Reid Hoffman, Co-Founder of LinkedIn, said, “No matter how brilliant your mind or strategy is, if you’re playing a solo game, you’ll always lose out to a team.”
We often cite visionary leaders, crackerjack strategies, and disruptive technologies as the catalysts for stratospheric business breakouts. Still, nearly every successful CEO will point at their team. Hoffman is right, though. There’s no such thing as a billion-dollar solopreneurship or even a nine-figure one.
If a business wants to grow, it needs to invest in HR. Beyond the conventional usage of the term “HR” as a compliance enforcer, we’re zeroing in on “human resources” in the truest sense — the flesh-and-blood people that drive expansion.
But people are expensive. Young companies often consider investing in marketing or R&D, but talent is usually the most costly vector of a business that wants to grow.
We have discussed the importance of family offices as an often-overlooked source of capital for growing businesses. Let’s explore the war for talent and how family offices’ financial backing can help win the talent that tips the scales in favor of growth.
The Strategic Importance of HR in Business Scaling
Many businesses start as solopreneurships or small teams of founders. Everyone wears many hats. They may rely on business-process outsourcing to get them over the early hump of growth, but eventually, every business that wants to grow has to hire.
Why? CEOs can only focus on the high-return tasks of business growth—strategic relationships, PR, process optimization, etc.—if a dedicated team manages the other functions.
Many companies fail at this crucial juncture. They have mastered a process that produces results for their clients or customers, and it’s time to hire. But due to capital constraints, they struggle to achieve the same results at scale that came effortlessly with a smaller team serving a few clients.
It might have all worked fine if they had top talent … but top talent is expensive. That’s the Catch-22 of profitable growth — you need to spend to get the people you need, but you don’t yet have the means to spend without risking bankruptcy. Yes, the investment could produce those returns … but who knows how long it will take to dial that process in. Meanwhile, the corporate credit cards are screaming for mercy, and the founders are losing sleep at night.
A growing company needs to thread the needle—how do you hire like a billion-dollar company when it’s barely a multi-million-dollar company? Companies that can accomplish this will have a crucial competitive advantage.
Diverse Financing Solutions: The Role of Family Offices
Many business owners think their only viable financing sources are inflexible lenders or demanding private equity investors. The lenders want their timely payments; private equity investors want their fast exit, or else.
Family offices are a little-understood, little-known player in the business financing space that fills a much-needed niche —patient capital.
A quick primer on family offices: A family office is a discrete firm that manages the financial affairs of a single family (or, in other cases, a group of families). The office’s employees provide various services, including allocation of investment capital.
Families usually need a sufficiently high net worth to cover the costs of a whole office to manage their finances. The benefit is that they don’t have shareholders or a board of directors clamoring for quarterly earnings. They often think generationally in terms of their family’s values and legacy. They can make creative deals with companies they believe in and can afford to wait years, even decades,for an exit.
Leveraging Family Office Investments for Organizational Scaling
Family offices are suitable partners in financing organizational scaling because they are often patient and invest in alignment with their values rather than solely pursuing returns.
Investments in people are always uncertain. Five-year plans can quickly become ten-year plans as you iron out and adapt to the unpredictable. You can address this by paying a premium to entice top talent … but that takes a lot of capital, with results still stubbornly beyond the horizon for years.
Because of their independence and value-driven, generational approach, family offices can offer capital and flexibility — ideal for a company that needs to scale its organization over time.
Forming Strategic Partnerships with Family Offices
Strategic partnerships with a few family offices can make all the difference in furnishing a company on the cusp with the capital it needs to break through — whether through HR or any other vector.
The right family office partnership can offer substantial and flexible financial support. They can be a source of equity investments, debt financing, or both, often with terms more adaptable than traditional funding sources.
Of key importance is finding alignment between your company and the family office—finding the family who aligns with your long-term financial goals and your company’s vision, mission, values, and desired impact on the world. Your legacy can become part of theirs, and family offices become uniquely generous under those circumstances.
The Catalytic Role of Capital-Raising Firms
The challenge, then, is finding the right family office partner. Family offices don’t exactly advertise in the Yellow Pages. In fact, many high-net-worth families don’t want to be that accessible.
Moreover, family offices are as diverse as families themselves. Some may not make private equity or debt investments, while others focus exclusively on the family’s holdings. Even if you get the meeting, it may not be the right fit.
Specialized private equity teams, also known as independent sponsors, serve as valuable catalysts for forming partnerships between capital-hungry companies and the family offices that align with their goals and values. For more information, please refer to our article focusing on these groups.
When it’s time to scale your business, the who is more important than the how. Not just: “How will we scale with a capital provider?” but “Who do we need to scale?” The right talent often makes or breaks as businesses seek to bring their offerings to a larger audience.
Most businesses never get there because they don’t have the capital to attract top talent. They either fumble the ball by being stingy with their HR investments and limping forward with weak talent, or they saddle themselves with debt or equity investment obligations that put them on the razor’s edge of insolvency.
Family offices provide a vital source of patience, flexibility, and values-based capital to fund the talent pool that growing companies need to scale.
If your company is ready to invest in HR and you think family offices may be the right funding source for that ascent, contact Cap Expand Partners. Since the 1970s, we have leveraged our network to support rising stars. Contact us for a free consultation today.
