PEGs and Family Offices are BUYERS!
To anyone who has followed this blog for any length of time, the terms PEGs and family offices are probably at least somewhat familiar. But the activity that we’re seeing in the market at the moment suggests that a post on these groups would be worthwhile.
“Family offices” are broadly defined as family-controlled investment groups. PEGs”, or private equity groups, are groups of mostly unrelated investors that have pooled their capital for the purpose of investing in bigger fish that any of the individual investors would normally consider. If you intend to become a professional business broker – or if you’re a business owner considering selling all or a major portion of your business – PEGs and family offices must be on your list of buyers.
Let’s look at each.
Family offices can be a single-family office or a multi-family office.
Single-family offices are generally set up by very wealthy families and charged with managing the family’s wealth. When people think of single-family offices, the names Rockefeller, Ford, and Gates come to mind in the U.S.; Arnault (LVMH), Pinault (fashion) and Albrecht (ALDI) in Europe; and Lee (Samsung), Wan-Tsai (Cathay) and Chung (Hyundai) in Asia. Each of these families are worth many billions of dollars and you’re unlikely to run into anyone even remotely connected to them at any picnic or wedding or football game you might be attending, especially if you’re in the nose-bleed seats.
But there are countless other families that, although not nearly as wealthy as these, are wealthy enough to set up family offices.
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Many families with investible assets of between $10 million and $25 million are interested in setting up family offices but finding management talent to invest and manage the family’s wealth is not cheap. This is the impetus for the establishment of multi-family offices, which pool resources to serve the needs of multipe high-net-worth families.
There are multi-family office management firms that count 50 or more wealthy families as clients; and these families are the only clients these firms have.
Many of these smaller but high-net-worth families represent “first generation wealth”. Often, these people have experienced a liquidity event, such as selling a business they started many years ago. But they may also be baby boomers who have retired from very high-paying roles. And there’s a lot of that going around these days, especially in countries were small businesses are free-est and taxes are relatively modest. (See “The Silver Tsunami“.)
Private Equity Groups
A private equity firm makes equity investments in operating companies using various investment strategies including buyouts and growth capital. Each PEG raises funds from investors and invests in businesses that meet the PEG’s investment criteria. At the moment, PEGs are flush with cash and very active in the market looking for good businesses to buy.
Some PEGs bring their own management team to a deal and take the existing owners out completely. Others want to control the business they invest in but want the founders, current owners or management team to stay on and continue to grow the business. Both types of PEGs should be on your list of buyers.
PEGs differ from family offices in that PEGs focus almost exclusively on acquiring businesses whereas family offices are generally less focused and will invest in a broad range of diversified opportunities including less-risky vehicles such as corporate and municipal bonds, equities in large, publicly-traded companies, commodities, precious metals and real estate.
But like family offices, PEGs come in all sizes. The smaller ones are where we focus.
We’re constantly on the receiving end of inquiries from small and mid-size PEGs looking for businesses that have between $2 million and $10 million in revenue and a minimum of $250,000 to $500,000 in discretionary earnings. These are lower Middle Market businesses that represent the sweet spot for a handful of professional business brokers.
How Many PEGs and Family Offices are Out There?
More than you think, mate!
If you’ve been paying even a modest amount of attention over the past three years, you may have noticed the equity markets around the world have been surging. That fact alone means there is more and more money out there looking for a profitable place to park itself.
And that fact means that there are more wealthy individuals and families that are investing in PEGs or setting up family offices or engaging with multi-family office firms.
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Want some proof?
Well, no less an authority than Wealth X Pte Ltd has the scoop. According to its World Ultra Wealth Report – 2018,
“In 2017, the world’s ultra high net worth (UHNW) population – individuals with a net worth of $30m or more – rose by 12.9% to 255,810 people, a sharp acceleration from a year earlier. Their combined wealth surged by 16.3% to $31.5trn, implying healthy gains in average net worth.”
And as long as this current economic expansion has been, with the U.S. president appearing to come out of that recent impeachment unpleasantness in better shape than ever, the Brits regaining control of their destiny and even the Greek economy showing signs of a pulse(!), aside from the troublesome issues emanating from various Chinese precincts – Hong Kong, Wuhan, Spratly Islands, etc. – there is reason to believe that the ranks of the wealthy will continue to grow.
The Bottom Line
PEGs and family offices are hunting for investment opportunities and existing lower Middle Market businesses – those with annual revenue of roughly between $2 million and $10 million – are targets for most smaller PEGs. This is where we like to play. The sellers are generally knowledgeable, the buyers are well-capitalized and the commissions paid for our serves are quite handsome.
If you plan to become a professional business broker, you’ll probably start will slightly smaller deals in what’s known as the Main Street Market. But there is great demand for knowledgeable brokers in the lower Middle Market and I, for one, would aspire to be one of the individuals to fill that demand.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!