Family offices look for their “Buffett move” amid market chaos

While most LPs are in "wait and see" mode, some family offices are seeing a unique opportunity to help strong companies struggling in the short term.

While the economic crisis brought on by the coronavirus pandemic is leading most family offices to step back and assess the extent of the public market damage and needs of their own portfolios, as Buyouts reported, some families are seeing opportunity amid the chaos.

“I think situations like this are perfectly suited for family capital,” said Andy Cantwell, CEO and managing partner of Carlson Private Capital Partners, which invests on behalf of the Minnesota-based Carlson family. “There are a lot of great companies that are going through some short-term stress and strain.”

Carlson focuses on family and founder-owned companies in sectors including consumer products, industrial businesses and services. The firm, made up of former private equity professionals, is looking for opportunities to take stakes in companies already on their radar. They are flexible about how they will structure their investments, but said it would usually take the form of a combination of preferred and common equity.

Many companies facing immediate capital issues, but not looking to sell in an environment where valuations are so uncertain, may be interested in bringing in an experienced partner who can help them weather the storm and grow after that. Cantwell said Carlson’s “patient capital” might be an attractive option.

“It’s been selective…[companies] that were in our pipeline, that would not be businesses that were running a sale process, per se, but were just kind of thinking through the transition of the business and trying to get some liquidity,” Cantwell said. “So, it’s kind of working through that, while also trying to make sure we can give them a cushion to work through some of the things that are going on in the downturn.”

“Buffett move”

One of the models for this kind of targeted investment during a financial crisis is Warren Buffett’s investment in Goldman Sachs during the height of the 2008 global financial crisis. Buffett made a similar investment in Bank of America and more recently in Occidental Petroleum.

Buffett’s investments were through public stock. But private investors may have similar opportunities to pick up stakes in companies with a good long-term outlook, especially if public sources of credit dry up, finding their own version of what one source dubbed the “Buffett move.”

“There’s a lot of founders that recognize that bank debt is going to have some limitations, and potentially the overall public credit markets are going to be locked up,” said Christopher Zook, chairman and chief investment officer of Houston-based multi-family office CAZ Investments. “So, if really smart, sophisticated, large family offices that understand an industry can become a preferred equity provider to those really, really good private companies, it could be a win-win for both parties.”

CAZ Investments recently invested in OrbiMed Advisors‘ third royalty and credit opportunities fund, which Zook told Buyouts closed in January. OrbiMed focuses on healthcare investments, and this fund will focus on senior secured lending positions with economic sharing of the company upside.

“They’ve got a whole bunch of dry powder to go and put to work at what we think are very favorable prices,” he said.

That dynamic will bleed into all market sectors.

“What happens at times like this is the tourists get all run out of the area, and you end up with just the residents,” Zook said. “If somebody is a resident, they know the market, who’s good, who’s bad, who’s strong, and you don’t end up with just the tourist throwing silly money at opportunities.”

Opportunities abound

These sorts of moves by family offices make sense if they have maintained solid capital reserves in preparation for a market dislocation.

According to the UBS/Campden Wealth 2019 Global Family Office Report, 55 percent of family offices globally had expected a global recession by 2020.

“In preparation for this, nearly half of family offices realigned their investment strategies to mitigate risk, increased their cash reserves, and/or prepared to capitalize on opportunistic events,” Rebecca Gooch, Campden’s director of research, told Buyouts in an email.

“I think it is a classic long-term, value-oriented play which kind of typifies family investing,” said Mark Bell, who runs family office services and private capital for wealth manager Balentine.

When Carlson Private Capital Partners launched in 2018, Cantwell and his staff met with family members and told them the next economic downturn would be the ideal time to make new investments. With only three portfolio companies so far, Carlson has plenty of capital as well as family buy-in for the strategy. Cantwell told Buyouts he is already hearing from companies in their network.

“We’re open for business,” he said.

Action Item: read the 2019 UBS/Campden Wealth Family Office Report here.