Family offices are increasingly becoming their own equity funds and investing in companies directly, according to a new study.
A majority (62%) of family offices made at least six direct investments in the past year, buying a stake in a private company or providing lending, according to a family office survey conducted by BNY Mellon Wealth Management.
A larger number of family offices (71%) plan to make the same number or more direct investments in 2024. With the number of family offices tripling since 2019, and their total assets reaching an estimated $6 trillion or more, a flood of potential Family office funds in private companies have the potential to reshape private markets and the private equity industry.
“Direct investment presents exciting opportunities for family offices to leverage their unique competencies,” the report stated.
According to the report, family offices – the private investment arms of wealthy families – are often founded by entrepreneurs, who are skilled at running a private company. Investing directly allows them to contribute their expertise and management advice to portfolio companies, in addition to their capital.
Meanwhile, private companies are increasingly drawn to family offices, as banks tighten lending and private equity firms cut back on deals. Family offices have the advantage of offering more patient capital, as they typically invest for decades or even generations.
“Successful private market deals command a liquidity premium, meaning they can achieve returns significantly higher than what is available through public markets or even pooled private market investments,” the report said.
Family offices are also co-investing alongside private equity firms, which can result in lower fees and higher carried interest payments.
Direct investing has its challenges, of course. Family offices typically succeed in industries in which the family office has built its wealth or has particular expertise, which may limit the scope of its investment. Doing proper due diligence — delving into the finances and management of the company — can be difficult for small family offices. As a result, many are seeking help from major wealth management firms and deal advisors.
While two-thirds of family offices conduct their own internal due diligence on direct investments, nearly half also seek input from an investment advisor.
