Family Office Exec Shares Insights into Direct Deals, Co-Investments and Governance Structures

Kristen Oliveri, Head of Private Wealth Content with Markets Group, sits down with Tommy Mayes, Managing Director, Executive Advisor, SunGate Capital, a single-family private equity and investment office, to discuss everything from the direct deal landscape to family governance and family office regulation.


Q: How are family offices evaluating direct deals and co-investments in today’s landscape?

A: It’s been this long-held aspiration that families would figure this out in sort of a collective way and leverage off each other, but it’s never really evolved. Some of that is because of the way family offices are proprietary in nature, as so has my experience been with SunGate. Direct investing was the source of wealth, so evolving that has been the principal’s aspiration to continue down that path. We had several realizations back in 2019 that generated a lot of capital, so we began to put that capital to work. In doing so, we realized that the due diligence cycle and sourcing of deals required a lot of attention. We ultimately landed on using independent sponsors to create the leverage around diligence.

So generally, family offices are either struggling to figure this out or have been relegated to using funds and strategies. If you are going to go into this space, you must go into it in a very professional way and it’s expensive and requires a lot of resources and commitment by the family. Most families have not really gone down this path except for the upper 1% of families and the people who go into this space have a good team.

Q: What does your role entail with SunGate?

A: I come at this as a generalist on the team, but I can speak the governance and family dynamics language and also go pretty deep on the investment side. I try to be the bridge between the two.
I need to make sure the team is looking at things for the long-term mission, goals and objectives of the family but, at the same time, we are also looking at the structure of the enterprise and how we approach decision-making in an evolving way. I believe all family enterprise offices need to evolve as the family evolves.

Q: How do you evaluate a direct deal?

A: We buy EBITDA. We buy cash flow. It sounds straightforward, but we are not at all specific with regards to industry and we have been very fortunate, particularly last year. We bought either all or significant portions of four different businesses in four different industries and they were all cash-flowing, established businesses.

We look at all the things you would think are very important – obviously the company itself, the product or service it provides, the industry that it’s in and the core competency of the management team. What we do has been referred to as platform opportunities in the private equity space.

As a good example, we invested in a company alongside an independent sponsor in a company called Aqua Leisure carried in Walmart and Target. They had the ability to source manufacturing in the right geography and the right location at the right time. The idea was to take their core business which is very good and quite concentrated around their customers to Walmart and Amazon but take that platform and go look for other acquisitions to leverage off their supply chain management. We acquired around 47% of the company and we are a direct owner of that equity. We have a board seat, board rights and all the rights you may expect in our operating agreement.

Since then, we have acquired Airhead, which is a very well-known brand that was struggling with supply chain issues, as I understood it. We were able to make that acquisition, and see through what was a fairly high valuation, that we know we could add value to their operation and really continue to improve that business. We had the rights to maintain our equity level, so we increased our equity investment in Aqua Leisure to support the acquisition.

So that’s a platform for us – we’ve done the due diligence on the management team. We’ve done the due diligence on the sponsor. We do the diligence on the broader aspect of the business. We can just keep adding money to that investment as the opportunity presents itself.

Q: Are there any types of specific industries that you find yourself going back to over and over?

A: Our primary business was public, for-profit education, so we find ourselves looking at opportunities that are tangential to that. We haven’t pulled the trigger on any recently. We were close to one but we found some issues and backed away. The other thing that we have a pretty significant core competency on is in the medical space, particularly where you’ve got payments coming from insurance and Medicare. We sold what was then probably the fourth- or fifth-largest privately owned medical imaging company in the country in 2019. That was the source of some of the proceeds that we have been investing. That’s what’s really allowed us to ramp up our investing. We did make an investment in a podiatry rollup which was an acquisition of podiatry doctors.

Q: You’ve had lots of experience in direct investing so I’m sure you’ve learned a lot of hard lessons.

A: There are a couple of rules and the first one is obvious, but it gets to know and assess the situation fast. Determine whether it’s got the attributes you need to even make it remotely successful. Determine if it’s a fit for some of your broad and more important core philosophies, has a definable EBITDA, a nice growth trajectory and what we perceive to be a valuation that you can get your arms around versus one that’s got this fantastic valuation. That’s a primary filter for us in getting to know the deal fast.

I think families often get enamored – like car shopping. Once the salesman knows that you’re in love with the car, you’re in trouble.

You need a balance, have multiple voices and constructive conflict on the investment committee – all of those things tie into that one concept. The third thing I would recommend we’ve done well is to seek our research sources, consultants, advisors, due diligence partners and those beyond the independent sponsor that can come with specific industry experience.

We’ve been looking at a pet food chewables company and we found a consultant that helped us with the due diligence. We’re also looking at an organic dairy farm in Texas and we found a farmer who’s willing to dive in and not only invest alongside of us, but maybe even run it if we proceed with the investment.

Q: Once you’ve made an investment, what’s your experience been like working with companies and what does your involvement look like?

