This week’s insights include:

• Why direct investing has become so popular

• An intriguing $500k/year family office COO opportunity

• The tutoring side gig that’s caused a stir

• Simon Sinek on balancing intensity versus consistency

• The art of debating, persuading and public speaking

Family Offices and Direct Investing

Family offices are becoming a force in the direct investment world.

Direct investing is where a family office makes investments directly into private companies, rather than through intermediaries such as venture capital or private equity funds.

This involves direct negotiation with the company to provide debt or equity.

It gives the family office greater control, transparency, and potential returns on their investment. Direct investments also allow family offices to align their investments more closely with the family values and long-term goals.

Examples of direct investing may include an equity investment in a tech startup, debt financing for a real estate development or the acquisition of a manufacturing business.

A key advantage of direct investing is the ability to bypass third-party funds, which offers cost benefits.

Direct investing can also take the form of co-investments, where a family office invests alongside a private equity fund in which they are already a Limited Partner (LP).

Investments can be passive or active, with investors occasionally joining the company's board to influence business operations. This is more common when the family has specific and relevant competencies.

The Rise of Direct Investing

Direct investing is gaining traction among family offices. In 2023, Citi reported that 80% of family offices globally engaged in direct investments, with larger offices showing greater risk tolerance and less likelihood to pause investments due to economic uncertainty. 

According to a report by BNY Mellon, 62% of family offices made six or more direct investments last year, and 71% plan to maintain or increase this activity in the coming year.

Highlighting a broader trend, Goldman Sachs found that family offices allocated an average of 44% of their portfolios to alternatives in 2023, a slight decrease from 2021 but still significant. This allocation is expected to grow, with 48% of family offices planning to boost their investment in private equity next year.

This trend is further supported by a KKR survey that found family offices are significantly boosting their allocations to alternative investments, with 52% of their portfolios expected to be in alternatives by 2024.

It’s clear the trend for direct investing is growing as family offices pursue more alternative investments.

Benefits of Direct Investing

1. Higher Returns: Family office capital is famously patient capital and direct investments can help capture the illiquidity premium.

Direct investing promises potentially higher returns than public markets or pooled private investments. Family offices’ investment horizons almost always extend beyond VC and PE. Family office capital is often highly attractive to companies with long-term plans.

2. Control and Transparency: Direct investments allow family offices have significant direct control over their investments. By eliminating funds, family offices can be more closely connected with their investment.  

3. Cost Efficiency: By avoiding management and performance fees associated with PE and VC funds, family offices can reduce a layer of portfolio costs.

4. Strategic Involvement: Active direct investments enable family offices to leverage their expertise and influence the management and strategic direction of the investee company. This works really well when the family office is associated with an operating company in the same field as the investment.

The Challenges

A successful direct investing program demands significant resources and expertise and should not be taken on lightly.

Some of the challenges of direct investing include:

Due Diligence: Conducting thorough due diligence is time-consuming and requires specialized knowledge. While two-thirds of family offices perform their own due diligence, nearly half also rely on input from investment consultants.

Time Constraints: Direct investments take time. And they take even more time for less experienced family offices. About 42% of family offices cite time constraints as a major hurdle.

Operational Demands: Managing direct investments involves handling complex operational responsibilities, from human resources to compliance. This becomes even more challenging if the company operates outside the competencies of and experience of the family office.

Strategies for Successful Direct Investing

Lean and Opportunistic: Some family offices make opportunistic direct investments using their existing staff's resources. This approach is more reactive and relies heavily on external partners for due diligence and execution.

Investment opportunities arise organically from the family’s network.

In-House Dedicated Team: Larger family offices often build in-house teams to manage direct investments, functioning similarly to a private equity fund but with a long-term investment horizon.

Hybrid Outsourced Solutions: Family offices lacking resources for an in-house team may co-invest alongside private equity funds or outsource management while maintaining discretion over each investment.

Wealthy families often have well-established alliances with other wealthy families and can share resources in co-investment opportunities.

As a means of gaining access to a wider range of direct investments, family offices sometimes invest in a number of VC or PE firms in order to have greater access to their deal flow and network. 

Key Considerations for Family Office Direct Investing

Alignment with Values: Successful direct investing programs require that investments reflect the beliefs and values of the families and their family office.

Clear Investment Criteria: Establishing clear criteria for target investments, such as size, geography, and business culture, helps in curating a well-diversified portfolio.

Formalized Family Participation: The involvement of family members in the investment process should be well-defined to avoid conflicts and ensure smooth operations. Deals brought to the family office should not get special treatment – they should be subject to the same rigorous due diligence and deal appraisal as any other deal. 

A Quick Poll

What Next?

Direct investing offers family offices an exciting opportunity to leverage their competencies for potentially higher returns and greater control over their investments.

There is also an underrated yet prominent reason family offices engage in direct investing: it’s a lot of fun and it’s an opportunity for all generations to learn.  

The trend towards direct investing is set to continue. According to FINTRX, direct investment growth has been particularly driven by newly created family offices, with two-thirds of those established since 2015 participating in direct investments.

Family offices are becoming increasingly sophisticated and they are willing to allocate ever more capital to direct investments.

It may be too early to call it a paradigm shift, but family offices are certainly starting to be a disruptive force. As trillions of dollars of wealth are transferred through family offices, the financing of companies could look very different in a few years. 🚀

𝕏 highlights

A wealthy family is splashing out to hire a tutor/mentor for their daughter.

Some see family offices as status symbols, some keep a low profile.

I’m just asking questions this week…

 💼 where to work

Three new family office job opportunities worth a look. The first is particularly intriguing.

COO & Capital Raising Partner - Private Family Office (California / Family Office)

VP Investments, Public Markets - Lazard Family Office Partners (New York / Service Provider)

Head of Finance - Private Family Office (London / Family Office)

📚 what to read

This week I’ve been reading Win Every Argument by broadcaster Mehdi Hasan. Hasan certainly thinks quite a lot of himself, but the book is entertaining and explores some interesting ideas around debating and arguing. I’m ready to start picking more fights on Twitter!

📺 what to watch

The key to effective leadership with Simon Sinek, and how the small things can make a big difference.

And finally…

A look at the +31,000 followers of Mr Family Office on X.

North America dominating with 73% of followers, Europe coming second with 12%. However, a disappointing 0% of Mongolian family offices are following along. 🤷‍♂️

That’s all for today.

Here’s a taster of some upcoming newsletter topics… feel free to share thoughts on these if you have anything interesting to add.

• When you don’t need a family office

• What’s going wrong with family office conferences

• The millionaire migration

Family Office Buzz will be in your inbox Monday (here’s the last edition if you missed it). Otherwise, feel free to connect on LinkedIn.

Here’s to an incredible weekend!

X

 in LinkedIn

✉️ [email protected]

📶 RSS feed

𝕏 @MrFamilyOffice