Family offices investing from the shadows
More and more family offices are investing in franchising, but little is known about most.
Shadowy entities that control billions of dollars are among us. No, this isn’t some tinfoil hat-Illuminati madness, but family offices are all across the franchising industry and few people—if anyone—has a complete picture of what they’re doing.
So what is a family office? Generally, the 4,000 to 15,000 family offices were created by successful company founders that either want to separate their business wealth from their personal wealth or put to work proceeds from a liquidity event like a complete or substantial sale of a business.
The average North American family office has $926 million in assets under management, according to Campden Wealth, a research and education firm that works with family offices. Such entities handle everything from paying the housing staff, monitoring real estate investments, paying bills and educating the younger generations—but for the most part, it’s the investment arm of the family.
Preserving the wealth
Like any investor, family offices are looking for a return. But unlike other investment bodies, the major reason for investing is to preserve the family wealth for the next generation and beyond. Another stark difference is that many family offices don’t have fund investors pushing them to put capital to work, so they can wait for an ideal investment.
“In any of the investments we make, it’s always very, very selective; our MO is very few and far between. It has to really feel like and be something special,” said Brad Saltz, a former CFO at Houston’s Restaurants and public restaurant accountant who now runs a small family office.
Saltz said he’s seen more family offices getting into investments in the franchising space. It’s a proven model and in some ways the risks are less. The landscape is littered with companies that thought they could do it better than someone else; proven is always better than unproven.”
Campden Wealth has seen similar moves for family offices. They’re increasingly moving away from traditional holdings, which have been soft. In fact, Campden found that North American family offices saw a 4.1 percent decline from 9.9 percent to 5.8 percent return on investment between 2013 and 2014 in their most-recent published research.
“With the very low return opportunities in the public equity markets and bonds and obviously cash, which used to be a part of any portfolio, increasingly we are seeing a trend towards private equity engagements whether that be direct or through private equity funds,” said Dominic Samuelson, CEO of Campden Wealth.
He said family offices are embracing a “risk-on” strategy, or seeking the volatility of investments outside of stocks and bonds in search of a return in the single digits or higher. Often, those investments come in the form of private equity. According to Campden’s 2015 research, the average family office has invested 22 percent of its wealth in private equity.
In turn, those funds are putting more capital into the franchising world. “What the families like, they like cash-generative businesses. A lot of franchises are cash-generative businesses,” said Samuelson.
FundCorp is a private equity fund backed by a pair of family offices. The firm recently grabbed two franchised restaurant brands: Gatti’s Pizza and Gigi’s Cupcakes.
It’s a rarity among generally passive family office investors, but the offices behind FundCorp are engaged with the investments and hold weekly meetings to hear updates and give advice.
“They’re passionate and they’re engaged in these investment and they get up every single day as excited about these investments as I do. So that’s fun to work with folks like that,” said Michael Poates, president at FundCorp affiliates KeyCorp and Sovrano, with a background in Dairy Queen and Whataburger.
Poates, who operates the restaurant investments, said working under a family office has a couple of major benefits. “First you’re able to have access to capital to the point where you can make quick decisions if necessary and move quickly on prudent business matters,” said Poates.
“The second thing is that they literally bring years of experience to the table with respect to banking, banking relationships, capital management and general leadership strategy that they bring to the organization.”
His family offices have been looking further afield from their typical investments in oil and healthcare as the oil market sags and regulations make for a murky forecast. Since buying Gatti’s last year, they’ve retooled the 47-year-old brand and opened the first newly designed restaurant. Since buying Gigi’s just months ago, Poates admitted his team is “still drinking from the firehose,” but expects major growth soon.
Loving new businesses
Like the people behind FundCorp, Sandy Beall also likes to get involved, but don’t look for him behind the counter working for his desired 25 percent return. The founder of Ruby Tuesday started his own family office after leaving the casual diner in 2012. He’s still focused mainly on the restaurant industry, backing several small brands including franchised Nekter Juice Bar and his own franchisee businesses in Jimmy John’s and Pinkberry.
“My whole focus has been just investing, helping small business grow. That’s what I love, creating new businesses. I have 10 of them right now, that keeps me pretty busy,” said Beall. “I invest and then generally I advise founders. The first couple years of investments I meet with the owners quite often, help them with plans and encourage them etcetera.”
So what are family office investors like Beall looking for in a business? The basics are still the basics: above average unit metrics, strong leadership and a proven concept. But given the family office luxury of waiting for great opportunities, the intangibles matter, too.
“The intangibles might mean a little more to a family office,” said Saltz. “I put family offices in the entrepreneur category because they once were, they are a little more driven by inventing things.”
Good positioning and creative founders really speak to family office investors. “I don’t just make investments. I have to really like the brand and the brand position, I have to really like the people,” said Beall. “Really the only concepts I care about are millennial-based because that will have the same 20 to 30 plus-year run that the bar and grill or the family segment had before that. So it’s just at its infancy stage in its life cycle.”
Business leaders looking to get a slice of the family office pie are going to have to lean on their network. These investors are incredibly—almost absurdly—private and don’t need to advertise. So if business owners aren’t already within a few degrees of a family office member, it’s better to make sure the business performs well.
“Our opportunities are due to the relationships that we all have either in the business world, the restaurant world or the real estate world. We have enough relationships over our 30-year careers that things tend to come our way,” said Saltz. “We aren’t beating the bushes to find them.”