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A version of this article first appeared in CNBC's Inside Wealth newsletter with Robert Frank, a weekly guide for high-net-worth investors and consumers. Register to receive future issues, directly to your inbox.
Family offices are increasingly avoiding private equity funds and directly buying stakes in private companies, according to a new survey.
Half of family offices plan to do “direct deals” – or invest in a private company without a private equity fund – over the next two years, according to a family office survey from Bastiat Partners and Kharis Capital.
As they grow in size and sophistication, family offices are becoming more confident in finding and negotiating their own private equity deals. Since family offices (the in-house investment and services firms of high-net-worth families) are typically founded by entrepreneurs who started their own companies, they often like to invest in similar private companies and leverage their expertise.
More than half (52%) of family offices surveyed prefer to do direct deals through syndicates, where other investors take the lead, “reflecting a cautious approach and reliance on the expertise of established sponsors,” according to the report.
“Family offices are gradually being recognized as an economic powerhouse in private markets,” according to the report.
The big challenge for family offices as they make more direct deals is so-called deal flow, or the volume of potential deals. Since most offers are unattractive or unsuitable, family offices may see 10 offers or more for every one that works, according to the report.
At the same time, family offices fiercely protect their privacy and prefer to remain largely unknown to the public. Without a public profile, they are unlikely to be included in deal offers or banking calls and miss out on potential investments. 20% of family offices surveyed cited “quality deal flow” as their top concern.
One solution, according to the report, is for family offices to start developing more public profiles and establish more contacts with each other to attract deal flow. According to the survey, 60% consider networking with other family offices “important” and 74% are “eager for more presentations.”
The other challenge for family offices doing direct business is due diligence, according to family office experts. When a private equity fund or company invests in a private company, they often have teams of bankers or in-house experts capable of analyzing a company's finances and its prospects. Family offices typically lack the infrastructure to conduct rigorous due diligence and run the risk of buying troubled companies.
To formalize their deal process, more family offices are creating investment boards and committees. According to the survey, 54% of North American family offices have established investment committees to help vet investments.
When it comes to their preferred private investments, they like to venture “off the beaten path,” focusing on niches and emerging asset classes. Family offices, for example, are increasingly investing in real estate tax liens, fertility clinics, real estate sales and leases, whiskey aging, and litigation financing.
“These approaches provide family offices with access to private investments that offer attractive returns, cash yields, and low correlation to traditional markets,” according to the report.