“What should I invest in now?” It’s the million-dollar question – literally, in many cases. It’s also the question we hear wealthy families and business leaders always ask. This question gains urgency when considering alternative investments, a response to the current global context of geopolitical tensions, soaring interest rates, and rampant inflation.
As an ultra-high-net-worth individual (UHNWI) or a business owner sitting atop trapped capital, financial management may seem like a tightrope walk between two skyscrapers – one of capital preservation, the other of wealth growth. Although traditional financial markets have demonstrated long-term reliability, they might not offer sufficient diversification, especially for multi-generational family wealth. Alternative investments such as private equity, real estate, and private debt provide additional options for achieving these objectives.
High-net-worth families and individuals often collaborate with family offices to obtain the specialized expertise and tailored strategies required to navigate this complex financial environment. For further insights into how family offices contribute value, refer to our preceding article.
Let’s explore some of the alternative asset classes that typically resonate with affluent families looking for direct investments, and how these are being affected by current market conditions.
Navigating the Complex and Rewarding World of Private Equity and Venture Capital
Since the summer of 2022, with the onset of interest rate hikes by central banks, the private equity (PE) and venture capital (VC) sectors have encountered substantial obstacles in investment activities, fundraising, and exit strategies. Buyers and sellers are struggling to agree on asset values, and even when they do, financing remains a hurdle.
Private Equity
Private equity performance
Despite these challenges, PE has consistently outperformed public stock markets, achieving an average annual excess return of 5.3% and a total return of 13.4%, according to Bain & Company. This isn’t luck; it’s skill. Great fund managers have a knack for picking companies with promise, and then rolling up their sleeves to improve operations and streamline finances.
The Family Office Connection
Family offices have recognized the potential in PE, shifting from a predominantly passive role in fund-level investing to a more active stance in direct investments. They have emerged as a crucial source of funding for growing companies.
Investment Approaches
There are two primary pathways to engage in PE and VC: pooled funds or direct investments. Both approaches have distinct advantages, and family offices must judiciously choose between fund managers and target companies.
Crafting a Strategic Approach
Family offices need a clear strategy that not only targets financial returns but also accounts for factors like control, diversification, impact, and education—especially for the next generation, or “NexGen.” They must define their role – whether as hands-on operators, active or passive investors, or asset allocators – which will significantly influence their investment strategy and implementation.
Additionally, family offices should tailor a strategy that leverages their distinct strengths, such as operational or industry expertise, a relevant network, or experience in owning and managing a family business. Honest self-evaluation is key to identifying areas where they can add significant value, particularly when aligning with family-owned businesses seeking investment but cautious of external investors.
Venture Capital: A Petri Dish for Innovation
VC is an essential field for those interested in innovation and disruptive growth. With over 40% of US IPOs being venture-backed, according to the National Venture Capital Association, VC stands out as a critical platform for emerging companies.
Historical Importance and Future Promise
VC has been a rewarding yet demanding playground for investors. The long-term nature of the investment, coupled with high risk and the necessity for extensive networks, makes VC a niche investment choice, not suitable for all strategies.
Role of Family Offices in Venture Capital
Family offices have become increasingly important in the VC ecosystem, providing not just funding but also invaluable expertise and support. They often focus their investments in sectors where they can apply their own experience or foster innovation, offering a unique combination of financial and intellectual resources.
Challenges and Intricacies
The complexities of sourcing deals, performing due diligence, and managing illiquid investments make VC a demanding asset class. Family offices must carefully consider these aspects, ensuring they align with their broader wealth management strategies and determining the extent to which VC fits into their portfolio.
Looking Beyond Financial Returns
While VC is known for offering uncorrelated returns and potentially higher long-term gains, its appeal to many family offices extends beyond mere financial metrics. It provides an opportunity to influence sectors they are passionate about, such as healthcare or climate technology.
Developing a Strategic Framework
No one should enter VC on a whim. Engaging in VC requires a carefully crafted strategy that addresses both financial and non-financial objectives. Given the competitive nature of the VC market, family offices also need to assess their access to high-quality investment opportunities.
The Road Ahead
Presently, family offices are focusing their VC investments on rapidly evolving sectors like medical devices, healthcare, gaming, and climate technology. Those new to VC must be prepared for a steep learning curve, best navigated by cultivating networks and accumulating hands-on experience.
Investing in Private Debt: High Yields in a High-Interest World
In the current climate of economic fluctuation and modest growth, private debt emerges as a highly attractive asset class.
Past and Present: The Appeal of Private Debt
Private debt has demonstrated an impressive average annual return of 8.3% over the past decade, according to Preqin. Its robust performance and resilience amidst market shifts have made it a preferred choice for many investors.
Advantages of Private Debt
For lenders, private debt presents attractive risk-adjusted returns and acts as a buffer against inflation and rising interest rates. Borrowers favor private debt for its expedited process, simplicity, and the potential for fewer lending parties – aspects particularly valuable in today’s unpredictable economic climate.
Emergence of Family Offices in Private Debt
Recently, family offices have begun to tap into the potential of private debt, recognizing its role in providing stability and higher yields in the current high-interest-rate scenario. These offices are increasingly pivotal in offering direct private credit solutions, with greater loan structuring flexibility compared to traditional financial institutions.
