An estimated $6 trillion to $7 trillion is available to companies through family offices, a less-familiar way to access capital than private equity and debt but one that can come with advantages in terms, specialists say.
The typical family office gets started through the sale of a family’s business interests, says Gregory Kushner, chairman at Lido Advisors, a wealth advisory firm. The money is invested in other companies, often but not always in businesses similar to the ones in which the family made its money.
"A family that made their money in the retail businesses likely would be much more comfortable investing in other retail businesses, where they could bring their insights and intellectual capital besides just their money," Kushner told CFO Dive. "Similarly, a family that made their fortune in technology likely would be comfortable investing in other tech companies, while other investors without specific domain expertise would not."
In contrast to other sources of capital, the long-time expert in the space said a family office will be more interested in a longer time period of investing for their capital, or perhaps even a permanent investment.
Kushner explained a major reason for their willingness to hold investments long-term is their desire to avoid the significant hit that income taxes bring when the holding is eventually sold.
By contrast, many private equity investors, particularly those with a large percentage of their funding from institutions like pensions or endowments, which are non-tax paying entities, would want to get their money out sooner.
That’s because the impact of income taxes is much less important, and therefore a shorter holding period is appropriate, he said.
The pros for a business to take funding from family offices outweigh the cons, said Andrew Apfelberg, a corporate partner at Greenberg Glusker in Los Angeles, which specializes in advising middle market companies.
"On the pro side, family offices tend to be more narrow in focus for their desired areas of investment," Apfelberg said. "They know a lot about those industries. As such, they can often be more efficient in vetting a prospect, finding value when others don’t and are able to provide real introductions and best practices when they acquire the company. Because family offices are built around former executives, they are able to speak the same language as a prospect in a way that many private equity professionals are not able to communicate."
The cons to Apfelberg are the inability to participate in larger transactions and the fact that many targets will fall outside of the family office’s narrow investment focus.
Family offices might have better terms than a bank, says Katherine Hill Ritchie, director of strategic development and board member of Nottingham Spirk, a product design company, and also an external advisor to several family offices.
"They can afford to be more creative in structuring deals because they may not have shareholders to answer to," she said.
That ability to be creative can make them an agent of change for companies that are looking for an innovation spark, said Jonathan Fishbeck, founder and CEO of EstateSpace, an estate management firm.
"Impact investing growth has continued to compound, and this is very exciting when we start to see how family offices are becoming agents of change and enabling innovation like never before," he said.
To find family office sources, he said, the firms make their interests public. That means finding the right match can be done with open source research or connecting with community platforms such as the Family Office Club.
The important thing for a CFO to recognize is that the family office is a collection of entities making investments towards a common family-oriented goal, said Trey Taylor, CEO of Taylor Insurance Services, who runs a family office.
Unlike giant investment funds, like BlackRock and other hedge funds, family offices have the flexibility to invest in anything they think will satisfy a financial need for the family, he said. And they’re small enough to be agile, so they’re more likely to invest in companies that aren’t publicly traded.
They also typically have access to multiple pools of capital, so it's probably not just going to be a one-and-done investment — you can go back to the well repeatedly in many cases, he said. And if they don’t want to participate in subsequent funding rounds, they will often introduce you to other family offices.
"What fits a particular office’s investing criteria today may not next year, and may fit it again the following year," he said.
Because of that, deals are passed around among family offices pretty freely.
The question the CFO should ask is, Taylor said, "What's your return horizon for this investment?"
Once that’s known, the family office will say, "'This is three-year money,' or 'This is seven-year money,'" he said. "And that’s where you start."