity fi rms in the process.

Perhaps no family offi ce better typifi es this trend than the Pritzker Group, headed by Anthony Pritzker and J.B. Pritzker, brothers and heirs to the Hyatt hotel chain fortune. The Pritzker Group has been investing family money directly into companies for 14 years, but mostly on an informal basis. It wasn’t until 2012 that the Pritzker’s decided to truly focus their energies on private equity and staff up their operations. They hired PE professional Paul Carbone, formerly of Robert W Baird’s private equity arm, to lead their PE efforts, and added other industry experts from Blackstone and Equity Group Investments.

Since then, the family has acquired seven companies in just four years, including LBP Manufacturing, maker of the coffee cup sleeves used to prevent Starbucks’ customers from burning their hands, and most recently PLZ Aeroscience, a manufacturer of aerosol cans.

The Pritzker Group is not alone. PitchBook, a research and data collection fi rm, reports a substantial increase in direct investments by family offi ces. It recorded 97 such deals in the U.S. in the past fi ve years, compared to 56 in the previous fi ve. And these fi gures are likely a fraction of the real total given that family offi ces tend not to share information about their transaction activity. What’s more, a 2014 survey by McNally Capital, which helps wealthy families manage their investments, found that 77% of families preferred direct investments into companies rather than into private equity funds. That’s up from 59% in 2010. The McNally study also found that, in 2014, 37% of family offi ces had at least three people in their offi ce specifi cally dedicated to making direct investments, up from just 22% in 2010.

The Benefi ts of Direct InvestingThere are several reasons why family offi ces are making more direct investments, rather than just investing in a private equity fi rm as a limited partner. The most obvious is that family offi ces are increasingly looking for ways to avoid the high fees associated with outside investors, such as a 2% management fee and 20% of profi ts, or carry.

This sentiment is summed up by Noam Abrams, Vice President of Private Equity at the Vinik Family Offi ce, which is headed by Jeff Vinik, owner of the Tampa Bay Lightning hockey team. “We like to know where our money is going,” Abrams told RIABiz, a news site for the advisory community. “Why pay a substantial management fee and carry for something that you don’t know? We believe that we can get better alignment doing one-off deals.”

Another reason is transparency. “Families are getting away from black box investing, where they give their money to a private equity fi rm as a traditional limited partner and let them do as they please,” said Steven Thayer, a partner at Handler Thayer LLP, which provides legal services to family offi ces. “After the Great Recession of 2008, people really started paying attention to what was going on inside that black box. Family offi ces didn’t want to cross their fi ngers and hope that the outside investors were making the right investments. They really wanted more control over the investments that were being made.”

Going Toe-to-Toe with PE FirmsCompetition for private equity transactions from non-traditional players like family offi ces is clearly on the rise. As family offi ces grow in size and power, they are searching for new opportunities that can earn ever-higher returns.

“Given the growing wealth of these family offi ces, we expect to see increased competition for private equity deals in 2016,” said Jeremy Swan, National Director of CohnReznick’s Private Equity and Venture Capital Industry Practice. “We are seeing multigenerational family offi ces that have grown their portfolios and want to explore new opportunities. They are going down the path of bringing managers on board who are deal people.”

Family Offi ces Play Powerful New Role in Private Equity

Forward Thinking Thought Leadership

PRIVATE EQUITY INSIGHTS

We are seeing multigenerational family offi ces that have grown their portfolios and want to explore new opportunities. They are going down the path of bringing managers on board who are deal people.”

— Jeremy SwanNational Director of

CohnReznick’s Private Equity and Venture Capital

Industry Practice

“

- 1 -

Look at the Reinmann family, which recently acquired Keurig Green Mountain, maker of home and offi ce coffee brewing systems, for $13.9 billion. The deal caught many by surprise, as did the price tag, which was a 78% premium over where the company had traded. This family has amassed a consumer products empire that includes such brands as Jimmy Choo shoes, Durex condoms, and Peet’s Coffee & Tea.

Direct Investing Does Not Always Make SenseBut not every family offi ce has the resources, expertise, and acumen of a Quilvest, Pritzker, or Reinmann. And not every family can successfully execute a direct investment strategy.

“Family offi ces need to ask themselves about the advantages they have that will allow them to compete with a PE fi rm that is also hunting for good deals,” said Thayer. “How are they going to be better than a PE fi rm? If you were trying to get others to invest in your family offi ce, would you be able to tell a story that makes sense and that outside investors could get behind? If there is no good reason to do it, maybe you shouldn’t be doing it with your own money.”

Francois de Visscher agrees wholeheartedly. The founder of de Visscher and Co. LLC, an independent fi nancial advisor to single-family offi ces, he is also a director and shareholder of his own family’s $6 billion global enterprise, N.V. Bekaert S.A. “Family offi ces should not engage in direct investments just because everyone else is doing it. Before they do their fi rst direct deal, they need to take a step back and create a coherent strategy,” advised de Visscher. “What kind of returns are they looking for? Which megatrends do they want to be exposed to? Are they trying to develop a legacy business for the next generation? Are they looking for a job-creation vehicle for younger family members? This all needs to be codifi ed in a formal investment policy statement.”

Experts like de Visscher and Thayer believe that direct investments do make sense when the family offi ce has a defi ned strategy or mission that it truly believes in, such as supporting socially responsible companies or investing in renewable energy. It also makes sense when the family offi ce has unique expertise and insights in a particular industry—typically the industry where the family amassed its wealth in the fi rst place.

