Wealthy families are winning deals away from private equity

Michael Gottdenker glimpsed the future over a bowl of pasta earlier this year, and he liked what he saw.
 
The CEO of Hargray Communications, a telecom company servicing South Carolina and Georgia, was having lunch with billionaire Jim Davis, founder of family office Redwood Capital Investments, and his adviser David Watson. Over the previous week, the two had taken a liking to Gottdenker’s company. “I didn’t think that family offices would make direct investments,” Gottdenker says reflectively, “or if they did, I thought that it would be a lot of work to get their interest.” And yet, between bites of Italian food at a restaurant in Columbia, he came to realise he could be speaking with the new owner of Hargray, a business that he had helped turn into a half-a-billion-dollar company. He shared the story of an employee who had worked her way up the business — all the way from the company’s call centre to management.

 
Gottdenker’s story, which highlighted the potential he saw in employees, seemed to resonate with Davis, who’d made his fortune as the co-founder of a staffing and recruitment company. And so, not long after the coffees disappeared, Davis told his would-be partners — two other family offices vying to buy Hargray — that he wanted in on their deal to acquire the company. There were other potential suitors waiting in the wings. In order to succeed, Davis and his partners would need to beat private equity, not to mention other strategic acquirers, at their own game.
 

Families were once regarded as slow-moving and inexperienced investors, but that’s all changed in the past few years. Looking beyond traditional investments in stocks, bonds, or even alternatives such as hedge funds, many family offices—vehicles that manage the investments and affairs of the wealthy — have pursued direct investments in companies and real estate. The most sophisticated ones are turning into investment giants, leveraging their patient capital and regularly pitting their checkbooks against private equity firms. They’re also going so far as to hire away top talent, scouring the country to beat other players to attractive targets and competing with them for big-ticket deals in companies worth hundreds of millions, or even billions, of dollars. And perhaps most surprising of all, they’re winning. That’s because one of the biggest advantages families can have over traditional private equity is speed.

 
This was particularly effective in the case of Hargray, whose sale to Davis and his partners became official on March 7. Its private equity owners, Quadrangle Group LLC, had periodically been seeking to sell the company as it wound down its Quadrangle Capital Partners II fund. In the fall of 2016, several attractive offers began to emerge. One came from a member of the company’s board: Kevin Wilcox, a managing director of Stephens Capital Partners, a single family office that oversees the wealth of businessman Warren A Stephens. They sought a partner and soon caught the eye of The Pritzker Organization, the Chicago-based investment firm for Thomas Pritzker. The two firms quickly started due diligence. After two months they had the outline of a deal, but the price they’d have to pay was steep. They needed to recruit a third partner, and with other buyers looking at the company, they had to move fast. That’s where Davis came in.

 
Davis’s Redwood Capital Investments reveals little on its sparse website, except that it can complete deals quickly. In just a few days, Davis’s firm was able to comb through diligence completed by the other families, conduct some of its own, and catch up with its new partners. Eight days later—less than two weeks after Redwood first heard about the deal—Hargray announced that the consortium of families, led by the Pritzker group, would buy the company. The terms weren’t disclosed, but Hargray took out a $450 million term loan to fund the buyout, according to a person familiar with the matter, suggesting the company was valued at least that high.

 
“There’s a network that’s growing of the big family offices who do these kinds of deals,” says Joseph Gleberman, managing director for The Pritzker Organization. “I was in the private equity business at Goldman for a long time, and it’s not dissimilar to what it was like 20 years ago, when you started to see Blackstone do a deal with KKR or Goldman do a deal with Warburg Pincus.”