A version of this article first appeared in CNBC's Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. Sign up to receive future issues, straight to your inbox. Family offices that make direct investments in private companies may be exposed to more risk than they realize, a new study shows. Direct deals, when family offices buy stakes in private companies directly rather than through a private equity manager, have become popular with family offices and represent a growing share of their investment portfolios, according to the 2024 Wharton Family Office Survey. However, many fail to take advantage of Their strengths as investors. They are increasingly unable to monitor and identify the sources of transactions. According to the survey, half of family offices that make direct private investments have private equity staff who have been trained to structure and identify the best private deals. Furthermore, only 20% of family offices that undertake direct deals hold a board seat as part of their investments, according to the survey, suggesting they lack strong oversight and monitoring. “The jury is still out on whether this strategy will work,” said Raphael “Rafi” Amit, a management professor at the Wharton School who founded and leads the Wharton Global Family Alliance. Direct deals have become one of the hottest investment trends for family offices. Half of family offices plan to make deals in the next two years, according to a recent study by Bastiat Partners and Khris Capital. Many family offices see direct investing as a path to higher returns traditionally offered by private equity but without the fees, because they invest on their own. They can also draw on their experience running a private company, since many family offices were founded by entrepreneurs who built and sold their family-owned businesses. However, the survey suggests that they may not be taking full advantage of their experience. Only 12% of family offices surveyed said they had invested in other family-owned businesses. The results may also show that family offices simply see better opportunities in non-family-owned businesses, Amit said. Family offices pride themselves on their patient capital, investing in companies for a decade or more to take advantage of the “illiquidity premium.” However, when competing for investments in private companies, family offices often stress that they do not need a quick exit like private equity firms. The majority of family offices surveyed (60%) said the overall time horizon for their investments is longer than a decade. When it comes to direct deals, their theory is different from their practices. Nearly a third of family offices surveyed said the time horizon for direct deals was only three to five years. About half said they invest over a six- or 10-year time frame, and only 16% said they invest for 10 years or more. “They are not taking advantage of the unique aspect of private capital, its more durable and flexible nature,” Amit said. Family offices favor joint 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 found direct deals, most answered through their professional network, through their family office networks, or they were self-generated, according to the survey. They also lean toward later-stage investments rather than seed rounds or startups. According to the survey, 60% of deals were Series B rounds or later. When deciding on a company to invest in, family offices emphasize the management team and leadership over the product. 91% of participants said that the main criteria are the quality and experience of the management team. Although family offices may prove successful in their direct deals, the lack of professional staff, short time horizons and lack of board seats are “puzzling,” Amit said. “It will take several years to see if this works,” Amit said.
A version of this article first appeared in CNBC's Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. Sign up to receive future issues, straight to your inbox.
Family offices that make direct investments in private companies may be exposed to more risk than they realize, a new study shows.
