While you may have seen headlines about private equity moving into the buy sell world, that can actually be something of a misnomer. It is generally more accurate to say that different forms of outside capital, of which private equity is one, are investing in automotive dealerships. Those investors differ in the amount they invest and terms under which they invest.

From family and friends to family offices

Family and friends is the smallest, and most frequent, form of outside capital investing in dealerships. “Family and friends happens a lot,” says Tim Batchelor, co-founding partner of Open Road Capital. The amount invested is generally less than $5 million, he says, and they are generally long-term, or evergreen, investors.

The next step up is non-family small investors. Depending on the size of the network, these types of investors can generally raise a few million on individual deals. David Rosenberg, owner of DSR Motor, a growing dealership group in the Northeastern U.S., has used on his own capital and non-family investors for several deals, he says. Rosenberg says he has raised “a little over $50 million.”

That amount can cover the blue sky, or intangible assets, portion of the deals and may include real estate. However, Rosenberg and his outside investors have a separate company to acquire dealership real estate. Some of those investors are also investing in the operating company, says Rosenberg. His investors are evergreen and range from family and friends to family offices, says Rosenberg.

Family offices are the next level of outside capital moving into retail automotive. They manage the financial needs of a wealthy family, including investments. Family offices vary widely in size and structure and in how much they can invest, says Batchelor.

“There’s no precise definition or wealth boundary for what rises to the level of a family office,” says Halbert Rasmussen, shareholder of Scali Rasmussen PC, “but generally the wealth and investments are sufficiently high to justify the family employing at least two or three full time executives from outside the family.” Rasmussen also notes that the larger family offices may also operate their own private equity companies..

An example of a small but significant family office investing in dealerships is Redwood Capital, the investment arm of the Jim Davis Family Office. It invested in Hudson Automotive Group in 2018 and has also backed Larry Morgan in Morgan Automotive Group’s acquisition of many Florida franchises. Family offices can hold onto investments as long as they choose, which is generally long-term.

True private equity

True private equity firms generally invest in mature firms with cash flow. PE firms can also borrow money. There aren’t that many pure private equity firms investing in dealerships for reasons discussed in another story in this newsletter.

Open Road’s Batchelor uses the term private equity group for an investment group that raises institutional capital. Such institutions include pension funds, insurance companies, investment banks, and sovereign wealth funds. Rasmussen notes that while individual investors are occasionally included in acquisitions by private equity firms, they are almost always extremely high net worth individuals, and general have their own family office.

Private equity firms require a great deal of in-depth information on prior performance, partner background and other specifics. Therefore, it is difficult to raise true private equity capital “and those that do have a certain pedigree,” says Batchelor.

The amount invested is almost always $200 million and above, in a fund structure in which the private equity firm acts as General Partner and the investors are limited partners, and the GP has full discretion to invest the capital consistent with its charter, says Batchelor.

Some private equity firms have grown so large that they themselves have gone public, such as Berkshire Hathaway (BRK-a/-b), BlackRock (BLK), and KKR & Co (KKR). They remain private equity firms because they continue to pool funds from multiple investors, as well as themselves, to acquire private companies, says Rasmussen.

To be sure, private capital has backed some dealership acquisitions. One example is David Rosenberg’s partnership with David Abrams, founder of Abrams Capital, in 2006 to acquire dealerships which became part of Prime Automotive Group.

When things go wrong

A now infamous example of outside capital investing in dealerships is GPB Capital’s 2017 acquisition of Prime Automotive Group from David Rosenberg, along with many other dealership acquisitions.

GPB, often mistakenly referenced as a private equity group, was actually an accounting firm that raised capital from individual investors rather than institutional investors. It ended in the federal prosecution of GPB senior executives and a forced sale of GPB assets to Group 1 Automotive and other buyers.

PE knocking on the buy sell door

More true PE firms are trying to find ways to make investment in auto retail work, says Faris Syed, founder and president of SAR Partners, a Florida-based automotive mergers and acquisitions firm. He is working on an acquisition of a Texas dealership involving a New York-based private equity firm, says Syed.

The New York firm is backing an operator looking to acquire a dealership with under $100 million invested, he says. If the deal goes through, the PE firm will exit in seven years or be bought out by the operator.

The number of deals headed by a dealership operator but backed by private equity will grow in 2025, predicts Syed. PE firms will be lured by the attractive potential return on investment, he says.

“They are looking for an 18 to 20 percent return,” says Syed. “They can get that if the (dealership) business is run properly.”

PE firms are sophisticated investors who bring with them cost controls, economies of scale, and better negotiating power on capital, he says.

An open road to outside capital

Open Road is an operating company, not an investment company, says Batchelor. In 2023, Open Road partnered with Bain Capital Credit, a private investment management firm. Unlike many institutional capital firms, however, Bain’s structure allows for much longer hold periods of investments, says Batchelor adding, “regardless, we don’t have a hold period.”

Dealerships are gaining the attention of outside capital because of the “general steadiness of the industry,” says Batchelor. The retail auto business “ebbs and flows over time but it is pretty involatile.”

This article was written for Getting to Go, a buy/sell newsletter from Scali Rasmussen.