Five Questions with Patrick McCloskey, founder of Aeterna Capital Partners, a family office-backed investment firm

  • FO competition with PE firms: an overrated story
  • Focus: financial services, consumer, media and business services
  • Alignment/misalignment “natural screening mechanism”

Patrick McCloskey is founder and managing partner of Aeterna Capital Partners and represents the interests of a European multigenerational family. The firm, set up in the U.S. in 2013, focuses on lower-middle-market companies and structured special situations. Previously, McCloskey co-managed Lazard’s private-placement group from New York and London and held similar roles at Lehman Brothers and Donaldson Lufkin & Jenrette/Credit Suisse. 

1. Are family offices competing with PE firms for deals?

Most private equity firms we know are very professional and highly competent. People like to talk about the family-office community infringing on private equity and usurping the best deal flow. We think this makes for a good story but is a bit overrated. Yes – there are times when we compete with a PE firm, and if it’s a competitive dynamic, we will do our best to distinguish ourselves from the competition. But more often than not, we compete against an owner’s change of direction or a lender willing to extend credit on terms we can’t and don’t want to compete with.

2. What sectors do you target in the U.S.?

We are long-term bullish on the U.S. and aim to create a portfolio diversified across the balance sheet and across different industry groups including financial services, consumer, media and business services. We have our eye on a few other sectors where we would like to gain exposure. Targeting certain industry sectors is one thing but finding the right people to partner with is another.

Some of our portfolio companies are Kitchen Art, [a provider of] home cabinetry for large-scale construction projects in southeast Florida; Nautilus Marine, an offshore-oil-and-gas-services company; Lending Point, an Atlanta-based direct consumer lender; and Florida-based Legacy Cos, [which] manufactures and markets food-service equipment, appliances and tools.

3. How do you narrow your selection from the deal flow?

We see several hundred deals per year but seriously review only a small percentage. We like to think about quality of deal flow rather than quantity and disqualify a high proportion of opportunities right out of the gate because they are too early stage for us.

We like cash flow and businesses with a history of living through different business cycles. The source of the opportunity is important to us and certain sources tend to get our attention.

We are not really interested in broad auctions. If a business is being sold, we also like to understand the motivation of the seller and how interests can be aligned going forward. This can take some time to understand and appreciate but we think time well spent. Alignment/lack of alignment tends to be a natural screening mechanism.

4. What makes you an investment partner of choice?

Many family-office groups will tell you that their lack of a formal fund structure allows for a more patient and flexible approach to an investment. We have found this to be generally true. We start with gaining an understanding of the need being addressed (e.g., liquidity for a co-owner, growth capital, refinancing of existing debt, etc.) and try to solve for that. We don’t always find a solution but because we are able to invest across the balance sheet and not tied to a single product, we are hopefully able to provide the owner with different ideas to consider — perhaps one or two he/she hasn’t contemplated.

We are patient and long-term-oriented and very much value relationships. We are not in a rush and it is important for us to get to know our partners. We appreciate the challenges of direct investing and know that forecasts often don’t evolve as planned. Having trust and confidence in your partners — both management and co-investors — is critical.

5. How have you witnessed the family-office environment change in the last few years?

Family-office groups are proliferating and becoming more organized; there is no doubt about it. The toe-in-the-water approach to investing in alternative assets often meant participating as a passive LP in a third-party fund. That is still the case but a variety of factors have led groups to invest, or at least explore investing, directly into real estate, private equity or private lending. The ability to better control liquidity, fees and the types of businesses owned are a few factors driving this trend.

As a result, family offices are professionalizing teams and playing an increasing role in the private capital markets. There is also a growing spirit of collaboration and cooperation among family-office groups and we are seeing that first hand. Many groups like ourselves tend to be thinly staffed, so we rely on other like-minded investors to share resources.

We are part of a few affinity groups and go out of our way to team up with others. This leads to a host of new and interesting relationships which are constructive professionally and personally.