Global Expansion of Private Debt
Although the US is a major player in private debt, opportunities are abundant globally. Family offices are expanding their horizons, seeking diversified lending opportunities, especially in Gulf countries.
Future Prospects of Private Debt
Given its attractive features and strong historical performance, private debt is poised to remain a significant asset class. For family offices, it represents a chance to balance risk and return while leveraging their distinct capabilities in loan structuring and capital provision.
Real Assets, Real Opportunities: The Enduring Appeal of Real Estate Investments
The Timeless Attraction of Real Estate in Investment Portfolios
Real estate has long been a staple in diversified investment portfolios, prized for its balance of risk-adjusted returns and potential for capital preservation. This asset class holds a unique allure for family offices, but what factors contribute to its irresistible charm?
Steady Performance: A History of Strong Returns
Data from Benefit Street Partners reveal that private real estate has delivered an impressive average annual return of 8.7% over the last twenty years. This robust performance underscores real estate’s reliability and profitability as an investment choice.
Diverse Investment Spectrum in Real Estate
Real estate investment is not a monolith. It encompasses a dizzying array of segments, from residential and commercial properties to industrial spaces and undeveloped land. Recently, non-traditional sectors like student housing, medical facilities, and assisted living communities have attracted significant attention from family offices.
Why Family Offices Love Bricks and Mortar
Family offices have a diverse approach to real estate, influenced largely by the origins of their wealth and their investment objectives. Some have amassed their fortunes through real estate, naturally gravitating towards further investments in the sector. Others seek real estate for diversification or unique opportunities absent in public markets.
Complexities of Direct Real Estate Investment
Direct investment in real estate is intricate yet potentially lucrative, demanding considerable expertise. Family offices face challenges in identifying investment opportunities, formulating business strategies, arranging financing, and performing due diligence. A critical decision involves choosing between self-managing properties or employing external management.
Real Estate and Social Impact
Increasingly, family offices are considering the social impact of their real estate investments. By funding projects like low-income housing or specialized accommodations, they can make a tangible difference in society.
Measuring Real Estate Investment Success
The measure of a successful real estate investment often boils down to its equity multiple. For those considering direct investments, the key question is: “What would the financial outcome be if the property were sold for the same price at which it was acquired?”
Infrastructure: The Bedrock of Tomorrow
The Essential Role of Infrastructure
In an era marked by rapid technological advancements and economic growth, infrastructure is the cornerstone of modern society. Key sectors such as transportation, energy, utilities, and telecommunications are not just facilitators of societal advancement but also attractive avenues for financial investment, noted for their resilience and low volatility.
Infrastructure: A Market Poised for Expansion
2023 highlights the robustness of the infrastructure sector, even amidst economic fluctuations. According to McKinsey & Company, global infrastructure investments are projected to soar to an astonishing $49 trillion by 2030, indicating significant growth prospects.
Adapting to Global Shifts: Embracing Sustainable Investments
With a global shift towards sustainable energy, infrastructure investments are aligning with this trend. The renewables and natural gas sectors are becoming prime investment targets, especially for family offices.
The Synergy of Family Offices and Infrastructure
Family offices, with their extended investment horizons and adaptable capital structures, are ideally suited for infrastructure investment. These characteristics make them apt investors for projects that might be less appealing to traditional firms due to their scale, complexity, or long-term nature.
The Importance of ESG in Investment Decisions
Family offices are increasingly prioritizing environmental, social, and governance (ESG) considerations in their investments. In infrastructure, this translates to ensuring that projects are sustainable, ethically managed, and beneficial to local communities.
Leading the Way into the Future
The significance of infrastructure as an investment class continues to grow. With their ability to invest over the long term and their focus on ESG factors, family offices are well-positioned to make a profound impact, contributing significantly to the development of foundational projects that will shape future economies and societies.
Cap Expand Partners: Facilitating the Synergy with Family Offices
In the intricate world of alternative investments, navigating the complexities presents a formidable challenge. Cap Expand Partners meets this challenge head-on, fostering strong collaborations with family offices. These partnerships are crucial in uncovering insights and benefits across a diverse array of alternative asset classes.
Expertise and careful judgment are essential to successfully maneuver through this complex environment, characterized by high interest rates and economic uncertainty. In such a fluctuating landscape, there is no replacement for the specialized guidance provided by seasoned financial professionals. They are instrumental in guiding UHNWI and families toward a future marked by financial success.
Cap Expand Partners leverages its expansive network of family offices to assist business leaders in securing the necessary capital to achieve new levels of efficiency, profitability, and market innovation. For those eager to explore the possibilities within alternative investments, we invite you to reach out to us. Your prosperous tomorrow starts with the choices you make today.
Aligning with the Right Family Office for Your Capital Goals
For all the talk about family offices in the private equity and M&A space, their operational intricacies are not widely understood. This is natural — these are private institutions, not listed on any stock exchange. They typically guard their privacy closely and don’t want just anyone to come knocking.
Worse, when business owners and independent sponsors learn about the advantages of securing capital from family offices, they may incorrectly assume that all family offices function identically. This can lead to wasted effort spent courting a family office whose strategic approach is not a match for their capital-raising objectives.
