Patient Capital Becoming Mainstream

Strategic acquirers and traditional private equity firms still very much dominate the M&A landscape and that is not expected to change anytime soon. However, over the past several years there has been an increase in other types of participants coming into the market. These participants are investing in companies, but aren’t typical private equity firms. They are namely high-net-worth individuals, family offices, multi-family offices, pension funds and one-off investors. These players are popping up so frequently these days that the market has labeled them as their own category of buyer and refers to them as patient capital buyers.

Patient capital buyers don’t have a goal of owning the business for a typical three- to five-year ownership cycle like a traditional private equity group. They plan for long-term investments, sometimes looking to own businesses for the foreseeable future.

Patient capital buyers are indeed becoming a more accepted part of the M&A fabric, but because these groups aren’t necessarily beholden to outside investors or limited partners and are indeed private investors, it’s difficult to track how many of these investors are active in the market and the number of assets they have acquired. “This group has really grown over the past several years,” says Jason Bass, a managing director at Harris Williams & Co. “When we build a buyer’s list for a process we almost always create a category for the patient capital buyers today. This group is competitive and cannot be overlooked.”

Being a patient capital investor has certain benefits. First, they often have more timing and structure flexibility. They frequently don’t intend to sell businesses they own, which gives them a much longer time horizon to build a business—a positive, especially when a founder or management team is planning to stay with the company in some capacity.  They are also commonly willing to take minority stake positions in companies without the worry of an immediate exit strategy. “It allows for methodical value creation with less urgency, which can be viewed a positive,” says Bass. Also, there is less emphasis on leverage and no distraction that comes with fundraising obligations.

Patient capital groups have become more prevalent as a result of the public markets’ strong growth, since they have been able to grow their assets substantially over the past eight years. Many of these groups have accumulated wealth through a single business or industry and are seeking ways to diversify. Additionally, patient capital groups are hiring professionals who have previously worked in private equity or investment banking, giving patient capital buyers the confidence to participate in competitive sale processes in a manner that is competitive with traditional private equity groups.

In addition to hiring professionals to help find and execute acquisitions, many patient capital buyers have knowledge in and around industries where they were able to build successful careers and amass wealth, which can give them an advantage when looking for deal flow. “Many times, these investors don’t want to invest in the industries where they made their money because they want to diversify, but they will invest in adjacent markets where they have contacts and knowledge,” says Bass. 

That said, certain sectors lend themselves better to patient capital than others because of the nature of the business. For example, high-growth sectors or disruptive markets may be better suited for investments from private equity or strategic buyers than patient capital because they frequently require additional investment and guidance.

It’s interesting to note that while patient capital can be a direct competitor of private equity, that’s not always the case. Many times private equity firms and patient capital providers will partner together. “Patient capital providers may take a minority position and they can be helpful to a private equity firm because they may have networks or knowledge that can help a private equity firm create positive change at a portfolio company,” says Bass. “Forming a partnership is not uncommon.”

Patient capital buyers like Berwind Private Equity, JM Family Enterprises, The Pritzker Group, Stone Canyon Industries, BDT Capital Partners, MSD Capital, and Dunes Point Capital are regularly on Harris Williams & Co.’s radar these days, and the firm has experienced an overwhelming increase in the participation of patient capital groups in their processes since 2013. For example, since 2013 the number of patient capital groups to take books on Harris Williams & Co.’s deals has increased approximately tenfold. 

In fact, in 2015, Harris Williams & Co. sold Marquette Transportation Company, a marine towing and transportation services company, to BDT Capital Partners. The Kentucky-based firm had been a portfolio company of KRG Capital. BDT keeps a low profile, as do many patient capital firms, but the firm has more than $12 billion in assets under management and more than 150 employees globally. The firm advises and invests on behalf of wealthy families including the Buffets, the Waltons and the Webers. 

Harris Williams & Co. has sold multiple companies to Dunes Point Capital, a family office, including Harvey Industries and Power Distribution Inc. Harvey is a manufacturer and distributor of windows and exterior building products. Prior to its sale to Dunes Point, Harvey was a family-owned business. Dunes Point is a family office led by Tim White, a former investment professional at GSO Capital Partners and The Blackstone Group. Several members of Dunes Point’s investment team have experience from investment banks or more traditional private equity firms.

Going forward as the private equity industry continues to mature and professionalize, patient capital providers are expected to become a larger part of the market. “I expect to see more of this type of investor. As with any market, the private equity industry has matured and it’s not a surprise to see other types of investors looking for ways to enter the market,” says Bass. “It’s a sign of the industry’s growth.”

Published May 2018