Family offices are increasingly forming their own private equity funds and investing directly in companies, according to a new study.
A BNY Mellon Wealth Management survey of family offices found that the vast majority (62%) made at least six direct investments last year, such as buying shares in private companies or making loans.
Even more family offices (71%) plan to make the same number of direct investments or more in 2024. With the number of family offices having tripled since 2019 and total assets estimated at more than $6 trillion, the influx of family office capital into private companies could reshape private markets and the private equity industry.
“Direct investing offers family offices an excellent opportunity to leverage their unique capabilities,” according to the report.
According to the report, family offices — the private investment arms of wealthy families — are often set up by entrepreneurs with experience running private companies, and by investing directly, they can provide their portfolio companies with not only capital but also expertise and operational advice.
At the same time, as banks tighten lending and private-equity firms cut deals, private companies are increasingly drawn to family offices, which have the advantage of being more patient providers of capital because they typically invest over decades or even generations.
“Successful private market transactions have the potential to capture an illiquidity premium and achieve significantly higher returns than those obtainable through public market or pooled private market investments,” the report said.
Family offices also co-invest with private equity firms, which allows them to reduce fees and increase carried interest payments.
Of course, direct investing has its challenges. Family offices typically thrive in the industries in which they made their fortunes and have expertise, which can limit their investment scope. Conducting proper due diligence (a detailed investigation of a company’s finances and operations) can be difficult for smaller family offices. As a result, many family offices turn to larger asset managers or transaction advisors for help.
Two-thirds of family offices conduct their own in-house due diligence on direct investments, but almost half also seek input from investment consultants.
