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When structuring a deal, family offices invest for long-term value
Tech startups, emerging technology, media and telecommunications (TMT) and biotechnology have become the preferred investments of US family offices looking to grow wealth. In a shift away from real estate amid a rising-rate environment, ultra high net worth US families flush with capital took the long view, investing in growth areas.
According to PwC’s 2023 Global Family Office Deals study, family offices’ M&A activity also included increased investment in startups, foreign and cross-border transactions and club deals. But investors may be surprised at the level of vigilance that comes next. Accompanying the opportunities for investment returns are the inherent tech, tax and regulatory complexities.
Family offices earn a gold star for making the right moves to enable growth and viability. As we saw in PwC's Global Family Business Survey, family wealth is putting the same entrepreneurial savvy and strategy into their M&A activities, adapting to a changing world while positioning themselves for the future.
Family offices are selective on deals
The study showed small and medium-sized deals continue to pick up in the US. While 85% of family offices that invested in deals during 2021 were in small and medium-sized transactions, this figure had risen to 90% of family office deals transactions by 2023. Family offices typically weigh the long-term impact of investments on generational wealth. And with adequate dry powder, they can afford to be selective, using equity to focus solidly on areas that can support and grow legacy wealth.
Although a preference to remain onshore continues, an overall trend of foreign transactions shows that US family offices continue to seek value further afield in recent years. Outbound foreign deals by US family offices increased from 6% in 2014 to 16% in 2023.
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An entrepreneurial mindset leads to investment in growth areas
Many family offices were founded by individuals who saw opportunities where others did not. It’s not surprising then, that there's been a shift from real estate to small and medium-cap growth areas in M&A.
While alternatives like real estate have long provided family offices an investment hedge, the recent global shift toward technology could not be overlooked. Although burgeoning investor appetite for the acquisition of high-quality assets lies ahead — particularly in emerging property subsectors such as wellness, digital infrastructure, e-commerce, affordable housing and other residential-oriented themes — opportunistic family offices have put available capital to work in growth areas.
A US preference for deals in software-as-a-service (SaaS) startups, artificial intelligence (AI), machine learning (ML) and TMT have replaced investments in multifamily real estate. Coming in a close second was investment in the biotechnology sector. Many of these investments include digital-native companies with emerging technology that will have an immediate impact on upping your tech game for growth.
Shifting priorities: Start-up investments take center stage for US family offices
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Club deals still predominate
As the deals cycle ebbs and flows, family offices in the US have relied on co-investments or club deals for most of their M&A activities. Although the share of these deals has declined slightly from 71% in 2021 to 65% in 2023, they remain a significant majority. It’s important to remember conducting individual due diligence is critical, no matter who your potential partner is. Making sure the deal fits the family’s long-term objectives in an increasingly complex economic, digital and regulatory environment means family offices may need to seek a specialist’s advice to accurately value the potential and risks of their investments.
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Going global on deals means going global on governance and compliance
Family offices need to be aware of the tax and regulatory implications of investment locations, especially if they involve foreign transactions or cross-border deals. Keep a careful eye on cybersecurity for legacy companies. Here are the three big regulatory areas to consider:
- Pillar Two tax. If your M&A activity includes new foreign businesses, your office may be subject to Pillar Two considerations under local laws. The increase in the proportion of foreign transactions for family offices based in the US — including a transition from real estate to start-ups since 2020 — will come with geographical regulatory considerations. With more than 3,000 US family offices widening their investment nets, Pillar Two implications and complexities are likely.
- ESG and EU’s Corporate Sustainability Reporting Directive (CSRD). Looking at the overall trend, foreign transactions are increasing for family offices based in the US, reaching a record high in 2023. That means those companies may be subject to stringent CSRD disclosure requirements around sustainability, including financial considerations of double materiality.
- Emerging tech and cybersecurity. According to our 2024 Digital Trust Insights Survey, 44% of global CEOs report using an integrated suite of cyber tech solutions, and 39% plan to move to one within the next two years. Staying vigilant and compliant regarding cybersecurity can be more difficult if your newly acquired, tech-forward company doesn't have robust cybersecurity embedded.
US-based family offices prefer a home market focus — although proportions of foreign transactions increasing
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Think about
The deals outlook is a continually changing landscape of opportunities and layered considerations. When it comes to M&A, family offices should be vigilant, agile and informed to make sound decisions, invest for long-term objectives and continue growing generational wealth.
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