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. Sign up to receive future issues directly to your inbox. Family offices that make direct investments in private companies may be taking on more risk than they realize, according to a new survey. Direct deals, when family offices buy stakes in private companies directly rather than through a private equity manager, have become very popular among family offices and represent an increasing proportion of their portfolios, according to the Survey Wharton Family Office 2024. However, many fail to leverage their strengths as investors. And they are increasingly falling short in terms of monitoring and seeking agreements. According to the survey, only half of family offices that make direct private investments have private equity professionals on staff trained to structure and identify the best private transactions. What's more, according to the survey, only 20% of family offices that do direct deals take a board seat as part of their investment, suggesting they lack strong oversight and monitoring. “It's not yet known whether this strategy will work,” said Raphael “Raffi” Amit, a management professor at The Wharton School, who founded and leads the Wharton Global Family Alliance. Direct deals have become one of the hottest investment trends for family offices. Half of family offices plan to make deals in the next two years, according to a recent survey by Bastiat Partners and Kharis Capital. Many family offices see direct investing as a path to higher returns than private equity traditionally offers, but without fees since they invest on their own. They can also draw on their experience running a private business, as many family offices were founded by entrepreneurs who created family businesses and sold them. However, the survey suggests that they may not be taking full advantage of their experience. Only 12% of family offices surveyed said they had invested in other family businesses. Amit said the finding may also show that family offices simply see better opportunities in companies that are not family-owned. Family offices pride themselves on their patient capital and invest in companies for a decade or more to take advantage of their “illiquidity premium.” However, when competing for investments in private companies, family offices often emphasize that they do not need a quick exit like private equity firms. The majority of family offices surveyed (60%) said their overall time horizon for their investments is longer than a decade. When it comes to direct agreements, their theory seems different from their practice. Nearly a third of family offices surveyed said their time horizon for direct deals is only three to five years. About half said they invest within six or 10 years, and only 16% said they invest for 10 years or more. “They are not taking advantage of the unique aspect of private equity: its more permanent and flexible nature,” Amit said. Family offices are favoring syndicated and “club” deals, where families partner with other families to make an investment or take a backseat to a private equity firm leading the investment. When asked how they find direct deals, most responded through their professional network, through their family office networks or that they generate them themselves, according to the survey. They also lean toward later-stage investments rather than seed or seed rounds. According to the survey, 60% of deals were Series B rounds or later. When making a decision about a company to invest in, family offices emphasize the management team and leadership over the product. 91% said that the main criterion is the quality and experience of the management team. Amit said that while family offices can be successful in their direct deals, the lack of professional staff, short time horizons and lack of board seats are “disconcerting.” “It will take several years to know if this will be successful,” Amit said.
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 that make direct investments in private companies may be taking on more risk than they realize, according to a new survey.