Let’s clear up some of the confusion so you can connect with the right partners for your objectives — what are the best family offices to approach, and what are some of the different strategies they use?
Navigating the Family Office Landscape
A family office is a private wealth management firm dedicated exclusively to a single family or a select group of families. Usually, these families are very wealthy — otherwise, managing their affairs would not require a dedicated office with salaried staff.
This article explains family offices in more detail. In this other article, we describe why they are of particular interest to businesses and independent sponsors looking to raise capital. Simply put, family offices can be a source of “patient capital” that doesn’t come with the pressure of outside stakeholders clamoring for an exit. Families often take an extended, even multi-generational view, which can make them attractive partners for long-term capital plays… provided that the investment opportunity aligns with their focus.
No two family offices are alike, so it’s crucial to understand how they can differ from each other. Let’s look at some of the different ways family offices can be segmented. That way, when you meet one, you can better deduce what kind of family office you’re talking to.
Common Types of Family Offices
To avoid confusion, here are some common ways in which family offices are differentiated from each other with abbreviations:
Single-Family Office (SFO) – manages the affairs of a single family.
Multi-Family Office (MFO) – manages the affairs of multiple families, often formed when several family offices pool resources for the running of the office.
Embedded Family Office (EFO) – a family office that forms a part of a family-run business, usually not a separate entity but rather a department of a greater business that manages the private affairs of a family, not business operations.
Virtual Family Office (VFO) – an outgrowth of the digital revolution, a family office that is run online rather than at a brick-and-mortar office, usually to keep the operation lean and efficient.
The abbreviations, while helpful, only scratch the surface. The essence of each family office is its strategic approach. Whether an office leans towards managing investments or providing specialized services can significantly impact its alignment with your capital-raising efforts.
Service-Based vs. Investment-Based
Some family offices are investment-based, with their efforts geared toward enhancing and safeguarding family wealth. Others adopt a service-based model, aggregating various professional services for the family’s convenience within a single entity.
Imagine a service-centric family office as a one-stop shop. Individuals who typically engage separate financial advisors, accountants, attorneys, and other professionals. With a service-based family office, these services are integrated and provided collectively, tailored to the family’s needs. This consolidated service suite could cover areas like:
Estate planning
Tax planning and compliance
Risk management
Philanthropy
Concierge services
Wealth management and investing are often folded into the package, but be careful — some family offices are more service-based rather than investment-based. In other words, don’t waste your time pitching an investment opportunity to a service-based family office.
Wealth Management vs. Investment Strategies
Additionally, businesses, independent sponsors, and other fundraisers need to understand whether the family office’s strategy is more focused on wealth management or investment.
Family offices with a wealth management focus typically allocate and diversify assets within a specified range of investments. Their primary concerns usually include mitigating risk, devising tax strategies, and preserving capital. As you can imagine, these offices might not be the ideal target for ventures that present high-risk, high-reward investment opportunities (like private equity).
Family offices with an investment focus take a hands-on approach to managing and increasing the family’s wealth long-term. Their operations are similar to that of a hedge fund, aiming to boost the family’s overall financial legacy. These offices are often open to exploring private equity ventures that have the potential for significant rewards.
Embedded vs. Independent
When considering family offices to approach with investment opportunities, it is important to know if the family office is “embedded” or “non-embedded” (i.e. independent).
Independent family offices are typically established after a major liquidity event (e.g. the sale of the main business). The infrastructure is usually independent of any other business — the office solely exists to serve a family’s independent financial affairs. Embedded family offices, often closely connected to the family business, may prefer investments that complement their existing interests.
Determining the Right Fit For You
A family office rarely falls exclusively into one of the above categories; many are a blend. The absence of certain ideal characteristics in a family office doesn’t necessarily preclude a potential alignment. The office may serve a variety of functions, one of which could be the perfect fit for your capital requirements. Dig a little deeper before you rule someone out.
How can you determine whether the investment priorities of a particular family office align with your needs? Consider evaluating the following:
Investment team. Investment-focused family offices often have a dedicated team for evaluating and executing investment opportunities.
Size and structure. Larger family offices tend to have both a wealth-management team and an investment team. Smaller offices are more likely to have one or the other.
Public disclosures and announcements. Look for press releases, news articles, and public disclosures about the investment activities of the office.
Job postings. Check to see if the family office is hiring staff members that might indicate an interest in investment opportunities — portfolio manager, deal originator, analyst, etc.
Service providers. Family offices interested in investments probably have relationships with valuation experts, private equity consultants, and similar professionals.
Identifying the appropriate family office for your deal is not a matter of chance — it’s a strategic endeavor. The right office can provide not only substantial patient capital but also establish a long-term, mutually beneficial partnership that drives growth and success for decades.
At Cap Expand Partners, we specialize in matching your project with the right investors. If you’re an independent sponsor or a business owner in pursuit of capital, we invite you to book a call with us. Let’s leverage our expertise to connect you with a family office that can help realize your capital goals.
As transaction volume picks up, the EMEA region is getting more attention from IT services investors amid demand for digital transformation consulting.
M&A transactions in the IT services arena are picking up pace, with Europe one area of activity.
