Thierry Bosly, Partner at White and Case, shares his insights on the disruptive impact of family offices on established players in the private equity sector.
What is the impact of family offices on the EUMEA markets?
Family offices are new players in the private equity market. Due to their long-term investment focus, they are changing the dynamics of acquisition structure, requiring established players to rethink and update their existing investment models. Pricing is clearly affected by such long-term focus but that is not the only impact. Family offices usually invest with a long-term perspective, sometimes even for several generations. In such cases, what needs to be covered by shareholder arrangements, particularly in the case of minority investors, is completely different to what is required for an investment which is expected to last just a couple of years. The same applies to incentive schemes for managers, which can no longer be triggered simply by the exit of a financial sponsor.
“Family offices are challenging the established players and their existing models and are therefore a source of innovation.”
Are family offices disruptive?
Family offices are the “new kids on the block”. They are challenging the established players and their existing models and are therefore a source of innovation. Are they also disruptive? Probably not yet but the potential is there. Referring to the disruptive impact of technology, Bill Gates pointed out a tendency to overestimate changes which are going to occur in the next two years, while underestimating changes which will take place in the next ten years. In our view, the same could be said about the disruptive impact of family offices. We should not overestimate what their impact will be on private equity in the short term, but neither should we underestimate their impact in the medium term. At that point, there is a significant likelihood that they will indeed have disrupted the market.
What challenges and opportunities do you identify for family offices?
This is a tricky question because there are as many models of family offices as there are families. The challenges and opportunities available to family offices will vary depending on their structure and size, their investment focus, their level of maturity, their history and so on. Having said that, one of the major challenges facing family offices is attracting the talent needed to compete with the investment teams of private equity funds, while at the same time covering a wide range of expertise. Without that talent, family offices will fail and families will reduce the scope of their activities, relying again on external providers (tax advisors, lawyers, bankers, private equity fund GPs, etc.) to advise on and structure their investments.