Todd Martin and I recently learned about a success story for a family office participating in a fully marketed industrial company. Our friends at Lincoln International were acting as the exclusive financial advisor for an industrial company that participates in the filtration industry. They had significant interest from Private Equity firms and were surprised that a family office demonstrated industry expertise, keen interest in the dataroom and an aggressive bid to obtain a management meeting.
Family Bid Was Distinctive
The family office distinguished itself with three unique features:
1. It did not require a financing contingency
2. It demonstrated sophistication about a seasonal earnings blip
3. It was attractive to management as it promised long-term ownership
In the final bidding process, the family office was significantly behind the leading PE firm, but the family patriarch was eventually convinced of his family’s need to pay up. At the end, the family prevailed as the high bidder.
Distinction Came With Complications
What was most interesting to us was the subsequent structure to accommodate management with a long-term incentive package that could rival the typical PE structure. The family could not mimic the “equity upside” (combination of outright stock ownership and exit oriented stock options or profits interests) of the rival bidders. As Lincoln International put it, “It became pretty complicated to arrange an aligning and motivating incentive compensation structure because the family intended to hold the business for the foreseeable future.” Ultimately, a structure was crafted that management could accept.
Private Equity Model Aligns With Management
The irony is that what made this family compelling to management was its long term perspective, but the absence of a real exit eliminated tax advantages that can normally accrue to a management team through profits interests and outright stock ownership.
As families step up to compete with PE firms with unique and compelling bid characteristics, they will have to evolve competitive and aligning compensation structures to win the deal. Intermediaries do not want closing risk, especially in this robust “sellers’ market.” That risk is real where compensation plans are not competitive with PE or publicly held strategic acquirers.
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