A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions delivered directly to your inbox. Family offices that invest directly in private companies may be taking on greater risk than they realize, a new survey suggests. According to the 2024 Wharton Family Office Survey, direct transactions, in which a family office purchases shares of a private company directly rather than through a private equity manager, have become popular among family offices and account for an increasing share of their portfolios. The bigger. However, many people fail to play to their strengths as investors. They are also increasingly lacking in monitoring and deal hunting. The survey shows that only half of family offices making direct private investments have private equity professionals who are trained to structure and identify the best private deals. Furthermore, the survey revealed that only 20% of family offices with direct transactions include board seats as part of their investments, indicating a lack of strong oversight and monitoring. “The jury is still out on whether this strategy works,” said Raphael “Raffi” Amit, a Wharton management professor and founder and leader of the Wharton Global Family Alliance. Direct trading has become one of the hottest investment trends for family offices. A recent survey by Bastiat Partners and Kharis Capital revealed that half of family offices plan to conduct transactions within the next two years. Many family offices see direct investing as a way to get the higher returns traditionally provided by private equity, but without paying any fees because they are investing their own money. They can also draw on their own experience running private businesses, as many family offices were founded by entrepreneurs who founded and sold family businesses. However, surveys suggest they may not be making the most of their experience. Only 12% of family offices surveyed said they invest in other family businesses. Amit said the findings may also indicate that family offices simply see better opportunities in non-family businesses. Family offices pride themselves on their patient capital, investing in companies for a decade or more to take advantage of their “illiquidity premium.” However, when vying for investment in private companies, family offices often stress that they do not need to exit as quickly as private equity firms. The majority of family offices surveyed (60%) said their overall investment horizon was more than ten years. When it comes to direct trading, their theory seems to differ from practice. Nearly a third of family offices surveyed said their time horizon for direct transactions was only three to five years. About half said their investment horizon was six or 10 years, and only 16% said their investment horizon was 10 years or longer. “They’re not taking advantage of what’s unique about private capital – its more durable and flexible nature,” Amit said. Family offices favor syndicates and “club deals,” where families team up with other families to invest, or give way to private equity firms that lead investments. The survey showed that when asked how they found direct deals, most people said it was through their professional network, family office network, or creating it themselves. They also tend to invest in later stages rather than seed or startup rounds. Surveys show that 60% of deals are Series B or later. When deciding to invest in a company, family offices emphasize the management team and leadership of the product. 91% of respondents said the top criterion is the quality and experience of the management team. Amit said that while family offices were likely to succeed in direct transactions, the lack of expertise, short time horizons and lack of board seats were “puzzling”. “It will take years to know whether this will be successful,” Amit said.
A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up To receive future editions delivered directly to your inbox.
Family offices that invest directly in private companies may be taking on greater risk than they realize, a new survey suggests.
