Family Offices Face Hidden Risks in Making Direct Investments

Family Offices Taking on More Risk with Direct Private Investments?

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.

Direct Investments May Carry More Risk

Family offices making direct investments in private companies may be taking on more risk than they realize, according to a new survey. Direct deals, where family offices buy stakes in private companies directly rather than through a private equity manager, have become increasingly popular among family offices and account for a growing share of their portfolios. However, many are failing to take advantage of their strengths as investors.

Monitoring and Deal Sourcing

According to the 2024 Wharton Family Office Survey, only half of family offices making direct private investments have private equity professionals on staff who are trained to structure and identify the best private deals. What’s more, only 20% of family offices making direct deals take a board seat as part of their investment, suggesting they lack forceful oversight and monitoring.

Direct Deals: A Growing Trend

Direct deals have become one of the hottest investment trends for family offices. Half of family offices plan on conducting deals in the next two years, according to a recent survey from Bastiat Partners and Kharis Capital. Many family offices see direct investing as a path to higher returns traditionally offered by private equity, but without the fees, since they are investing on their own. They also can leverage their experience in running a private business, since many family offices were founded by entrepreneurs who built family-owned companies and sold them.

Investing in Other Family-Owned Companies

The survey suggests that family offices may not be fully leveraging their experience. Only 12% of family offices surveyed said they invested in other family-owned companies. Amit said the finding may also show that family offices simply see better opportunities in non-family-owned businesses.

Time Horizon

Family offices pride themselves on their patient capital, investing in companies for a decade or more to take advantage of their "illiquidity premium." Yet when vying for investments in private companies, family offices often stress that they don’t need a fast exit like private equity firms. The majority of family offices surveyed (60%) said their overall time horizon for their investments is longer than a decade. When it comes to direct deals, their theory appears different from their practice. Nearly a third of family offices surveyed said their time horizon for direct deals is only between three and five years. About half said they invest with a six- or 10-year timeframe, and only 16% said they invest for 10 years or more.

Conclusion

Family offices are favoring syndicated and "club deals," where families team up with other families to make an investment or take a back seat to a private equity firm leading the investment. When asked how they find direct deals, most said through their professional network, through their family office networks, or that they’re self-generated, according to the survey. They also lean toward later-stage investments rather than seed or startup rounds. Fully 60% of the deals were Series B rounds or later, according to the survey.

FAQs

Q: What is the trend in direct private investments among family offices?
A: Direct deals have become one of the hottest investment trends for family offices, with half planning to conduct deals in the next two years.

Q: What are family offices looking for in a company to invest in?
A: Family offices emphasize the management team and leadership over the product, with 91% citing the primary criteria as the quality and experience of the management team.

Q: How do family offices find direct deals?
A: Most family offices said they find direct deals through their professional network, their family office networks, or that they’re self-generated.