The competition for high-quality deals is more intense than ever, leaving many buyers to think outside the box for ways to win dealflow. The competitive environment is forcing family offices, like Pritzker Private Capital and Sam Zell’s Equity Group Investments, and independent sponsors, like the Grantchester Group and Rotunda Capital Partners, to look for new ways to participate.

By definition, family offices and independent sponsors fall outside the mainstream of traditional private equity firms. Originally, family offices were established by wealthy families to invest in private equity firms. Over time, many family offices began investing directly in companies themselves. Originally, independent sponsors were firms that invested on a deal-by-deal basis, without raising a traditional PE fund. Over time, some have begun to raise funds. Now both groups are forging ahead with new innovative ways to remain competitive.

“During the last 12 months, we have gone from an economy that was shutting down to one that is rapidly ramping up again, with a flood of new capital all driving record-high valuations,” says Paul Carbone, president and managing partner of Pritzker Private Capital (PPC), a Chicago-based family investment firm. “We have seen both ends of the spectrum in a very short period of time. Family direct investing will continue to evolve, and alternative strategies throughout the M&A industry will continue to proliferate and become more important as the industry matures and investors adapt to meet the demands of a highly competitive marketplace.”

Here is a look at four strategies that family offices and independent sponsors are using to deploy capital in response to today’s competitive market conditions.

Clubbing to Drive Returns
Investing as a consortium became commonplace for private equity firms over the last decade. Joining forces gives buyers more buying power and more experts to help create value. This fact is not lost on family offices and independent sponsors who are increasingly following suit. Pritzker Private Capital (PPC) — traditionally a direct lead investor in companies — has committed to this strategy in hopes of gaining a competitive advantage. Through its committed club strategy, PPC is frequently partnering with like-minded co-investors behind a shared long-term oriented approach to building businesses. 

PPC invests on behalf of the Pritzker family and others because the firm has raised a captive fund. The Pritzker family is one of the wealthiest families in the U.S. and made much of its money through founding the Hyatt Hotels Corp. (NYSE: H). PPC is led by chief executive Tony Pritzker and Paul Carbone.

Paul Carbone

PPC’s club approach enables the firm to diversify its investments by size, sector and time, to maximize returns with the appropriate risk profile – while offering sellers the opportunity to partner for long-term growth. 

In 2020, PPC teamed up with Concentric Equity Partners and Duchossois Capital Management to recapitalize Energy Distribution Partners (EDP), a distributor of propane and light fuels in North America.

“EDP is a terrific local company, and we partnered with two other Chicago families to get the deal done,” says Carbone. “We decided that, together, we could best support the company and take it to the next level. This is a great example of family investors working together to build value for the long-term.”

The Duchossois family’s wealth stems from manufacturing railroad cars and other equipment. The family is also known for buying international racecourse Arlington Park and rebuilding it after a 1985 fire before merging with Churchill Downs in 2000. The course is currently for sale.

Concentric Equity Partners embraces the club model when it makes sense to do so. Founded in 2003, the firm invests on behalf of the Steans family. Harrison Steans, who died in 2019, was an entrepreneurial banker who bought Hyde Park Bank & Trust and five other banks and eventually sold the group to NBD Bancorp, becoming chairman of NBD’s Illinois operation.

Ken Hooten, a partner at Concentric Equity Partners, says his firm was “delighted to join Pritzker Private Capital and Duchossois Capital Management, two like-minded family investment firms, to support a strong, growth-focused business like EDP.”

Concentric, which primarily focuses on early-stage investing, invested in EDP early on and introduced PPC and Duchossois to EDP as the company grew and needed more capital.
“There are lots of family offices that are very smart and have lots of money, but the question comes down to who do you want to do life with?” says Hooten. “It would have been very easy for us to exit EDP and put a win on the board, but PPC invests on the larger end of the buyout spectrum, and the three families fit together well, and we decided it made sense to team up.”