“Family offi ces are well-served to look for deals in a particular industry where they can put their expertise to work,” added Swan. “This expertise can also give them an edge in deal origination that a PE fi rm might not have, given their knowledge, experience, and networks in a given industry.”

Appeal to Business OwnersAnother big advantage for family offi ces competing for deals is their natural appeal to business owners. Rightly or wrongly, many business owners have an outdated opinion of private equity as corporate raiders intent on maximizing returns through fi nancial engineering. By contrast, “They see family offi ces as real people they can touch and feel, which is not always the case with a PE fi rm,” said Thayer.

PE fi rms, for their part, are beholden to their investors who demand to see a return on their investments within a set time period. Private equity fi rms have about three to fi ve years to put that money to work, a handful of years to grow the businesses, and a fi xed period of time in which to exit those investments so they can raise their next fund. The family offi ce, however, is a different model. Family offi ces can provide longer term capital and there are no limitations as to how long they can hold onto their investments. In this market, that is a very attractive selling point.

It is also the narrative that family offi ces like the Pritzker Group has been hammering home recently to business owners looking for capital. “Today, more sellers widely understand that they have choices beyond private equity,” J.B. Pritzker recently told Crain’s Chicago Business: “You don’t have to sell to the fi ve-year owner who’s going to fl ip your company sooner than you think it ought to be fl ipped.”

Another big advantage is that family run enterprises are eager to partner with family offi ces because they share many commonalities in their approach to business. “Having an investor that understands family governance and how families operate within a business context can go a long way to contributing to the future success of the business,” said de Visscher. “Additionally, family offi ces bring a permanency of capital to the table. They are not bound by certain structure or fi rms to exit an investment quickly. That is basically a dream come true for a family run business looking for capital.”

Family offi ces should not engage in direct investments just because everyone else is doing it. Before they do their fi rst direct deal, they need to take a step back and create a coherent strategy.”

— Francois de VisscherFounder of Visscher and Co. LLC and Director of N.V. Bekaert S.A.

“

- 2 -

Co-investments on the RiseIt is important to remember that families participating in direct investments generally haven’t abandoned private equity funds altogether. Indeed, quite the opposite is true. Family offi ces account for 9% of all capital invested in private equity funds last year, compared with 4% in 2010, according to research fi rm Preqin. That’s probably because family offi ces are richer than ever. Single-family offi ces hold about $1.2 trillion in assets and multi-family ones manage about $500 billion, according to the consulting fi rm Family Wealth Alliance.

Family offi ces are also partnering with PE fi rm in what are known as co-investments. This is where a family offi ce associates with a PE fi rm on a deal-by-deal basis, essentially picking and choosing which investments it wants to participate in rather than handing over a blank check to the PE fi rm. Co-investing is a growing phenomenon. A 2014 UBS and Campden Wealth family offi ce report found that about 80% of family offi ces had participated in co-investing.

Many family offi ces see co-investing as a win-win, because they get to invest directly in deals alongside a PE fi rm and, at the same time, do not have to pay any extra fees to the PE fi rm. They also don’t have to hunt for the deals themselves, which often entails raising their profi le in the marketplace, which many family offi ces are loathe to do.

“Family offi ces typically like to fl y under the radar. But for deal origination, they need to expose themselves a bit more, which can be a challenge,” said Thayer. “But, with a co-investment, they can pair up with the PE fi rm and get the benefi t of the fi rm’s deal fl ow while still keeping their anonymity. That’s because it’s the PE fi rm out there in the market drumming up deals and doing the diligence to get it to the fi nish line. That’s a good model that satisfi es family offi ces, which don’t want to be out there rummaging for deals and being solicited by the masses.”

The bottom line is that family offi ces represent an increasingly important source of capital for private companies in the market. “From a seller’s perspective, family offi ces are another avenue they may not have thought of before,” said Swan. “For some businesses, there are real advantages to working with a family offi ce rather than a PE fi rm.”

He adds that, as more family offi ces take on the challenges and responsibilities they once entrusted to private equity fi rms, they need to adopt many of the strategies that CohnReznick advises for private equity fi rms. “Family offi ces need to conduct the proper due diligence, strive for operational effi ciencies, and better manage risk by adopting programs such as cybersecurity best practices,” said Swan. “That is how they can ensure success and maximize the value of their investments.”

ContactFor more information on our services for family offi ces, please contact:

Jeremy Swan, Principal, Private Equity and Venture Capital Industry Practice National Director646-625-5716 or jeremy.swan@cohnreznick.com

John Bova, Client Relationship Executive, Private Equity and Venture Capital Industry Practice646-601-7798 or john.bova@cohnreznick.com

May 2016

About CohnReznickCohnReznick LLP is one of the top accounting, tax, and advisory fi rms in the United States, combining the resources and technical expertise of a national fi rm with the hands-on, entrepreneurial approach that today’s dynamic business environment demands. Headquartered in New York, NY, and with offi ces nationwide, CohnReznick serves a large number of diverse industries and offers specialized services for middle market and Fortune 1000 companies, private equity and fi nancial services fi rms, government contractors, government agencies, and not-for-profi t organizations. The Firm, with origins dating back to 1919, has more than 2,700 employees including nearly 300 partners and is a member of Nexia International, a global network of independent accountancy, tax, and business advisors. For more information, visit www.cohnreznick.com.

© 2016 CohnReznick LLP

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specifi c professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

- 3 -

cohnreznick.com