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A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.
Family offices are increasingly buying shares in private companies directly, bypassing private equity funds, according to new research.
Half of family offices plan to go “direct,” or invest in private companies without private equity funds, over the next two years, according to the Bastiat Partners and Harris Capital Family Office Survey. .
As family offices grow in size and sophistication, they are becoming more confident in finding and negotiating private equity deals for their companies. Family offices (in-house investment and services companies for high-net-worth individuals) are typically founded by entrepreneurs who started their own companies, so they may prefer to invest in similar private companies and leverage their expertise. It happens often.
According to the report, more than half (52%) of family offices surveyed prefer to trade directly through a syndicate led by other investors, which is based on a “prudent approach and an established “This reflects a reliance on the sponsor’s expertise.”
According to the report, “family offices are increasingly being recognized as economic powerhouses in the private market.”
A big challenge for family offices with more direct transactions is the so-called deal flow, or the amount of possible deals. Most deals are unattractive or inappropriate, so family offices may have 10 or more deals for every one that goes well, according to the report.
At the same time, family offices fiercely protect their privacy, preferring to remain largely unknown to the public. Without a public profile, you are less likely to participate in deal proposals or calls with banks, potentially missing out on potential investments. A whopping 20% of family offices surveyed cited “high-quality deal flow” as their main concern.
One solution, the report says, is for family offices to start building more public profiles and further strengthen their networks with each other to attract deal flow. According to the survey, 60% consider networking with other family offices “important,” and 74% say they would “like to make further introductions.”
Another challenge for family offices dealing directly is due diligence, family office experts say. When a private equity fund or company invests in a privately held company, it often has a team of bankers and in-house experts who can analyze the company’s financial health and prospects. Family offices typically lack the infrastructure for rigorous due diligence and are at risk of being acquired by troubled companies.
More family offices are establishing boards of directors and investment committees to formalize the transaction process. Research shows that 54% of North American family offices have an investment committee to vet investments.
When it comes to private investing, they prefer to venture “off the beaten path” by focusing on niche and emerging asset classes. For example, family offices are increasingly investing in real estate tax liens, fertility clinics, real estate sale-leasebacks, whiskey aging, and litigation financing.
“These approaches give family offices access to private investments with attractive returns, cash yields, and low correlation to traditional markets,” according to the report.
