Family offices are increasingly shifting their investment strategies towards becoming their own private equity funds. A recent survey by BNY Mellon Wealth Management revealed that 62% of family offices made at least six direct investments in the previous year. This involved buying stakes in private companies or providing lending directly. Moreover, a staggering 71% of family offices plan to make the same number or even more direct investments in the coming year. With the number of family offices tripling since 2019 and their total assets estimated to be over $6 trillion, their movement into private markets could potentially reshape the landscape of the private equity industry.
The report highlighted that direct investment presents exciting opportunities for family offices to leverage their unique competencies. Family offices, which are the private investment arms of wealthy families, are often founded by entrepreneurs with a strong background in running private companies. By investing directly, they are able to not only provide capital but also offer their expertise and management advice to the portfolio companies. This hands-on approach sets family offices apart, especially in a time when banks are tightening lending and private equity firms are becoming more selective with their deals.
Family offices have the advantage of offering patient capital, with investment horizons that can span decades or even generations. This long-term vision allows them to capitalize on the illiquidity premium that comes with private market investments. By bypassing public markets or pooled private market investments, family offices have the potential to achieve significantly higher returns. Additionally, co-investing alongside private equity firms not only reduces fees but also increases carried interest payments, further enhancing their returns.
However, direct investing comes with its own set of challenges. Family offices tend to excel in industries where they have built their wealth or possess specific expertise, limiting their investing scope. Conducting thorough due diligence, which involves a deep dive into the financials and management of a company, can be particularly challenging for smaller family offices. As a result, many are turning to larger wealth management firms and deal advisors for assistance. While a majority of family offices conduct their own internal due diligence, a significant portion also seek input from investment consultants to ensure sound investment decisions.
The rise of family offices as private equity funds signifies a notable shift in the investment landscape. With their deep industry knowledge, patient capital, and hands-on approach to investing, family offices are poised to play a significant role in shaping the future of private markets. Despite the challenges they face, the willingness to adapt and seek expertise from external sources will likely contribute to their continued success in direct investments.