Raising and Investing in SPACs
Special purpose acquisition companies (SPACs) are certainly the darlings of the investment world today. SPACs have raised more than $38 billion from January through mid-March, with an average of $296 million for 128 SPAC IPOs, according to SPACInsider. That’s nearly half the money raised by SPACs in 2020. Last year, SPACs brought in a record $83 billion with an average of nearly $335 million for 248 listings.

Family offices and independent sponsors see SPACs as a way to generate returns and compete, particularly given that most private equity firms are not able to invest in SPACs, due to their agreements with limited partners.

Liz Griggs, founder of the Grantchester Group, an independent sponsor that focuses on electrification, energy and healthcare, is exploring all kinds of different strategies today, including investing in SPACs. Griggs and her partners were operators prior to launching Grantchester in 2018. Griggs founded One Call Medical, which has become the largest Workers’ Compensation ancillary care company in the U.S., with more than $1.5 billion in revenue. Armed with lots of private equity contacts and a large network, Griggs decided to become an independent sponsor.

“The SPAC market is like the dot-com era of the 1990s,” Griggs says. “It’s so hot right now. You have to be careful, but it’s a great place to generate returns. I invested in a SPAC that is electrifying cars and trucks, kind of like Tesla for commercial vehicles. It’s been a great deal, and I am already working on another SPAC.”

Liz Griggs

Other independent sponsors are doing the same. Associated Capital, the parent of Gabelli Principal Strategies, a fundless private equity vehicle, recently launched the $175 million initial public offering of its SPAC, PMV Consumer Acquisition Corp. (NYSE: PMVC) in the latter half of 2020. PMVC was created to pursue consumer companies that have an enterprise valuation in the range of $200 million to $3.5 billion.

Family offices are also turning to SPACS as a way to generate returns. The family office of Egyptian billionaire Nassef Sawiris, NNS Group, launched a $600 million SPAC called Avanti Acquisition Corp. at the end of 2020.

Additionally, the family office of Sam Zell, Equity Group Investments, also filed with the SEC at the end of the year to raise its own SPAC, Equity Distribution Acquisition Corp. Zell, who made his money through real estate holdings, is planning to target “opportunities to apply technological advancement within the industrial industry,” according to the filing papers.

Raising Captive Funds
Although contradictory to the name, independent sponsors are increasingly excited about the idea of raising captive funds, as finding capital quickly in a competitive environment can be difficult.

Rotunda Capital Partners, based in Bethesda, Maryland, and Evanston, Illinois, was an independent sponsor for approximately a decade. In December, the firm held a final close on its first institutional private equity fund, Rotunda Capital Partners Fund II, which was oversubscribed with $195 million in commitments.

“The market has been very dynamic in the past few years and continues to be so,” says Dan Lipson, a managing partner with Rotunda. “We are seeing a lot of great deals in the market, and with an institutional private equity fund, it allows us to be in the best position to move quickly to close on investments in great companies and great management teams we want to partner with.”

Dan Lipson

Rotunda is not alone. Other independent sponsors are also looking to raise committed funds. Sidereal Capital Group of Summit, N.J., is looking to raise its first committed fund. Jabbar Abdi, a managing partner with the firm, explains the balancing act. There have been advantages of being independent, such as flexibility on investment horizons and types of deals he looks at, but when the firm finds an opportunity, it wants to be able to move quickly, which can sometimes be a struggle when he has to actively find investors to solidify the deal before he can commit.

“When we find an opportunity at a good purchase price, a committed fund will allow us to compete better down the road and be more nimble,” says Abdi.

Grantchester’s Griggs is also considering raising a committed fund for the same reasons. “I just started thinking about raising a fund,” she says. “Grantchester has a great following with great investors, but I am working on an amazing deal right now, and I started reaching out to my investors, and they are in the middle of their own deals, and it slows me down from getting a commitment. It’s a competitive market. If I had my own fund, I would just take the deal down, which makes me think I will just raise a fund. Timing is everything. I like not having the paperwork, and I like the flexibility of being independent, but having to move quickly as an independent can be a constraint.”

