Family offices are planning large investments in private companies

Family offices are increasingly becoming their own private equity funds and investing directly in companies, according to a new survey.

A majority (62%) of family offices made at least six direct investments in the past year, where they buy a stake in a private company or make a loan, according to the family office survey by BNY Mellon Wealth Management.

An even greater number of family offices (71%), plan to make the same number or more direct investments in 2024. With the number of family offices having tripled since 2019 and their total assets reaching around 6 trillion dollars or more, the flood of family office money into private companies could reshape private markets and the private equity industry.

“Direct investment presents exciting opportunities for family offices to leverage their unique competencies,” according to the report.

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Family offices — the private investment arms of wealthy families — are often founded by entrepreneurs who are capable of running a private company, according to the report. Direct investment allows them to contribute their expertise and management advice to portfolio companies, as well as their capital.

At the same time, private companies are increasingly pulling back from family offices as banks tighten lending and private equity firms do fewer deals. Family offices have the advantage of providing more patient capital, as they typically invest for decades or even generations.

“Successful private market deals capture the illiquidity premium, meaning they can potentially achieve significantly higher returns than are available through public markets or even pooled private market investments,” the report said.

Family offices are also co-investing alongside private equity firms, which can lower fees and increase carried interest payments.

Direct investing has its challenges, of course. Family offices typically succeed in industries where the family office has built their wealth or has particular expertise, which may limit their investment range. Doing 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 deal advisors.

While two-thirds of family offices do their own due diligence on direct investments, nearly half also seek input from an investment consultant.

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