A version of this article first appeared with Robert Frank in CNBC’s Inside Wealth newsletter, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions, straight to your inbox Family offices investing directly in private companies may be taking on more risk than they realize, according to a new survey. Direct deals, when family offices purchase stakes in private companies directly through private equity managers, have become increasingly popular among family offices and account for a growing share of their portfolios, according to the 2024 Wharton Family Office Survey. Yet many fail to take advantage of their power as investors. And they fall short in their monitoring and deal sourcing. According to the survey, only half of family offices making direct private investments have private equity professionals on staff who are trained to structure and identify the best private deals. What’s more, only 20% of family offices directly deal with a board seat as part of their investments, according to the survey, suggesting they lack strong oversight and monitoring. “The jury is still out on whether this strategy will work,” said Raphael “Rafi” Amit, a professor of management at The Wharton School who founded and leads the Wharton Global Family Alliance. Direct trading has become the most popular investment trend for family offices. According to a recent study by Bastiat Partners and Kharis Capital, half of family offices plan to trade in the next two years. Many family offices see direct investment as a route to the high returns traditionally offered by private equity but without the fees, since they are investing themselves. They can draw on their experience in running a private business, since many family offices were founded by entrepreneurs who created family-owned companies and sold them. The survey, however, suggests that they may not be fully utilizing their experience. Only 12% of family offices surveyed said they invested in other family-owned companies. Amit said the finding may also show that family offices simply see better opportunities in non-family-owned businesses. Family offices pride themselves on their patient capital, investing in companies for a decade or more to take advantage of their “illiquidity premium.” Yet when waiting to invest in private companies, family offices often insist they don’t need a quick exit like private equity firms. The majority of family offices surveyed (60%) said their overall time horizon for their investments was more than a decade. When it comes to direct contracts, their theory seems to differ from their practice. About a third of the family offices surveyed said their direct trading period was only three to five years. About half said they invest with a six- or 10-year time frame, and only 16% said they invest for 10 years or more. “They’re not taking advantage of the unique aspect of private capital — its more permanent and flexible nature,” Amit said. Family offices are syndicated and favor “club deals,” where families take a back seat to an investment with another family or to a private equity firm leading the investment. When asked how they find direct deals, most said through their professional network, their family office network, or they are self-generated, according to the survey. They are leaning towards later stage investments rather than seed or startup rounds. Fully 60% of deals were in the Series B round or later, according to the survey. When deciding to invest in a company, family offices emphasize the management team and leadership over the product. Fully 91% say the primary criteria is the quality and experience of the management team. Amit said that while family offices may prove successful in their direct contracting, the lack of professional staff, short time horizons and lack of board seats is “puzzling”. “It will take a few years to find out if it will be successful,” Amit said.
A version of this article first appeared with Robert Frank in CNBC’s Inside Wealth newsletter, a weekly guide for high-net-worth investors and consumers. sign up Get future editions, straight to your inbox.
Family offices investing directly in private companies may be taking on more risk than they realize, according to a new survey.
