There’s no question that the number of family offices is on the rise. A recent study by Campden Researchrevealed that there are over 5,300 family offices worldwide. About 2,200 of the family offices are in North America. About 67% of family offices that exist today were established after 2000.
There aren’t hard and fast rules on what amodern-day family officelooks like. A single family office typically has over $150 million in private wealth and is one family. In recent years, multi-family offices have increased. In multi-family offices, families — related or not — have shared interests, investment goals, infrastructure needs, or operational requirements. By coming together, they save resources. This way family offices can focus more energy on portfolio growth and increasing net profit margins.
Over the past decade, the way family offices invest has evolved. In the past, family offices stayed in their comfort zone, by acquiring operating businesses in their business sector.
It’s not uncommon for private equity portfolio companies to double or even triple growth thanks to merger or acquisition. Albeit positive, rapid growth brings new operational challenges that can stop the upward momentum in its tracks. Interim executives bring the expertise needed to enable growth on a massive scale.
“Sometimes a business will start with $40 million in sales, and through acquisition will be two or three times that size. Often that creates an environment where you need to add to the management team, whether that be the CFO or the CEO,” said Forest Wester, a Partner at Trivest Partners that leverages interim executives to enable growth.
Private equity funds use interim executives in a variety of scenarios. However, these scenarios are typically problems that need to be solved such as the abrupt departure of a CEO.
The world of mergers and acquisitions can be complex for owners focused on building their companies.
We’re often asked by owners about their options to exit and sell the company. Often, work needs to be done to prepare – in advance of any sale process – to ensure maximum value is realized. Owners may opt to bring in an outside perspective like an interim executive to provide an operational roadmap to improve operations and package the company for eventual sale. This process, however, typically begins with two types of targets in mind:
Strategic buyers (Strategics) are companies who are already operating in the field/industry where acquiring your business will be complementary to their business, expand their customer base, or give them a competitive advantage.
Financial buyers include private equity funds, family offices, and individual investors who provide their own equity funding and borrowing to acquire businesses as a path to future gains.
Let’s dive in to the difference between strategic buyers and financial buyers:
I was having a conversation with company founders in a healthcare startup who made the comment: “we’re new to being entrepreneurs.”
That was their opening for free advice. It’s hard building and scaling a business when most startups fail or have a tough time and that’s not celebrated enough. Instead we just marvel at the likes of Mark Zuckerberg and aspire to be like Uber, Facebook, Google.
The truth is that most every new businesses – it’s a slog. A grind. A tough battle at some point in their existence, if not in fact for many years. Steve Ballmer of Microsoft had a phrase for this: the long middle. He said its fairly easy to be creative, think up a brilliant new product, and decide to charge forward. Then comes the middle: the long slog.
The overriding, ever present recurring theme of PE fund managers is dealflow. What keeps a PE fund manager up at night? Dealflow. What gets a them up in the morning? More deals. What drives them to stay connected and answer the phone while on vacation? That would be more deals.
And dealflow’s brother is price. As dealflow becomes more pressured and harder to come by, prices of companies go up. And seemingly everything gets shopped since fund after fund are grabbing for the same opportunities.
Proprietary access to deals is the holy grail. Into this challenge, how does a professional investor win, if you can’t even get to the start line?
Many private equity funds hear the words “interim executive” and think the only application is turnaround or short-term fill-in. But for PE funds seeking a great return, they look to interims for their unique abilities to build and transform companies.
Here are six major use cases for interim executives in PE-owned portfolio companies:
Interim Executives in Diligence
Most funds hope to spread their wings – work beyond industries where they’ve already had success, by looking at new industries where acquisitions may cost less and produce higher returns. The further afield they go, the more they need expert leadership removed from prior operating teams.
The best private equity funds talk about backing great CEOs, entrepreneurs, and management teams. But in the lower middle market ($2-$15 million in EBITDA), what’s a private equity fund to do when the company they are acquiring lacks resources and the management skills to earn great returns?
What if serious talent doesn’t extend beyond the CEO or founder?
Douglas Song, co-founder of Prodos Capital Management and an investor in lower middle market companies, says that “there’s always a way to think creatively and unlock value in any lower middle market company.” He especially finds common themes among companies where entrepreneurs or families have built a great business over time, but are lacking in certain areas where partnering with additional resources will help them take the business to the next level.
“No duty the executive had to perform was so trying as to put the right man in the right place.” -Thomas Jefferson
Private equity fund managers aren’t in the caretaking business. They are in the business of sparking change within companies that can be grown or turned around to produce big returns for their institutional investors. And that change can’t be just incremental. Fund managers strive to be in the business of transformation.
Sometimes, along with capital, transformation means bringing in solid, experienced leadership to help take a company to the next level.
First-year Change Agent members have access to the Interim Institute’s 4 hour audio program on the Fundamentals of Interim Management, and a one-hour strategy session to help jumpstart their interim career.
*$200 additional charge for Accelerator Program only applies for first-year members. After the first year, membership renews at $485/year.