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Selling to a PE Group or a Family Office - Which is The Best Buyer?

Private markets are just as hot as any other these days. Available capital and smart money are looking for good businesses in all sectors. PEGs and SFOs many times find each other competing for the same deal. What should a founder or a management team consider when having to make a choice between the two?

I’ve written before about considerations when selling your business before. This post is to share my view of private equity groups (PEGs) and single/multi-family offices (SFOs) as acquirers and why I’d go with one vs. another.


When I contrast PEGs and SFOs, I’m looking at them as acquirers of a privately owned business regardless of the industry.


At the end of the day, investors invest in people and founders also choose people to parter with and drive value creation.

Definitions:


SFO – Single Family Office, typically an investment vehicle setup by an individual or a family to start investing their wealth in private and public markets. SFO founders many times are former entrepreneurs and/or executives who built their wealth over time. It could also be an inheritance setup in a trust and used to invest in various asset classes.


PEG – Private Equity Group, an institutional investor with committed funds raised from third parties. These are professional investors who are in the business of creating value by putting deals together and creating value in private markets (privately owned businesses) via transformation, organic and inorganic growth, etc.

The two may appear very similar and in many cases they are. The main differences are where the capital comes from, who these entities report to, and restrictions & policies.


SFOs:

  • Fund investments from their own assets and capital.

  • The head of the family is the main decision maker.

  • Typically, no restrictions on concentration risk or types of investments applies.

PEGs:

  • Raise funds from other institutions and individuals.

  • Investment committee and/or a board of directors is the governing body within the group.

  • Restrictions apply based on a particular investment policy statement or mandate. These are set when the funds are being raised and committed.

It should be apparent from the above that there is much more flexibility working with SFOs rather than PEGs. SFOs can move faster and do not typically apply much of debt in structuring of a transaction. PEGs love using debt as an instrument to increase their ROI over time.

What to expect working with the two?


SFOs:

  • More flexibility getting capitalized but may lack speed and process.

  • May not have an Investment Horizon or exit plans but may get complacent as to value creation.

  • May be industry veterans with deep knowledge/connections and executive experience but may try to get involved a bit too close to running day-to-day.

PEGs:

  • Work expediently to close and drive value creation, but may have somewhat of a fixed investment horizon, i.e. need to exit an investment within a number of years.

  • Professional investors but may not be experts in a certain industry, although more and more PEGs specialize or have sector specialists.

  • Have processes and procedures and their own playbooks of running a business, that maybe a good or a bad thing depending on how you would run the business post acquisition.

In summary, SFOs have much more flexibility but may not move as fast or drive value as aggressively as PEGs. On the other hand, PEGs model exits and will exit your business eventually, whereas SFOs may decide keeping your business forever and focus on long-term value creation rather short-term financial return.


It’s important to note that more and more SFOs either hire their own investment staff and transform the organization to be and feel more like a PEG or join a consortium of Multifamily Offices (MFOs). MFOs have a centralized investment management and process/compliance staff that is shared by many SFOs. This structure makes MFOs even closer to a typical PEG.


Deciding to sell or recapitalize your business isn’t easy, and the decision gets complicated when you start evaluating bidders and their goals. The above is my opinion and experience working at or with the PEGs and SFOs. Neither is a perfect partner based solely on definitions. At the end of the day, investors invest in people and founders choose people to partner with and drive value creation.


-A.G.

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