Family offices, once primarily reliant on private equity funds for investment opportunities, are undergoing a significant transformation in their approach to wealth management. A recent survey conducted by Bastiat Partners and Kharis Capital reveals a notable trend: half of the family offices surveyed are planning to engage in direct investments in private companies over the next two years. This shift represents a growing confidence among high-net-worth families to leverage their expertise in identifying and negotiating private equity deals independently.
The roots of this trend can be traced back to the entrepreneurial nature of family offices. Many family offices originate from successful businesses founded by wealthy individuals who possess intimate knowledge of managing and growing companies. As these family offices expand in size and sophistication, they are increasingly inclined to invest in private companies that resonate with their background and expertise.
Interestingly, the survey also highlights that 52% of family offices prefer to conduct direct deals through syndicates, where established investors take the lead. This cautious approach suggests that family offices are not entirely comfortable navigating the intricate landscape of private equity on their own. By collaborating with seasoned sponsors and trustworthy co-investors, they can mitigate risks while still engaging in impactful investments. This method allows family offices to maintain a level of prudence as they delve into the world of direct private equity deals.
The recognition of family offices as influential players in private markets is growing. Their combined resources and unique insights allow them to function as significant economic powerhouses, making them increasingly attractive partners for businesses seeking investment. However, the volume of potential investment opportunities, known as “deal flow,” poses a considerable challenge for these entities.
A major hurdle cited by 20% of the family offices surveyed is the concern for quality deal flow. In an environment where the majority of deals are either unappealing or unsuitable, family offices may assess numerous opportunities—often ten or more—before discovering one that meets their criteria. Furthermore, their desire for privacy can inadvertently limit their access to potential investment opportunities. With most family offices valuing their confidentiality, they may not engage in public forums that could attract deal offerings or enable networking with fellow investors.
Enhancing their public profiles may be a viable solution. The survey indicates that 60% of family offices recognize the importance of networking with their peers in the family office space, and 74% express an eagerness for more introductions. By fostering relationships with other family offices, they can not only improve deal flow but also share insights and best practices that can inform their investment strategies.
Another critical obstacle faced by family offices investing directly in private companies is the diligence required to ascertain the viability of potential investments. Unlike private equity funds that boast teams of analysts adept at scrutinizing a company’s financial health, family offices may lack the resources to conduct in-depth evaluations. This limitation raises the risk of investing in companies with troubled financial histories, which could jeopardize their investments.
To counter this challenge, many family offices are strengthening their governance structures. About 54% of North American family offices have established formal investment committees designed to oversee and vet investment opportunities. This organizational strategy enables family offices to systematically assess potential investments, fostering a more disciplined investment philosophy.
As family offices refine their investment processes, they appear to gravitate toward unorthodox investment avenues. The survey indicates a growing interest in niche markets and emerging asset classes such as real estate tax liens, fertility clinics, sale-leasebacks in real estate, whiskey aging, and litigation financing. This trend toward “off the beaten path” investments reflects not only the family offices’ entrepreneurial spirit but also their desire to explore innovative opportunities that offer potentially higher returns.
The evolution of family offices from followers of private equity trends to independent investors capable of direct deal-making is a noteworthy movement in wealth management. While challenges related to deal flow and due diligence persist, the strategies being adopted illustrate a commitment to meticulous investment practices. As family offices continue their journey toward strengthening their roles in private markets, their potential to reshape investment landscapes becomes increasingly significant.