Family offices are increasingly becoming major players in the private equity market, with a majority (62%) of them making direct investments in private companies or providing lending. This trend is expected to continue, as 71% of family offices plan to make the same number or more direct investments in 2024.
One of the reasons behind this shift is that family offices, often founded by successful entrepreneurs, have unique competencies and expertise in running private companies. By investing directly, they can not only contribute their capital but also their management advice and industry knowledge to portfolio companies. This allows them to leverage their skills and potentially generate higher returns.
Moreover, private companies are becoming more attracted to family offices as traditional sources of funding, such as banks and private equity firms, tighten their lending criteria. Family offices offer patient capital, as they typically have long-term investment horizons spanning decades or even generations. This aligns well with the needs of private companies that require stability and support for their growth plans.
Co-investment is also on the rise, with family offices partnering with private equity firms to reduce fees and increase carried interest payments. This collaboration allows family offices to tap into the expertise and resources of established investment firms while maintaining a level of control over their investments.
However, direct investing does come with its challenges. Family offices tend to focus on industries where they have built their fortunes or possess specialized knowledge. This can limit their investing range and potentially expose them to risks if they venture into unfamiliar territory. Additionally, conducting proper due diligence on potential investments can be challenging for smaller family offices. Many of them are turning to larger wealth management firms and deal advisors for assistance in this regard.
While two-thirds of family offices conduct their own internal due diligence, nearly half seek input from investment consultants to ensure thorough analysis and evaluation. This reflects the importance of proper research and assessment in making informed investment decisions.
In conclusion, family offices are transforming into their own private equity funds and actively investing directly in private companies. With their unique competencies and long-term investment horizons, they are well-positioned to reshape private markets and the private equity industry. However, it is crucial for family offices to carefully navigate the challenges associated with direct investing, such as limited industry focus and due diligence requirements, to mitigate risks and maximize returns. Seeking assistance from wealth management firms and deal advisors can be instrumental in overcoming these obstacles and making successful investments.
