In a recent survey conducted by BNY Mellon Wealth Management, it was found that family offices are increasingly shifting towards making direct investments in companies rather than relying solely on traditional investment vehicles. The survey revealed that a significant majority of family offices, numbering at 62%, made at least six direct investments in the past year. Moreover, an even higher percentage (71%) expressed their intention to continue or even increase their direct investments in the coming year.
With the number of family offices growing rapidly and their total assets now estimated to be over $6 trillion, the influx of family office capital into private companies has the potential to reshape both private markets and the private equity industry as a whole. Direct investments provide family offices with the opportunity to leverage their unique competencies in specific industries, allowing them to not only provide capital but also valuable management expertise to the companies they invest in.
Advantages for Family Offices
One of the key advantages of direct investments for family offices is the ability to offer more patient capital compared to traditional investment funds. Family offices typically have a long-term investment horizon, sometimes spanning decades or even generations. This long-term view allows them to capture the illiquidity premium, potentially yielding higher returns than what is available in public markets or pooled private market investments.
While direct investing presents exciting opportunities for family offices, it also comes with its own set of challenges. Family offices often excel in industries where they have built their wealth or possess specialized knowledge, which can limit their investing scope. Additionally, conducting thorough due diligence on potential investments, including a deep dive into the financials and management of a company, can be daunting for smaller family offices.
Collaboration and Expertise
To overcome these challenges, many family offices are enlisting the help of larger wealth management firms and deal advisors to assist with due diligence and investment decisions. While a majority of family offices conduct their own internal due diligence, nearly half also seek input from investment consultants to ensure informed decision-making. Furthermore, family offices are increasingly co-investing with private equity firms, a strategy that not only reduces fees but also enhances the potential for higher returns.
The trend of family offices embracing direct investments is reshaping the landscape of private equity and private markets. By capitalizing on their unique strengths and expertise, family offices are positioning themselves as key players in the investment world, with the potential to drive innovation and growth in the companies they choose to invest in.