Private Equity in U.S.

Richest Are Bullish on U.S. as Family Offices Open Outposts

As the U.S. powers the global economic expansion in its fifth year, the world’s rich are counting on American companies to help increase their fortunes. 

At least a dozen family offices, with fortunes made in Europe, Asia and South America, have opened U.S. outposts in the past two years or are making direct investments in corporations from Silicon Valley to the East Coast. Their view is that the Federal Reserve’s aggressive monetary easing, a shale oil boom that’s lowered energy costs, and improving corporate balance sheets give the world’s largest economy an edge over other regions.

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Peca Ltd., a London-based firm started in the 1990s by a family that made its wealth mainly in financial services, has made about two-thirds of its private-equity and venture capital investments in the U.S. while reducing investments in Europe, said Anselm Adams, who oversees the firm’s alternative investments. A German family that founded an automotive company opened an investment office in New York this year to find deals in the automobile, textile or luxury industries, according to a person familiar with the matter, who asked for anonymity citing a lack of authorization to discuss the firm. 

“They are looking for diversification and more exposure to the U.S.,” Patrick McCloskey, managing partner at Aeterna Capital Partners, said of the firms. “Many family groups are trying to manufacture yield in a very low-interest-rate environment and are looking for unique and customized ways to do so.”

$4 Trillion 

McCloskey’s firm last year opened a New York office for a rich European family looking for deals in the U.S. In September, he helped his client finance a video-distribution company with a loan that pays the London interbank offered rate plus as much as 11 percent.

Family offices manage $4 trillion in assets globally, about 55 percent of which is based outside of North America, according to a 2014 study by London-based researcher Campden Wealth.  Affluence has grown fastest since 2013 in the U.K., Korea and Denmark, according to a report this month by Credit Suisse Group AG. (CSGN)

The U.S., where growth accelerated in the third quarter to cap its strongest six months in more than a decade, is “a big bright spot in the world,” said Stephen Cecchetti, professor of international economics at Brandeis International Business School in Waltham, Massachusetts. As the Fed winds down unprecedented stimulus, the European Central Bank is contemplating its own quantitative-easing program to tackle the weakest inflation in five years, and Japan is continuing purchases. 

Venture Deals 

Peca has been attracted to venture-capital deals in the U.S., said Adams, who declined to name the family he works for, citing privacy reasons. The firm has taken stakes this year in The Bouqs Co., an online flower-delivery business, and Circa, a mobile news service, Adams said. Both are closely held companies based in California. 

The family office generally invests $1 million to $3 million, working alongside private-equity firms rather than through funds because it pays no fees or carried interest on co-investments. 

“One of the things we’ve been very active in, in the last two years, is the venture capital scene,” Adams said in an interview via Skype. 

McCloskey’s firm usually seeks equity and lending transactions in companies with enterprise values of $5 million to $100 million, he said, declining to name the family sponsoring him for privacy reasons. 

Sideline Cash 

Aeterna helped finance RLJ Entertainment Inc. (RLJE), a Silver Spring, Maryland-based video content distributor founded by Robert L. Johnson, because it liked the business, management and risk-reward profile, McCloskey said. Four other lenders were involved in the $70 million deal, according to an RLJ filing. 

“There’s so much cash on the sidelines ready to be put to work by families that took money out in the financial crisis or that have operating businesses generating a lot of income that they haven’t put in the market yet,” said John Benevides, president of Chicago-based CTC myCFO LLC, which advises family offices and is a unit of the Bank of Montreal. “They are giving us a shopping list.” 

‘More Cautious’ 

That capital has made finding bargains a challenge. Price multiples for U.S. private-equity deals are the highest since 2007, and some transactions are being done with less leverage as more equity is being contributed to the average deal, said Andrew Lee, head of alternative investments for the chief investment office at UBS AG (UBSN)’s wealth-management unit, which oversees $1 trillion. Those factors may make it harder to see returns as attractive as in the recent past, he said. 

“We’re more cautious on allocating aggressively to U.S.- focused private-equity opportunities,” Lee said. “On a one-off basis there may be situations that may make sense.” 

Valuations have also risen in U.S. venture-capital deals, particularly for later-stage companies, Lee said. 

One area where family offices find opportunities are private companies looking for a new, private owner, said Francois de Visscher, whose Greenwich, Connecticut-based firm advises single family offices and family-owned businesses. 

Every day, about 10,000 Americans born between 1946 and 1964 reach retirement age. Many of them have built businesses, don’t have an heir to take over and want to sell, said Robert Elliott, vice chairman at Market Street Trust Co., a multi-family office established to manage the wealth of the Houghtons, founders of glassmaker Corning Inc. 

The U.S. is “a good hunting ground, particularly with this generational shift,” Elliott said in an interview. 

Colombia, Chile 

“Some wealthy families from countries like Colombia, Chile and Belgium have even established single-family offices in the U.S. with the intent of accelerating their American direct investment activities,” said de Visscher. 

More than 40 percent of the 330 members in the Family Office Exchange are buying at least one private company a year, said Sara Hamilton, founder of the Chicago-based group. 

The deals are part of a larger trend among family offices to find investments themselves. The number of family offices seeking equity stakes or lending opportunities directly grew 45 percent this year at Axial, an online network that connects companies to capital, said Peter Lehrman, the New York-based firm’s CEO. 

Like Minded 

“We get at least one call a month from a family company that is ready to sell and wants to sell to another like-minded family instead of a private-equity firm,” said Hamilton, whose group is a network of private families around the world with an average of $450 million in investable assets. 

The New York firm that’s been investing money for the German automotive family was in talks earlier this year to buy a family-owned business based in California, said the person familiar. The family is looking for public or private companies in the automobile, textile or luxury industries with enterprise values between $250 million and $300 million. The transaction fell through, the person said, because of the seller’s lack of speed in closing the deal. 

“It doesn’t come without risks,” Aeterna’s McCloskey said of international investments. “It’s easier said than done.”  -- Bloomberg  2014 Oct 31

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