An October report from Drake Star, an investment bank, cited more than 305 digital services M&A deals in the third quarter of 2023, compared with 290-plus transactions in Q2. The quarter has “seen significant deal momentum,” according to the company, which pointed to the need for digital transformation and cost efficiency as fueling demand for such companies. Drake Star includes managed IT services and digital transformation service providers in the digital services category.
While economic uncertainty affected IT services M&A earlier this year, the Drake Star report said investor confidence is growing amid stabilizing interest rates.
IT services deals in Europe
European transactions stand out among the current M&A trends. Accenture this week said it inked an agreement to purchase 6point6, a U.K. technology consulting firm with offices in London and Manchester. 6point6, which employs about 400 people, focuses on cloud, data and cybersecurity services.
The transaction volume stems in part from North American service providers looking to acquire companies in Europe. A September report from Cap Expand Partners, a financial consultancy based in Belgium, noted an uptick in intercontinental transactions involving IT consulting companies. While European firms have been expanding into North America, the pattern is stronger still in the opposite direction. North American companies are “aggressively capitalizing on European market opportunities,” according to the report, “Connecting Continents: European and U.S. IT Consultants.”
The slower uptake of digitalization in Europe is one factor driving interest in European services providers.
The divergence in digital adoption levels between Europe and North America is a key factor influencing the interest of IT consultants in European opportunities.
Sergio van Luijk Managing partner, Cap Expand Partners
“This scenario offers opportunities for digital transformation, making the European market particularly attractive to North American consultants,” he said.
Other considerations include the COVID-19 pandemic, which highlighted the digital adoption gap between U.S. and European businesses, and the opportunity for boosting European firms’ productivity through digital initiatives, van Luijk added.
Syntax’s acquisition plan
Syntax Systems has one intercontinental IT services deal in the works. The Montreal-based technology solutions and services provider plans to acquire Beyond Technologies, a professional services firm with operations in countries including Canada, the U.S., France and Morocco. Syntax announced the pending transaction on Oct. 3.
The EMEA region offers an opening for expansion. “Europe continues to be a market where industry analysts project double-digit IT services growth and there is still significant transformation opportunity, as digital transformation is a virtuous cycle,” said Christian Primeau, global CEO at Syntax.
Syntax previously acquired Freudenberg IT in Germany and Linke in Spain. Primeau said the company’s intent to join forces with Beyond Technologies will provide access to France’s IT services market, noting the need to invest in local expertise and local language resources to serve clients in Europe, the Middle East and Africa.
Customers seeking productivity gains via transformation are turning to IT services firms, which are attracting investors.
More funding for IT services deals
The growth in private equity funds pursuing deals in the IT services market suggests the potential for more transactions globally. In the U.S., 150 private equity groups have become important MSP investors, said Abe Garver, managing director and MSP team leader at Focus Investment Banking, an M&A advisory firm with headquarters in Vienna, Va. Half of that number are looking for their first MSP platform, while the other half have already acquired a platform and are seeking add-on deals, he noted.
The average size of an MSP-seeking private equity fund grew from $500 million in 2020 to $1 billion today, Garver said.
John Moore is a writer for TechTarget Editorial covering the CIO role, economic trends and the IT services industry.
Independent sponsorship appeals to individual investors who have more business acumen and industry insight than investment capital. The independent sponsor model is highly flexible and constantly evolving, as are the ways that sponsors are compensated for their efforts. Although the specifics of this model aren’t widely publicized, its increasing adoption by institutional investors, family offices, and the private equity sector has generated demand for more information about its workings.
Every independent sponsor deal offers a unique compensation blueprint, designed to motivate the sponsor, satisfy investors, and distribute cash flows appropriately. To craft a compensation structure that works best for you and your investors, consider the following three types of compensation and how they work together to represent the interests of everyone involved: transaction fees, management fees, and upside fees.
Transaction Fees
These one-time fees compensate independent sponsors for their initial sourcing and due diligence efforts before any returns from the deal are realized. It is common for a significant portion of these fees to be reinvested as shares into the deal, aligning the sponsor’s capital with that of other partners. While we generally see the following ranges, it’s important to note that these rates may vary depending on the complexity and size of the deal. The fee could also be influenced by the sponsor’s track record, market conditions, and geography:
In the US, transaction fees of 1%-4% of the enterprise value, which can be the cumulative result of a series of smaller charges.
In Europe, a sourcing fee of 1%-2% of the equity value is generally applied.
Management Fees
These fees acknowledge the pivotal role of independent sponsors in promoting business growth and steering management. Management fees are contingent upon the sponsor’s engagement, specific contractual arrangements made with capital providers, and may also be influenced by regional variations:
In the US, these fees are typically based on a percentage of EBITDA, ranging between 2%-8% p.a. This range is often combined with a floor and a cap, or simply a floor. Some structures may include a fixed fee in addition to or in place of a percentage-based fee.
In Europe, the fees, typically calculated as a percentage of the required equity, range between 0.5%-1.5% p.a. This percentage may increase to 1.5%-2.0% p.a., e.g. in the case of ultra-high-net-worth individual and small family office investors.
Certain capital providers might split the management fee with independent sponsors, while others permit the sponsors to keep the entire amount. Any management fee structure must maintain a balanced approach to compensation. Sponsors should be fairly rewarded for their contributions, but excessive withdrawals can harm the business and, by extension, diminish the value of investments made by other shareholders. Crucially, a restrained approach to management fees underpins the principle that a significant portion of the independent sponsor’s compensation should come in the form of upside fees that align with value creation.