A: We have a variety of scenarios and a lot of it has to do with age and stage of the company. Depending on our level of capital, we’re looking at one or two board seats. We are very active in terms of communicating with the sponsor and the management team to the extent that we can add value. I think that’s where our principal is most gifted in getting in and rolling up sleeves and getting with the management team to really help solve problems and pursue opportunities.

We also have companies that we’ve founded so those may be more of an accurate example where we own a majority stake in a specialty life insurance carrier. It’s a private placement life insurance company called Investors Preferred. We’re a big believer in the structure from a wealth planning perspective and because of my background I got involved in that early on when I came along. Then we decided to really lean into the company and grow it more rapidly and elaborate on the market opportunity. We stepped in as an operating member of the team and I exist as the president of the company right now. We have doubled the size of the company in the last couple of years. We’re seeing tons of opportunity to add staff.

Q: Where are the opportunities you’re seeing today in different sectors that you’re excited about?

A: I have been in a deep dive in the digital asset space and spending a lot of time [there]. I live in Winter Park, Florida, and there’s a significant presence in this area. When I say digital assets, what I’m really talking about is the venture side of crypto where a lot of these tokenized assets are essentially equity representation of the underlying protocol in technology. That’s been something I personally have been really excited about.

Q: What types of governance structures does SunGate have in place and tell me how that fits into the big picture?

A: Like a lot of family enterprises that are still led by the principal and the founder, it has been formative in rehearsing for the more formal future. I’ll give you an example. We started a regular rigorous discussion around our investments, and we call it our investment committee. It’s very informal from a voting standpoint but it’s how we build consensus around investment ideas on both the public and private markets.

On the family side, we have a family board meeting that is a monthly meeting with generation one (G1) and generation two (G2) and I facilitate a discussion that’s a combination of a discussion amongst the family around important family issues.  I also have someone come in and report on what else is going on in the enterprise both from a balance sheet perspective and a cash flow and profitability perspective and getting their thoughts and opinions about it.

At the same time, we’ve chartered a private trust company that will be inserted into the governance structure that will formalize some of the things we’ve been rehearsing for years. A trust company requires a board of directors. It requires an investment committee, a distribution committee and requires certain things from a regulatory standpoint that creates the rigor around a true family governance structure.

I still believe that while the private trust company can be intimidating and has a lot of structure to it, it’s still the state of the art in terms of providing a sustainable, long-term structure for living through multiple generations. If you’re an aspirational family enterprise, it’s still one of the best structures.

Q: Are there any types of specific regulations that you as a family office should pay special attention to today?

A: Family offices still enjoy being family offices with the exemption from the SEC registration, but I know several enterprises like hedge funds were sort of abusing that definition to a certain extent, causing it to continually getting scrutiny. So, we know it’s possible that you could come along and find much stricter parameters for that exemption and it might even call some families today to have to register. I don’t think that would be all that bad, but I have experience in the registered space so we understand the implications and it’s not as intimidating as it would be for a private family. But to my earlier point, a private family trust company is naturally exempt.

One thing that we could see in terms of regulation is co-investing and investing in club deals. Things like that where you can find yourself in the position of being an investment manager for non-family members may not be exempt. You could wind up being a manager or a discretionary manager and be in violation without even knowing it, but there are exemptions you can file to avoid that. I would constantly be on the lookout particularly if you’re active in the direct and co-investment space.

Q: Tell me a little more about you and how you found your way into the family office space.

A: There’s no training program, per se. I have been in the professional world for 34 years. The first 20 or so were in the environment of the commercial bank. Almost all that time I was there in what was early on called private banking and later called wealth management. I’m a farm boy from North Carolina but spent 10 years in wealth management, so I began to get exposure to family offices. I didn’t even realize some of them were family offices because I didn’t know what the expression meant back in the mid-2000s, but then I found out they were these families that had these formal office teams of people managing their affairs and I found them to be very good clients to work with. I convinced the firm that I was working for at the time that we had a multi-family office operation embedded within the private bank. That was successful, so I convinced the firm to open an office in Palm Beach and I ultimately ran it.

For a number of years, I started going to family office conferences and I kept meeting these people who loved the work they were doing helping families work through their issues of significant wealth. Then the great financial recession came along, and I had my hand called because the bank that I worked for ended up being handed to Wells Fargo.

It was financially challenging for me and my family, but I reached out to some mentors and they thought I should take a chance on a family office operation and was introduced to a very cool family in Graceville, North Carolina. It was a really interesting family with six generations, 400 living family members and 100 households that looked a lot like a multi-family office.

That was an easy transition for me because I understood where they were in their evolution. I worked with them for about five years and then I agreed to move on for a variety of reasons. Later I was introduced to a perspective client when I was in Palm Beach and I thought I would spend a year consulting with him and setting up a trust company, and here we are seven or eight years later – it’s been a very symbiotic relationship for all of us.

Along the way, I’ve made great friends in the space. That’s one of my favorite things about the family office world is the community of it and the diversity in terms of the things you can learn and experience. I’m really enjoying helping this principal visualize what his world looks like when he’s promoted to heaven and there are multiple generations of the family living under this governance structure that I’m able to help him design.