#318: Why Family Offices Buy Private Companies with Paul Moffatt

Ep.#4 [THEME FIVE]

Many entrepreneurs want to diversify their wealth out of their largest asset–their business. But what if you had so much wealth that you needed to diversify out of the public markets into privately held companies?

Today on the podcast, we get a special look into what it’s like to view–and invest in–privately held companies from the perspective of a family office.

A family office is a privately held company that handles investment management and wealth management for a wealthy family, generally one with over $100 million in investable assets, with the goal being to effectively grow and transfer wealth across generations. The company's financial capital is the family's own wealth. (Wikipedia)

In this episode, Paul Moffatt is on the show and shares with us how the family office he works for, Encore One, is structured, why they buy privately held companies, their approach, and what they do with them over time.

Encore One is over twenty years old and focuses on preserving the long-term legacy of their portfolio companies versus buying, gutting, and selling. In this episode, you will learn how Encore One reinvests the cash from their portfolio companies, how they make money, and why they have found their success in long-term holds (ten years and older). One thing Paul really leans into is how important it is to be aligned with their seller and management team on the future direction of the business.

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What You Will Learn

The structure of Encore One and how they run independently under the same trust.
Why Paul and his company don’t take out dividends from their portfolio companies.
Encore One’s mindset with their portfolio company and why it’s very long-term hold based.
Why Paul just focuses on acquiring one or two companies a year versus aggressive growth.
What happens when a private equity firm holds on to a company long-term versus buying and selling.
Paul’s deal structure and who it best suits.
How Encore One manages engagement with their portfolio companies so people are validated that they are professionally growing.
How Encore One makes money from all of its entities underneath one big trust.

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Bio:

Paul has spent his entire career serving the middle market. Prior to joining Encore One in 2017, Paul enjoyed a successful 16-year career in commercial banking, most recently as a vice president in the Twin Cities Commercial Banking Group at U.S. Bank. Prior to joining U.S. Bank in the Twin Cities, Paul held similar roles at LaSalle Bank, Cole Taylor Bank, and MB Financial in Chicago.

Paul has helped advise and fund over one hundred companies in various stages of development with a wide range of transactions and special situations. Paul graduated from Marquette University with a BS in Finance and minor in Political Science. He received his MBA from the Kellstadt School of Business at DePaul University. Paul lives with his wife and two children in Saint Paul, Minnesota.

Interview Quotes:

11:34 - “So we have a pretty clear agenda and purpose once we buy a business and that’s to support their long term growth. And then I get asked the question, ‘What do you get out of it?’ like, how do you get your return? And it’s really about capital appreciation and diversification.” - Paul Moffatt

17:29 - “You can think about it different ways. Maybe a return on equity versus an IRR which would be a traditional private equity benchmark. You can model anything. That doesn’t have to be realized IRR” - Paul Moffatt

20:45 - “I’m not a family member, I’m an employee and manager, I guess. But that’s the mindset that we have when we’re making and creating relationships, creating trust with businessowners, and making investment decisions that are good for the business.” - Paul Moffatt

21:42 - “[The traditional private equity market is] big, it’s profitable, and it exists for a reason. There are potentially terrific outcomes for businessowners.” - Paul Moffatt

36:13 - “Every situation is unique. Our approach, and it’s a reflection of our long term ownership, is that we can be flexible and we realize that there are multiple stakeholders and not just shareholders, that might have an interest in this transaction and it being successful.” - Paul Moffatt

44:57 - “We’re really thinking about creating value, which is not really about cutting costs or consolidating at a corporate level. It’s about–hopefully–creating an exciting growth opportunity for these people.” - Paul Moffatt