Family offices are increasingly becoming their own private equity funds and investing directly in companies, according to a new survey.
According to the family office survey conducted by BNY Mellon Wealth Management, the majority (62%) of family offices made at least six direct investments last year, in which they bought a stake in a private company or made loans.
An even larger number of family offices (71%) plan to make the same amount or more direct investments in 2024. With the number of family offices tripling since 2019 and their total assets reaching an estimated $6 trillion or more, the rush of money of family offices into private companies could reshape private markets and the private equity industry.
“Direct investing presents exciting opportunities for family offices to leverage their unique competencies,” according to the report.
According to the report, family offices (the private investment arms of wealthy families) are often founded by entrepreneurs who have the skills to run a private company. Investing directly allows them to contribute their experience and management advice to portfolio companies, as well as their capital.
At the same time, private companies are increasingly attracted to family offices as banks tighten lending and private equity firms close fewer deals. Family offices have the advantage of offering more patient capital, as they typically invest over decades or even generations.
“Successful deals in the private market capture the illiquidity premium, meaning they can potentially achieve significantly higher returns than those available through public markets or even private market pooled investments,” the report says.
Family offices are also co-investing alongside private equity firms, which can reduce fees and increase accrued interest payments.
Of course, direct investing has its challenges. Family offices are often successful in industries where they built their fortune or have special expertise, which can limit their investment range. Conducting due diligence (a deep dive into a company's finances and management) can be difficult for small family offices. As a result, many are seeking help from larger wealth management firms and transaction advisors.
While two-thirds of family offices conduct their own internal due diligence on direct investments, nearly half also seek the opinion of an investment consultant.
