Families jump into the PE pool

While private-equity investing is nothing new for wealthy families, it’s catching fire as family offices—asset managers that invest on behalf of wealthy families—increasingly take control of portfolio companies and collaborate with other families to do so.

After the financial meltdown forged a buyers’ market for deep-pocketed clans like the Pritzkers, private-equity allocations in multifamily investment portfolios nearly tripled, to 10 percent from 3.8 percent, between 2006 and 2010. Family Wealth Alliance LLC, a consultant in Wheaton, says two-thirds of family offices had private-equity holdings in 2010, up sharply from half in 2009.

Family offices, wary of public markets and disillusioned with high fees and commissions associated with private-equity funds, are using improved access to information and professional managers to make direct investments and improve risk management. Family investors can offer sellers more certainty that deals will get done and additional leeway on exiting them. That adds up to more flexibility on price and potentially higher returns for sellers who continue as shareholders.

“It’s a perfect storm of families getting good (at it) when funds are facing so many pressures on their business,” says John Rompon, a managing partner at Chicago-based McNally Capital LLC, which advises family offices and helps them overcome a common hurdle: finding appropriate buyout targets.

Thomas Handler, a Chicago lawyer specializing in family offices, estimates that 15 percent have more than half of their disposable assets invested in private equity—a proportion he describes as “nuts” for the wealth preservation-minded.

But, like private-equity investors in general, family offices are impatient with low returns elsewhere and are peopled with entrepreneurs who still have the itch to run companies.

“There are a lot of folks who just want to be in the hunt,” says Mark Blumenthal, a partner at Chicago accounting firm Blackman Kallick LLP. “There’s been a lot of liquidity events in the last 10 or 15 years, and they weren’t ready to retire.”

After selling a Chicago-area bank group, the Steans family invested up to $750 million in private equity and real estate, taking control in more than half the deals. (The family won’t reveal total assets under management.)

“Honestly, I think it’s more fun,” Jennifer Steans, a partner in the family office’s private-equity arm and daughter of patriarch Harrison Steans, says of direct ownership. “There are economic reasons as well.”

Steans’ Concentric Equity Partners effectively controls a bank holding company in Tampa, Fla., and with co-investors owns majority stakes in Chicago-based Tricoci University of Beauty Culture LLC and a Sarasota, Fla., pest control and lawn care company, she says.

Control positions, however, often require financial muscle that family offices can’t summon alone. Ms. Steans says Concentric does deals with Chicago private-equity firm Prairie Capital LLC and invests in funds managed by one of the industry’s biggest operators, Washington’s Carlyle Group L.P.

Chicago-based facilitator Family Office Exchange will launch a registered broker-dealer this summer to support co-investment interest among its 450 members, CEO Sarah Hamilton says.

The Mussos formed a multifamily office three years ago with Andrew Code, a local private-equity veteran, and Terence Toth, former president and CEO of Northern Trust Global Investments. It has about $500 million in assets and a private-equity arm, Promus Equity Partners LLC, that controls, sometimes with co-investors, a half-dozen small-cap firms, such as LogicMark LLC, a Virginia-based seller of emergency response devices, and ProSteel Security Products Inc., a gun safe company in Provo, Utah. Last month, Promus bought factory outsourcer QCC LLC in Harwood Heights.

“Having a handful of private-equity people on staff is not a cheap endeavor,” says Promus Managing Partner Brian Musso, 36, a wide receiver on Northwestern University’s 1995 Big 10 champion football team that went to the Rose Bowl. “So the multifamily office has really sprung out of necessity.”

His late grandfather Vinton “Birney” Imes Jr. owned a small Mississippi newspaper and several TV stations, including WMUR in Manchester, N.H. At Promus Mr. Musso works with older brother Zachary, 39. “We like the control—deciding what to buy and directing management, controlling the board of directors, things like that,” Brian Musso says. “We have the flexibility to own (businesses) for a long time.”

Mr. Rompon of McNally Capital says “families are increasingly taking a holding company approach—buying two or three platform companies and then growing those companies through smaller acquisitions.” McNally organized a 13-family investment of $1.4 billion in a “clean tech” syndicate and is assembling a $100 million food industry fund supported by 10 other families, the company says. Chicago’s William Harris Investors Inc., a family office for descendants of Toni Home Permanent Co. founder Irving Harris, is an investor in a McNally mezzanine fund.

McNally itself is the outgrowth of a single-family office (based on the Rand McNally fortune) that bumped up against shortcomings of the species, including the unwanted prospect of filing as a registered investment adviser, according to Mr. Rompon. Started in 2008 to act as a deal agent for families with net investible assets of $500 million to $4 billion, it has a database of 7,000 bankers, lawyers and other intermediaries to help connect buyers and sellers, he says.