After years of slowly increasing allocations to direct investment, some family offices are suffering losses and reversing course. In some cases, they may even stop practicing altogether.
Family offices often invest directly in private companies when they see an advantage, often as an extension of their family’s business interests. If the family has considerable experience in the manufacturing sector, they may be strong in evaluating investments in manufacturing companies and supplementing them with investment capital to spread the risk.
According to RBC’s 2022 North American Family Wealth Report, direct investments are performing well, returning 21% in 2021. As a result, the family office allocates more to them. Direct investment accounted for 9% of the family office portfolio in 2019, 10% in 2020 and 13% in 2021, according to UBS’s 2022 Global Family Office Report.
Since then, inflation, rapidly rising interest rates, market volatility and a slowing U.S. economy have dampened investment performance, suggesting that family offices may not be as good at direct investing as they thought. recognizing.
According to Ronald Diamond, founder of Diamond Wealth, which represents more than 100 family offices, over the past six months, family offices have either slowed down their direct investments or completely halted them with the intention of handing over the responsibility to asset managers. Did. From $250 million he will help invest in the private market with $30 billion.
“People are learning and will learn the hard way,” said Diamond.
According to FINTRX, a family office database, and the Family Office Report 2023 by Charles Schwab, the majority of single family offices (74%) have direct investments. But Diamond also said most of them aren’t as wealthy or sophisticated as you might imagine. According to Diamond, most single-family offices have only been set up in the last 20 years and cannot afford to hire dozens of qualified investment professionals to operate like a handful of big names. Most family offices struggle to operate and invest like these top companies.
A single-family office needs at least $250 million in assets to operate in an ideal manner. This includes making proper sourcing, valuation and direct investment independently.
Brian Forment, head of client solutions and investment strategy at UBS Private Wealth Management, said whether the flow of direct deals is slowing depends on family offices and deals.
“The jury is out on direct investment performance,” Forment said. But it’s the wealthy families who have taken more stakes in companies and industries they know well that fared better. The family office experience “depends on your ability to manage the due diligence process,” he said.
If family offices don’t have the resources to execute deals directly and get returns commensurate with the best investors, their allocations should be reassessed, according to industry experts.
“I agree,” Forment said. “If you don’t have the resources for due diligence, you need a company that not only has the capabilities, but the right perspective to see how deals flow.”
Bill Hagan, director and portfolio manager at Hirtle Callaghan, which entrusts more than $20 billion of family and institutional assets, said client interest in direct investment is undiminished.
“Many of the direct investments we are considering have come from managers of programs in which we have invested for a long time. They have a track record of long-term success. We guide our clients to think longer term about direct investment opportunities that help manage short-term volatility.”
Without guidance, direct-investing family offices may not be able to handle that volatility well, the adviser added.
