Private Equity Takes Aim at Family Offices


May 27, 2015

The newly rich entrepreneurs in places like the Silicon Valley and China are attracting global private equity firms. Family offices and their advisers are reportedly in charge of $4 trillion; a lot of money for private equity firms to use.


Increase in Family Offices
The number of family offices has increased rapidly in recent years. There are currently around 4,000 family offices globally. Interestingly, previous private equity managers manage many of the newly formed family offices.


Just recently, the co-founder of Blackstone’s GSO Capital Partners unit, Doug Ostrover, announced he is leaving the firm to start his own firm. This connection has played its part in creating a link between the two in recent times.


Not All About the Money
Although the $4 trillion alone is enough to get private equity firms excited about the wealthy families, money is not the sole reason for doing business with them.


Michael Arpey, a managing director at Carlyle, told Bloomberg these family offices also provide firms with expertise. Furthermore, family offices often “have fewer regulatory restrictions and can take bigger risks than pension or endowments”.


A large number of the clients in family offices are entrepreneurs who understand what selling and buying companies is all about. The in-depth industry expertise and understanding of how to vet for deals can be a crucial benefit for private equity managers.


William Heitin, chief investment officer at Windrose Advisors, told Bloomberg his clients are a big benefit to PE firms. Heitlin gave the example of a client who used to run a major food company and so, “if the private equity firm is looking at a deal with a food company, we put them in touch and then there may be a co-investment opportunity for the family,” he told the newspaper.


Reducing the Reliance on State & Corporate Pension Plans
For many private equity firms, wealthy individuals can offer an alternative way to fund investments. PE firms have previously relied mainly on state and corporate pension plans.


It’s a good time for the private equity firms and family offices to forge a partnership. According to Preqin, private equity firms made a record breaking $428 billion by selling holdings in 2014. This was a 30% increase for the previous year, highlighting the opportunities in the sector.


Private equity firms have also quickly increased the private wealth aspect of their business. Seeking Alpha notes how $43 billion of Blackstone’s $310 billion AUM currently comes from private wealth, which is three times more than five years ago.


Wooing the Families
Private equity firms often have to work hard in order to attract wealthy families to invest in their funds. The competition for the $4 trillion is heated and private equity isn’t always the preferred investment for the rich.


Jim Burns from private equity firm KKR told Bloomberg, “You really have to go door to door. Most family offices don’t necessarily want to be found.”


One of the ways PE firms are trying to convince family offices – other than with luxury jets and lunches – is with the promise of co-investments. This allows the families to invest through a pooled vehicle, with lower fees or sometimes no fees at all.


With China creating around 40,000 new millionaires in 2013, it isn’t any wonder that family offices are growing together with private equity’s interest in them. But it is likely the competition for the families will also heat up.

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