Episode 7: Family Office Deals Study

Full transcript

Peter Englisch: Hi everyone. I'm Peter Englisch. Welcome to our seventh episode of our podcast series, Up Next For Your Private Business. So far in this series, we have discussed several aspects of PwC’s EPB Heatmap. First, what constitutes an enabling environment for private businesses, then zeroing in on four of the Heatmap’s seven categories; the tax and regulatory regime, public health, ESG, education, skills, and talents.

Then we looked at the significance of crypto technologies for private and family businesses. Now, in this seventh episode, which is the last before we have a short summer break, we are going to drill down on family office deals. Drawing on the findings of our (PwC’s) new report on European trends and investing by family offices that we have published last month together with Family Capital.

Joining me to analyse these findings is a guest who knows a lot about family office deals, David Bain, Founder and Publisher at Family Capital, the leading online publication and source of global data analysis on family enterprises. Welcome David, pleasure to have you with us today.

David Bain: Great Peter, very much of a pleasure to be talking with you.

Peter: David, having studied our joint report, what stands out for you?

David: Well, I suppose it's just the level of family office deals, which is very high, phenomenally high, and how much they have grown over the last 10 years. So we just look at the numbers. We could see that family office deals went up to 227.6 billion last year, 2021.

That was a record high. They had never been so high as that before. And that's up from 152 billion in 2020, and of course, that was a year hugely affected by the COVID-19 pandemic. So you'd expect some fall off that year, but if you compare it to 2019 before the pandemic, the figures were still growing a lot, I mean, we had 218.2 billion in 2019.

Just the size really is one of the major findings of the report and how they have increased rapidly during the last 10 years. And that's one of the big takeaways from the research we've done with PwC.

Peter: I think this all underlines the fast rising importance of family offices in the deal space. With the overall family office deals, we have seen an especially strong rise in club deals, right? So where family offices are joining forces with other like-minded investors. If we have a look at these numbers, we could see that in sole deals, since 2012, the number has doubled, while club deals are up by 25 times. Wow. What is your take on this one?

David: Yeah, it's really interesting Peter.

And I think it's indicative of how the family office market has matured, if you like and compete better in the private equity, real estate world, when it comes to the institutional guys, who've dominated those markets for years. I mean, in some ways, it's happening at two levels. So, club deals would be family offices working together. So both as general partners at a deal, which is a big phenomenon.

But there's also another one which we see as well. Another sort of strand, in this club deal area, whereby maybe a family office is the lead. So it's a general partner and they're bringing other families in as limited partners. The idea there overall, is there’s a like-mindedness they tend to see patient capital, long-term capital as a way of competing against the scene of the big P (private equity) funds, If you like.

And also give some more fire power. So, you know, some of the big private equity funds are multi-billion dollar funds, so they need to compete against these guys. And obviously they may not be able to do that as a single family office, but working with other family offices, they can better compete to get those deals. That's a big area, which I think, is very well evaluated in the research.

Peter: Yeah. That's very interesting with regard to the firepower and competition with private equity houses, obviously the deal sizes have really grown so that there's a real competition now. And family offices are becoming relevant players, especially the big ones.

When we look at the geographical location for deals though, I think there are also some interesting findings, right?

David: I think so. I think my view of this is that you kind of expect these kinds of countries to dominate in Europe as we were in the research, we're looking at the European market. The UK (United Kingdom) is the biggest centre for direct investment from these companies in Europe, ahead of Germany and France.

Those are sort of the three biggest economies in Europe. So you expect them to do pretty well when it comes to getting deal flows from these groups. It reinforces those economies as the major centre of family office investments in Europe. And I think that will be likely to sort of be the trend going forward for at least the next five to 10 years.

Peter: That's interesting. And I think that Europe remains on the top list of direct investment also for international investors. It is very interesting from my point of view, it's not all going into Asia.

David: Yes, and I think that's probably the more interesting point is that we're seeing that family offices were probably looking more externally in Europe, at least to the US (United States) to Asia.

And what we're seeing with this research is that the boards, they're staying more at home, they’re staying more on the continent, which, yeah, I suppose that's a factor of a few things. I think that one factor is the fact that there are nice juicy deals to be had in Europe. So there's good returns.

There may be some other issues there, you know, that we're seeing a little bit of pull back from globalisation in terms of investment flows that are not quite as strong as they were maybe two or three years ago. So there's that factor as well. But yeah, I think it shows that Europe is a pretty strong market when it comes to family office domestic investments.

Peter: Yeah, that's good. And maybe it's also a question of culture. So you need, or you want to have the proximity to the cultural environment, to the setting in Europe, a regulatory environment that the family office can better understand than in other parts of the world, which leads me to another question. You may have looked at the EPB Heatmap overall.

The Heatmap that we have put together is an outline of the relative attractiveness of countries in Europe as a location to foster private businesses and entrepreneurship. Do you see any link with the findings of the EPB Heatmap and the findings from the Family Office Deal Study destinations?

David: Yes, very much so, Peter. If I look at the Heatmap, you can see Switzerland, Norway, UK (United Kingdom), Germany, Sweden, France make up the top overall (of the Heatmap). So the places we'd been talking about before; United Kingdom, Germany, and France. They're right up the top there (of the Family Office Deals Study). So yes, you would expect that to be the case that family offices would like to invest in areas where private businesses are well regulated and there's a strong entrepreneurial culture, which you'd expect in those six dominant countries in the Heatmap. So yes, very much so Peter.