Upside Fees
The most intricate and hotly debated part of a sponsor’s compensation is the upside fee. Directly linked to the investment’s returns, this fee comes into play in the case of a liquidity event such as a company sale. It allows for customized arrangements that cater to the distinct needs of both sponsors and capital providers.
Understanding Promoted Interest
For independent sponsors, the promoted interest (“promote”), which is a portion of an investment’s proceeds received after compensating the investors, is paramount. The promote is akin to the carried interest seen in private equity funds. While a 20% carry has become the norm, transactions led by independent sponsors often show greater variation.
Example
Let’s consider an independent sponsor who leads a deal with a $1 million investment from a capital provider. The agreed-upon promote is 15%. Following a successful exit, the investment’s value grows to $2 million. After returning the initial $1 million to the capital provider, $1 million remains as available proceeds. In this scenario, the sponsor’s promote would be 15% of this $1 million, equating to $150,000.
Variations in the Promote
The typical promote range in most deals is between 10%-15%. This can vary significantly based on factors such as the risk profile of the investment and the independent sponsor’s negotiating power. Deals with significant upside potential and sustained effort by the sponsor (e.g. buy-and-build strategies) may warrant a promote exceeding the 20% mark. Furthermore, the promote rate is significantly influenced by the industry of the target company and its operational scale. Specifically, a transaction involving a high-growth sector and a company whose operations are not yet sizable enough to capture the attention of traditional private equity firms could warrant a higher promote.
Even more complex is the way promotes are structured, including how independent sponsors qualify for them. Several factors can come into play here: preferred return (the “pref”), catch-up, and hurdle rates.
Preferred Return
The pref defines the return paid to investors after they have recouped their initial investment capital and before any payments are made to the independent sponsor. Essentially, it serves as a hurdle at which the sponsor begins to earn performance fees toward achieving the promote.
While 8%-10% is a common range for prefs in the US and Europe, specific factors like the investment horizon, market volatility, and sponsor track record can lead to variations. The lower end of that range is often seen in buyout transactions; in deals geared toward providing growth capital, higher prefs are more common. In some instances, we have observed prefs as high as 12% or more.
Generally, lower prefs favor independent sponsors—with one notable exception. When an independent sponsor chooses to receive transaction fees as investment shares instead of cash, the pref offers an opportunity to add value to these contributed fees. This occurs before the major portion of the sponsor’s performance-based compensation starts to accumulate.
Catch-Up
The Catch-Up Mechanism
The pref benefits investors by ensuring they receive their initial capital and a certain return before other financial considerations come into play. To balance the scales, the catch-up enables the independent sponsor to receive all subsequent returns—usually 100%—until the distribution levels align with the effective agreed-upon promote rate, assuming that the capital provider has already achieved their designated preferred return.
Example
Suppose an independent sponsor negotiates a deal with a 10% pref. Once the investment makes a 10% return, the catch-up mechanism kicks in. If the agreed-upon promote level is 20%, the catch-up will work to ensure the sponsor receives 20% of all proceeds, starting from the first dollar earned. So, let’s say the investment generates $100,000 in returns.
First, $10,000 goes to the investor to meet the 10% pref.
Next, the catch-up mechanism channels the subsequent proceeds to the sponsor until they ‘catch up’ to having 20% of the total proceeds.
In this example, the sponsor would receive the next $20,000 to catch up and reach the 20% level.
After the catch-up, proceeds would then be distributed according to the agreed-upon 20% promote level for the sponsor and 80% for the investor.
Essentially, the catch-up mechanism accelerates the sponsor’s earnings to reach the pre-agreed 20% promote level once the pref is met.
Variations in Catch-Up
Depending on the specifics of the agreement, the catch-up calculation may take into account one of two things or even both: the repayment of the initial capital invested and/or the predetermined percentage return on that investment. The catch-up is an optional feature and is sometimes difficult to negotiate in smaller deals and those organized by novice independent sponsors. While optional, the presence or absence of a catch-up can significantly affect the sponsor’s total compensation. It’s often a key negotiation point, especially in more complex or larger deals. Whether or not a catch-up clause exists, every agreement should clearly outline the rate at which sponsors are paid following the meeting of the pref.
Hurdle Rates and Resulting Promote Levels
Promote structures can vary widely in their complexity, offering options for multiple thresholds and rates. As the independent sponsor model matures, there is a trend toward increasingly intricate compensation frameworks. These usually feature a variety of hurdles with escalating promote rates, aiming to better align the interests of sponsors and capital providers. Institutional investors value this flexibility, as it allows them to craft tailored, performance-based agreements.
Beyond the pref, which is typically the first hurdle rate if included in the package, tiered systems designed to motivate performance throughout the investment lifecycle may come into play. These systems include various hurdle rates, often determined by IRR or MoIC values. For instance, an initial 8% pref could be followed by a 20% promote if an IRR of 15% is achieved. Generally, IRR thresholds range between 6% and 40%, while MoIC thresholds vary from 1.0x to 5.0x.
Distribution mechanisms in these deals often follow a “waterfall” model, where the abovementioned thresholds determine the distribution of proceeds to each stakeholder.
