Lynne Marek | Crain’s
Move over, private-equity funds. Here comes family money.
Ultra-wealthy clans increasingly are staffing their own buyout operations to take control of companies. Instead of relying on private-equity firms and paying fees, families regularly are winning deals in competition with them. While the trend is showing up nationwide, mainly in middle-market deals from $50 million to $2 billion, the increased competition may be more heated in Chicago because of the city’s concentration of firms doing business in that tier.
In a testament to the phenomenon, Pritzker Group Private Capital announced a deal today, its third deal in just two months. The private-equity investment arm of brothers J.B. and Tony Pritzker is buying Addison-based PLZ Aeroscience, a North American manufacturer of aerosol cans run by CEO Ed Byczynski. Terms of the deal weren’t disclosed, but the Pritzkers have said they’re interested in companies with values of $100 million to $500 million.
“I have seen a lot of success with family offices leaning on their industrial roots to attract deal flow,” says Andrea Auerbach, head of U.S. private-equity research at Cambridge Associates. “There’s a heritage there that a private-equity firm can’t lay claim to.”
Auerbach and others say it’s difficult to chart the phenomenon because families often don’t publicly report transactions with private companies. Still, Seattle-based research firm Pitchbook reported 37 deals by families last year, up from eight in 2005. Chicago-based McNally Capital, which helps wealthy families manage investments, says a 2010 survey found that 59 percent of families preferred direct investments over private-equity funds. That rose to 77 percent last year.
Pritzker Group has been buying companies since 2004, but it purchased just six firms in its first eight years. In 2012, the Pritzker brothers hired Paul Carbone to add to and oversee a team of 25 investment and operating professionals. Since early that year, it has acquired another seven companies in just four years. Overall, it has sold four, including Carter-Waters, Intersystems and Impact Products last year.
A capital crunch for traditional private-equity buyout firms after the recession helped open the door to more direct family investments. Because the billionaire Pritzkers don’t need the debt financing that fuels private-equity acquisitions, they saw an opportunity to amp up dealmaking, J.B. Pritzker says.
Families are flexible about how long they own a business, industry participants say. Private-equity firms, by contrast, typically buy and sell again within five years for a 10-year fund cycle dictated by investors, called limited partners. Wealthy families are becoming known, tongue-in-cheek, as “unlimited partners,” a nod to their deep pockets and tolerance for longer-term investments.
“Today, more sellers widely understand that they have choices beyond private equity,” Pritzker says. “You don’t have to sell to the five-year owner who’s going to flip your company sooner than you think it ought to be flipped.”
Another recent example of the phenomenon was the July purchase of the enterprise arm of eBay for $925 million by a consortium that includes the billionaire Lester Crown family. That family has been making direct purchases through its Chicago-based Longview Asset Management, led by family member James Star, along with other investment professionals.
Other family-owned firms in Chicago doing deals include PSP Capital Partners, founded by Penny Pritzker, sister of J.B. and Tony Pritzker; and Keystone Capital, headed by former Madison Dearborn Partners principal Kent Dauten.
Family buyers have certain advantages in wooing family-owned businesses and founding entrepreneurs because there’s often a sense of common ground, and perhaps a bit of starry-eyed respect for the scions. The families also are willing to work with existing management and maintain founders’ interests, such as philanthropic practices.
“Flexibility is why they’re carrying the day in a lot of these deals,” says David Sulaski, an investment banker in Chicago at Livingstone Partners. “They’re nimble and they’re increasingly organized.”
Sulaski, who mainly works with sellers, estimates that about a fifth of his merger and acquisition volume includes a family bidder. “Adding another class of buyers to the competition is a good thing for sellers,” he says.
That competition comes on top of an already frothy market, with too much capital chasing too few deals, say bankers and lawyers involved in the bidding battles. And it may have an outsize impact in Chicago because of the concentration of private-equity firms here that also are courting the middle-market deals most attractive to family firms.
Some Chicago private-equity players are taking a different approach: If you can’t beat ‘em, join ‘em. Chicago-based Sterling Partners, for instance, is part of the Crown consortium that bought the eBay unit. “Longview was particularly easy to work with given their ability to act quickly and deploy substantial amounts of capital,” says Danny Rosenberg, managing director at Sterling Partners.