Wealthy families are making a difference with investments in companies like Augeo

Deal activity may finally be tapering off in the mergers-and-acquisitions space. But the increasing participation of family offices has helped fuel a long bull run in the space that began shortly after the 2009 recession ended.

Family offices are the money-management arms of ultra-high net-worth families and wealthy individuals that often make direct investments in other companies. The Pohlad family is one of the most visible examples of those using this model of investing.

They tend to focus more on long-term investments and potential, which can help companies like St. Paul-based Augeo, which emerged when the Kristal family decided to transition from the restaurant business to one that provided employee, member and consumer-loyalty programs. It has taken close to two decades, eight small acquisitions and steady growth to build the company.

The company in September sold its Augeo FI business, a provider of financial institutional loyalty programs, to Lightyear Capital for $140 million. Proceeds of that deal will be used for future growth, but also to reward long-term shareholders whose patient capital helped Augeo build its business so that over the past 10 years it has produced a compound annual growth rate of 35 percent.

The deal was one of 24 merger-and-acquisition deals involving Minnesota companies during the third quarter. In the U.S., there were 1,254 such deals, the fewest in more than 10 years.

Augeo over the years has made eight successful acquisitions to expand its business. And it has depended on backers like Charles de Viel Castel to gain ground in a new industry.

De Viel Castel is managing partner of Stelac Capital Partners, a private-investment firm that represents several family offices and high net-worth individuals who invest capital for the long term. He has invested personally in Augeo since 2007, and Stelac Capital also has invested in Augeo on behalf of clients.

"I don't know if traditional private-equity investors would have been able to last 10 years," he said. "And more importantly, I'm not sure they'd be willing to last for another 10 or more years going forward."

De Viel Castel said he doesn't know what other shareholders would do, but he will be rolling over his investment in Augeo. He expects to be a funder for at least another 10 years.

The amount of investment from family offices and the number of families participating in the M&A market have increased as the money-management operations have become more sophisticated, said Scott Richardson, managing director of the Minneapolis office of Houlihan Lokey, the largest M&A advisory firm in the middle market.

In the past, family offices have been slower to compete for and finish deals.

But Richardson said in the past five or six years, these investment arms have hired more professionals from private equity to compete more aggressively for deals.

Richardson's job is to provide clients with choices. "At the end of the day, the market has become efficient," he said. "Giving [sellers] a third option to distinguish from private equity and strategic buyers is really attractive."

Now private equity is having to adjust to greater competition from family offices.

"There is a kinder, gentler view that private equity is trying to portray in the middle market," Richardson said. "Private equity is using a little bit of the family office playbook."

Family offices can employ some advantage by partnering together on deals. They also can be industry and geographically agnostic on investments and invest in various stages of a company's development, while private-equity firms might run into more restrictions across those investment criteria.

But it's the investment time horizon that's the biggest appeal for companies like Augeo seeking money from family offices.

On a recent Thursday, there was a whiff of breakfast at Augeo's offices just off Hwy. 280 and University Avenue in St. Paul. Each week, the company serves the staff a breakfast that always includes something off the old Embers Family Restaurant menu.

Henry Kristal, who died in 2007, co-founded the Embers in 1956. In the late 1990s, he and son David were trying to figure out how to save the chain as fast-casual restaurants and coffee shops were eating away at their breakfast and lunch business.

Instead, they decided to change the business, said David Kristal, a graduate of Sibley High School in West St. Paul, the University of Minnesota's Carlson School of Management and Stanford University School of Law.

"The trending in the market was just too difficult to overcome," he said.

The Embers restaurant business peaked with more than 30 locations and about $50 million in annual revenue. (There is still at least one independent restaurant still around, Ricky's Embers Family Restaurant in Fridley.)

But David Kristal's idea for a new company leveraged relationships in the restaurant and food industry and would help other restaurants compete through employee and customer loyalty programs.

After almost 20 years, the Augeo business made a successful transition to a new industry. It is privately held and has no institutional capital. But even long-term family office investors want to see a return on their investment.

"A number of years ago we began talking about creating liquidity for our investors," Kristal said. "Because we saw no ceiling to our growth … we were in no hurry."

The board hasn't met to decide on the distribution of Augeo FI proceeds, but there will be plenty left to invest back into the company, he said. "I plan to double down on growth of the remaining Augeo business."

The next step for the business is driving more immediacy to the loyalty programs and broadening collaborations through technology and partnerships with payment networks.

Augeo also is using what it learned with the loyalty programs to expand into design of health and wellness programs, employee engagement plans and membership programs.

"I feel so fortunate and quite privileged at the investors and board members that we've had," Kristal said. "They've been fair, they've been balanced, they've been patient and they've contributed strategically throughout the last decade."

Patrick Kennedy • 612-673-7926