Example
For instance, after meeting the initial 8% pref, the sponsor may be entitled to 20% of any additional gains. If another performance hurdle is crossed—let’s say, an IRR of 20%—the sponsor’s share could increase to 30% or more. Although percentages typically lie between 10%-30%, some deals do allow for wider variation based on risk profile, industry, and other factors.
Cap Expand Partners’ Added Value
Independent sponsors can unearth investment opportunities in ways that might be challenging for larger institutional investors. Along with this advantage comes a responsibility to fully understand how each party is compensated throughout every phase of the investment process. These compensation structures serve multiple purposes: they not only allocate cash flows but also reflect the investment’s anticipated value, the trust investors bestow upon the independent sponsor, and the specific priorities of each involved party.
Promote structures can vary in complexity based on the preferences of the parties involved. The key objectives are to align interests, meet internal rate of return requirements, and recognize the value each party brings to the table. It is worth noting that different capital providers have distinct approaches to compensating independent sponsors. In this intricate landscape, Cap Expand Partners distinguishes itself by leveling the economic playing field for independent sponsors.
Book a call with us to explore financing options for your deal.
To Ai Or Not To Ai: A Business Guide For Profitable Growth
Great session. Learned more in this hour than during an executive call with Matt Britt from Google. Liked the insight on “better decision making” where AI can help us to get a better situational awareness, give insight on triggers and dynamics and avoidance of biases.
Dann Rogge
Thank you for organizing this excellent talk. Very helpful and insightful.
Tom Doyle
Extremely interesting Sergio and well organised. Congrats!!
Michael Spincemaille
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If you’re a business owner or independent sponsor, you may have heard the term “family office” thrown around in financial circles. Family offices are private wealth management firms that cater to the financial needs of one family or a small group of households – they are becoming increasingly popular among wealthy families looking to manage their interests and assets.
One of the key benefits of working with a family office is their ability to provide customized investment strategies such as venture capital investments and financial planning services that are tailored to the unique demands and objectives of their clients. Family offices are renowned to diversify their investment methods and capacity for long-term thinking, which can generate impressive returns over extended periods.
At Cap Expand Partners, we understand the importance of having a strategic partner who can help navigate the complex world of finance and investments. Our team of experts has extensive experience working with family offices and can provide valuable insights into the specific investment approaches that have contributed to their remarkable success.
In this article, we’ll take a deeper dive into the world of family offices. Explore the investment strategies and investment processes that have made them such an appealing option for raising capital.
Whether you’re just getting started or hoping to grow your company, Cap Expand Partners can help you achieve your objectives through strategic, long-term thinking.
So keep reading to learn more about how family offices can benefit your business.
Family Offices Are Growing in Popularity
Wealthy family members are increasingly using family offices to handle their family’s assets and interests. These private wealth management companies aim to meet the financial requirements of a single-family or a small group of households.
In order to meet the particular demands and objectives of clients, family offices provide specialized investment strategies and financial planning services. Family offices are well known for their flexible investment methods and capacity for long-term thinking, as well as for their remarkable track records — all qualities which can prove useful to you when looking to grow your business.
Let’s Define Family Offices
What exactly is a family office, and how can it benefit your business? Family offices are either single-family offices or multi-family offices — and the difference between them is right in the name.
A single-family office or multi-family office is a private wealth management advisory company that works with extremely wealthy people. In a nutshell, a family office investment is a comprehensive solution for managing the financial and investing needs of ultra-high-net-worth individuals and their families.
Unlike a standard wealth management firm, family offices provide a wide range of services beyond just financial planning and investment management for managing family wealth. They can also provide budget planning, insurance, tax advice, family wealth transfer planning, and more. The goal of a family office is to help its clients manage their money on all fronts, providing a holistic approach to wealth management.
For midsize family business owners needing funds to expand their companies, a dedicated family office can be a great source of investment. But what investment strategies do family offices employ to ensure that they truly nurture their clients’ wealth?
4 Investment Strategies Family Offices Swear By
The primary goal of a family office is to bring profit to their clients, and they have developed several investment strategies to achieve this goal.
While some strategies, such as investing in stock markets and real estate, are well-known, family offices have started to shift their focus to other investment approaches that have been proven to be more lucrative in recent years. Let’s explore four investment strategies or investment portfolios that family offices are swearing by in 2023:
1 . Direct Investing
Also known as private market investing, wealthy families invest directly in businesses or assets rather than going through a private equity fund. With the financial crisis of 2007–2009, several family offices lowered their exposure to conventional investment strategies.
Past tactics involved a significant emphasis on asset allocations to publicly traded instruments such as equities and bonds. By contrast, they are now progressively shifting their focus toward non-listed market investments, where they play a pertinent role in financing private businesses. Most of the investment strategies listed in this article are forms of direct investments, underpinning how this trend is expected to prevail in 2023 and beyond.
2 . Private Equity
Private equity is a key asset class for many family offices as it provides access to a variety of opportunities, from cutting-edge digital start-up businesses to significant corporate transactions backed up by private equity funds.
The vast majority (69%) of family offices believe it’s crucial for diversity to participate in several private equity eras. The diminution of exposure to hedge funds and stocks accounts for a sizeable portion of this reallocation, while real estate and other real assets continue to play a large role in family portfolios.