Peter: So let's talk about the sectors. I think there are very interesting findings about the sector that family offices choose for investment. What patterns or trends do you see here?

David: Yeah, well, overall family offices, they like real estate. They've always liked real estate. And I think that came across very strongly within the research and that continues to be the case, but they like healthcare, healthcare and biotech are big (by deal value), as the findings show. And, I think there's a sort of underlying point with healthcare and biotech with family offices.

The family offices are more likely to take on riskier investments around biotech and healthcare because, well, there's two things with those two sectors, or if you incorporate them all in, and if you like the life sciences, is that there's a longer gestation period before, often, they make a lot of money in those businesses. Particularly on the venture side and even in the private equity side too, because they're privately controlled businesses and they haven't listed. So, this is indicative of the sort of patient capital approach family offices take with their investment attitude. They have the patience to wait for return on those types of investments, which tend to be less rapid than other parts of, certainly, the technology sector.

Yeah, I suppose there's another reason too. We always feel that a lot of family offices are controlled by slightly older people and they're considering their health a little bit more when they get older. So, we see a real trend in those, is that they invest, and a lot, in health related businesses, as they get older as well, there was a sort of demographic factor involved as well there.

Peter: And maybe this is also a consequence of the current pandemic and we see that health, health system is super critical and can also be a good long term investment for sure. But all those family offices, especially if they'd go into the health and biotech sector. So they have to compete with private equity houses.

You mentioned the element of patient capital already. Do you think that this is a main advantage of a family office? What makes them so different? Is it the idea of patient capital? And can you elaborate what you mean by that?

David: Actually, it's really interesting. There's a really interesting case. I won't mention the companies, but there was a fragrance company that was bought 10 years ago by a big London based family office and they kept it for 10 years.

They really nurtured that business and they just sold it. They sold it to a family business in Spain. And they said in the announcement about selling that business that, very much, we want to keep this in a family business, patient capital approach. You know, we didn't want to flip this business after five years of owning it, we wanted to build it up and we preferably wanted to sell it to a family business as opposed to a non-family business, because we felt that the whole DNA of that business was better suited to be with a family business.

I think this is a really interesting trend and I think it will just continue. And also, because I think a lot of these family offices are working together to get those deals as well. So you got a combination of more fire power because they're cooperating and they're doing more club deals and you gel that with patient capital, which is ultimately about the ability to hold on to that investment longer, but not be so anxious about your returns, as an institutional investor would be, or likely to be.

You get a combination of those two things. That is a pretty good prospect for family offices, doing some pretty juicy and pretty high profile and very good deals in the future.

Peter: Oh, that's very interesting. So it sounds like family offices might be the even better investors with a long-term perspective. But do you think that they respond in a different way to current situations like the Ukraine crisis or does this show a different pattern or reaction to those disruptive events that are happening on the globe?

David: Yes, I think so as well, Peter, I mean, it was interesting, it’s in our presentation of the research. This point was raised very much so by Jonathon Bond, who's the Chief Investment Officer of the Grosvenor Group, which is the biggest family investment group in the research we did, in terms of contribution. Particularly in the real estate world, they’re huge.

And he said, you know, we just don't look at things in terms of what's happening right now with the marketplace, whether that's some sort of financial volatility in stock markets or the war in Ukraine. They will take a much more long term approach and see things from that perspective, much more so than a lot of institutional investors or even retail investors, who will get nervous much more rapidly.

I really think this is a really valid point for family offices. And I think you'll see it actually in some of the data we're looking at, at Family Capital. Is that the family offices still seem to be the ones with the money more so than a lot of the institutional guys and the speculative money is leaving the marketplaces right now.

There’s just not enough of an amount because of the volatility and the equity markets. And, you know, I mean, you look at the big crypto markets as well. They've really tanked over the last six months. So all the speculative money tends to be leaving the marketplace and you have institutions. Yeah, well obviously they're still investing, but the money which seems to be more permanent is the family office money, the family business money.

And I think that's going to really come through over the next couple of years, even more so. That they're willing to play the longer game. As you see with so many of the family businesses, you know this really well, Peter, they don't have a lot of debt, so they're not so fearful of rising interest rates to pay all the money they've borrowed to do leverage deals, which they haven't really done unlike institutional wealth. So, yeah, I think it's a really valid point that family offices are going to be even more predominant in global capital markets over the next couple of years.

Peter: So, this has been very fascinating. Thank you, David, so much. And I agree. I think family offices really are not trying to time the market. It's more for them the time in the market. So it's a long-term perspective and I'm pretty curious how the next survey next year, that we both together, PwC and Family Capital, will take on the next global perspective, how this is going in which kind of results we will see if we compare then the European perspective and Europe as a destination for family office investments with Asia Pacific and the Americas. But for now, thank you, David, so much for your insight. Again, it has been fascinating. This has been the final episode before a short summer break. We will be back with new insight and new guests after the summer.

Thanks for listening. Wish you a great relaxing summer and we hope to reconnect soon. Bye-bye.