Family offices also see the benefit of raising captive funds. Larger family offices such as PPC have led the way. PPC closed on $1.8 billion for a committed fund a little over a year ago to invest in North American mid-market companies, focusing on manufacturing, services and healthcare. The Pritzkers are the largest investors in the pool, and the firm retains discretion over the investments. This is PPC’s first vehicle to include outside capital.

Stone Canyon Industries Holdings is backed by former junk bond legend Michael Milken. The firm was formed in 2014 and targets companies valued from $100 million to $2 billion. In 2020, the firm raised a $1.8 billion captive fund. Limited partners, including Ontario Teachers’ Pension Plan, Public Sector Pension Investment Board, Mubadala Investment Company, Eldridge Industries and the Olayan Group, invested in the fund. The fund has a long-term buy, build and hold focus. It is a first-time fund for the firm.

Bob Levine, the co-founder of buyout firm Milestone Partners, founded L2 Capital in 2011 to invest his personal capital in private transactions. L2. which invests in business services, consumer products and manufacturing companies, is contemplating raising capital to invest alongside its funds.

“We are heading in that direction,” Levine says. “A committed fund will help us maximize our ability to take advantage of opportunities that come our way. We have a history of working with founder sellers. We partner with owners and help them navigate through the next set of decisions. That has worked very well for us. Exploring the idea of a committed funds makes sense and will allow us to grow.”

A captive fund gives family offices more dry powder, but also has other benefits. One factor that plays a role is the narrowing spread between ordinary income and capital gains tax rates. Capital gains has been taxed at a rate in the low 20-percent range while ordinary income is taxed at 40 percent. “That is all changing, and meaningful tax advantages will be diminished,” Levine says.

Aligning More Closely With Private Equity Firms
Some independent sponsors are looking to align themselves more closely with committed funds rather than raise their own funds—another way to perhaps be sure that capital will be available.

Richard Baum, managing partner with Consumer Growth Partners, an independent sponsor that invests in the consumer space, says that aligning with private equity firms is a prudent move.

Richard Baum

“We were actually working with so many private equity firms to make sure we had capital providers that we have now tried to reduce the number of relationships that we focus on and bring deals to,” Baum says. “There are a number of private equity firms who bill themselves as independent-sponsor-friendly and source all their deals from the independent sponsor community. The independent sponsor model is now an accepted part of the dealmaking process.”

Merit Capital Partners, Trivest and Huron Capital Partners all tout themselves as friendly toward working with independent sponsors. Given that independent sponsors are typically looking at smaller transactions, they often see companies that aren’t on private equity firms’ radar but have potential as add-on acquisitions.

Baum added that there are now a lot of private equity firms calling on him rather, than the other way around. “We are a good source of dealflow for firms and can work very well together under the right circumstances. Working with specific firms can be helpful, and it is becoming increasingly normal.”

Brett Hickey, founder of private equity firm Star Mountain Capital, confirms that working with independent sponsors has been a great resource for his firm and something that he expects to continue. “There is a wide spectrum of independent sponsors, some with sector experience and some just want to source a deal,” says Hickey. “We evaluate them and determine which make sense to work with, allowing for flexibility in coming up with the right structure and a tailored solution for each. Sometimes it’s more about flexible capital solutions; other times it’s more about accessing our expertise.”

In 2019, an experienced independent sponsor with strong operating experience brought Star Mountain, a ship repair staffing business that the New York-based firm ultimately invested in. The founder wanted strategic capital partners to help him acquire some competitors to build a stronger, larger consolidated business. He knew the independent sponsor who introduced Star Mountain to the company.

“We helped the independent sponsor evaluate the company, acquire it and build out a management team and a board of directors,” Hickey explains. “It has been a great investment. Early in the pandemic it dipped a little, but a lot of the work is done outside, and social distancing isn’t a problem. It’s a good situation for all.”