For all except the biggest family offices, gaining exclusive access to the greatest private equity prospects has remained difficult. Wealth managers can add value by utilizing their connections to ensure clients can benefit from these investment opportunities.
3 . Impact Investing
The increase in ethical and impact investments, which coincides with families’ increasing alignment of their investments with their beliefs, is the second-biggest trend after private equity. The financial industry has advanced significantly.
Investors, including family offices, are increasingly turning to ESG investing and seeking private investment opportunities that align with their values and beliefs. Climate change is a top priority for these investors, who prioritize businesses with positive environmental and social impact.
The largest banks and some of the most significant financial organizations have also all reaffirmed their commitment to pushing the boundaries of innovation and encouraging responsible finance, making impact investing the second-biggest trend after private equity.
As ESG investing continues to grow, investors are actively seeking private investment opportunities that promote ethical and responsible investment practices, with family offices taking a leadership role in shaping the future of sustainable investing and advocating for more impactful and sustainable investment strategies, particularly for the younger generation.
Their biggest struggle is getting access to rare opportunities that are consistent with their principles and measuring the impact of possible investment opportunities in reality.
4 . Venture Capital
Family offices are increasingly favoring venture investments, as early-stage investments offer the potential to yield higher profits although coupled with higher risk. Startups can benefit from more than just patient seed capital, as family offices frequently add value through their active businesses, network of contacts, and strategic advice.
It’s Time To Grow Your Business
In conclusion, family offices provide a comprehensive solution for managing the financial and investing needs of ultra-high-net-worth individuals and their families. With their expertise in specialized alternative investments, risk management, and financial planning services, family offices can help wealthy clients manage their money on all fronts and achieve their financial goals.
As a business owner or independent sponsor, you may be interested in attracting funds from family offices as a way to expand your company’s reach and profitability. With direct investing on the rise, family offices may be an attractive source of funding for your business.
Whether you’re seeking to take your company to the next level or raise the profile and profitability of your enterprise, Cap Expand Partners can be your advisor and help you achieve your objectives.
So contact us today to learn more about how we can assist you in realizing your business goals by raising capital from family offices.
Welcome to the dawn of a new digital success story! Financial advisor Cap Expand Partner have shifted digital agency MMH into high gear through access to capital that will help them achieve their strategic objectives in record time.
(IN BRIEF) Modern Media Hub, a Dutch digital marketing agency, partnered with Cap Expand Partners, a Belgium-based firm, for a successful management buy-out transaction to raise capital and accelerate growth. Cap Expand Partners, known for offering cross-border financial solutions, provided creative financing solutions and connected Modern Media Hub with the right capital provider. Details of the financing party are undisclosed.
(PRESS RELEASE) BRUSSELS, 7-Feb-2023 — /EuropaWire/ — In the fast-paced world of business, companies need a reliable and experienced partner to help them achieve their goals, especially when it comes to finances in a turbulent global economy. Modern Media Hub, a Dutch digital marketing agency, found just that in Cap Expand Partners, a renowned industry leader in providing tailored M&A and financing solutions worldwide.
Cap Expand Partners was proud to assist Modern Media Hub in raising capital to enable the company to reach its strategic objectives and accelerate growth. The Belgium-based firm is known for offering cross-border financial solutions to business owners, managers, and independent sponsors in funding their strategic growth ambitions.
“We are proud to have been a part of Modern Media Hub’s journey towards success. Their purpose-driven vision, coupled with a dedication to innovation, and unwavering commitment to community, made for a successful partnership.” – Sergio van Luijk, Managing Partner at Cap Expand.
While the financing party and details will remain undisclosed, Modern Media Hub is thrilled to have worked with Cap Expand Partners to successfully execute a management buy-out transaction, empowering its team to take a major leap forward in achieving anticipated business goals. The experts at Cap Expand Partners provided creative financing solutions, connected Modern Media Hub with precisely the type of capital provider they needed, and tied the transaction together seamlessly.
“Working with the team at Cap Expand Partners to successfully execute our management buy-out transaction allowed us to take a major leap forward in achieving our business goals. They provided creative financing solutions and connected us with precisely the type of capital provider we needed – all leading up to a successful outcome where everyone involved could benefit from the deal.” – Sebastiaan Bergen Henegouwen, co-founder of Modern Media Hub.
Modern Media Hub is a Dutch digital marketing agency fueled by a team of modern media experts preparing businesses for the digital age. Founded in 2018 by Sebastiaan Bergen Henegouwen and Nick van den Dungen, Modern Media Hub exists to increase the impact of company brands in the field of modern media and enhance the loyalty of their customer base through content creation, creativity, and technology. Generating recurring income streams from subscription-based services such as social media management and high-end web development, Modern Media Hub helps businesses grow exponentially by reaching their target audience with authenticity
About Cap Expand Partners
Cap Expand Partners specialize in supporting cross-border M&A initiatives with innovative financing solutions. First established in the 1970s, the family business was founded on the belief that mid-sized companies play a vital role in tackling some of the world’s most pressing social and environmental challenges. Under the leadership of Sergio van Luijk, Cap Expand Partners assist companies and independent sponsors through a network of associate partners with cross-border expertise, using modern methodologies more evolved than traditionally used in the industry.
