The COVID-19 pandemic and resulting economic shutdowns upended business operations for family offices, causing many to pause and reassess their portfolios. But family office capital, which is often patient capital, is known for its resiliency during times of economic uncertainty.
PwC spoke with 18 family office clients to better understand how they are thinking about their direct investment portfolios in this challenging economic climate. Here’s what we heard.
Seizing opportunities to invest in new platform companies and add-on acquisitions for existing portfolio companies seems to be the priority for family offices, as most we spoke to are focusing on strategic acquisitions rather than exit strategies or divestitures. Many clients told us they are expanding into new sectors, industries or markets in the next few months to take advantage of sectors with high recovery trajectories.
Nearly all (94%) of the family offices contacted said they have plans for strategic acquisitions within the next year; 62% of those want to make an acquisition within six months. Just over one-third plan to divest within the next 12 months.
The majority of clients we heard from said they perform comprehensive due diligence on acquisition targets to identify, evaluate and understand potential risks, but just under one-half of the clients we polled believe their due diligence process on completed transactions met expectations. Due diligence should be comprehensive, including not only financial, operational, human resource and legal diligence, but also IT and cyber diligence.
Three-quarters said they perform comprehensive due diligence on targets, but the majority said due diligence did not meet their expectations.
Many respondents do not regularly assess portfolio assets by category to evaluate holding periods and optimization strategies (e.g., grow, maintain, fix, exit). Nearly two-thirds of family offices said they have a formalized methodology for creating value through acquisitions, but the question is whether their investments actually deliver value. When looking at public companies, 72% said they, too, have such a methodology, though 53% of acquisitions underperformed their industry peers on average, according to PwC’s M&A report, Creating value beyond the deal.
Only 29% of clients we spoke to said they regularly assess the portfolio and align assets into strategic categories — such as grow, maintain, fix, exit — which is a leading industry practice.
COVID-19 disrupted the normal functions of many family offices as they shifted to remote work and dealt with the economic downturn the pandemic caused. In these times of economic uncertainty, family offices need to be able to quickly review and adjust their investment models. Forty-one percent of respondents said their cash flow forecasts include sensitivity analysis and are reassessed for accuracy, which can be helpful in the COVID-19 environment.
However, most family offices we spoke to do not frequently review liquidity and cash flow levers — most review monthly or even less frequently. This may be due to a lack of technology capabilities, as often the required information may not be readily available on a more frequent basis due to data complexities and required manual processes. More regular and constant monitoring is one way to be more nimble in times of uncertainty, and automation and advanced analytics can help make liquidity management easier and more sophisticated.
Just over half of the family offices we spoke to are evaluating debt covenants, headroom in existing credit facilities and new sources of capital, but less than one-quarter are considering managed exits or accelerated disposals of underperforming assets to help boost liquidity.
Companies will likely reassess the effective use of cash, which may or may not include M&A. Cash-rich companies will be able to seize opportunities to improve and consolidate positions and invest in differentiated technology and critical infrastructure.
Supply chain optimization will remain a key driver as trade tensions continue and international cooperation declines — causing complexity in cross-border trade and investment, but potentially presenting more local deal opportunities. Companies interested in growing market share beyond their home country should consider reevaluating their business models and plans for integrating assets going forward.
The pandemic will continue to impact the way we work, live and consume, so innovation and technology solutions may continue to be highly sought after. Cross-sector companies that have these key capabilities can be attractive targets or industry acquirees. Dealmakers willing to consider how the health crisis could change the direction of certain industries may be better positioned to make deals with lasting impacts.
Successful dealmakers should adapt to this new, evolving environment in how they assess and evaluate M&A opportunities — as well as how to execute them. Agility and being open to new approaches for getting deals done can be critical for success in this changed environment. Technology will also be essential, as travel restrictions and increasing work-from-home trends have prohibited traditional site visits, in-person management presentations and due diligence, prompting dealmakers to hold virtual meetings, conduct virtual site visits and do other initial deal interactions remotely.
Family offices should do a health check on their due diligence procedures to ensure they are properly identifying the appropriate risks and regularly evaluating their portfolio based on defined holding strategies. Additionally, it is essential to perform comprehensive forecast and cash flow modeling to help prepare for any possible disruption and to take advantage of strategic opportunities should they arise. In an uncertain economic environment, constant monitoring and reassessing is key to being nimble with investment management.
In today's environment, value creation is more important than ever when executing a transaction. While an opportunistic investment may present itself at a good price, it should be strategic and aligned to the family office’s long-term objectives.