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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 are increasingly bypassing private equity funds and buying stakes directly in private companies, a new survey shows.
A family office survey by Bastiat Partners and Kharis Capital shows that half of family offices plan to engage in “straight deals” – investments in private companies without private equity funds – within the next two years.
As family offices continue to grow in size and sophistication, they have become increasingly confident in finding and negotiating their own private equity transactions. Because family offices (in-house investment and service firms of high net worth families) are often founded by entrepreneurs who started their own companies, they often like to invest in similar private companies and leverage their expertise.
More than half (52%) of family offices surveyed prefer direct transactions through syndicates, with other investors taking the lead, “reflecting caution and reliance on the expertise of existing sponsors,” the report said.
“Family offices are increasingly being viewed as an economic driver of the private market,” the report said.
A big challenge for family offices as they do more direct transactions is what’s known as “deal flow,” or the volume of transactions that are likely to occur. With most deals either unattractive or inappropriate, family offices are likely to see 10 or more deals for each valid deal, the report said.
At the same time, family offices fiercely protect their privacy and prefer not to be known to the public. Without a public profile, they are unlikely to participate in deals or banker calls and miss out on potential investments. Fully 20% of the family offices surveyed ranked “quality deal flow” as their primary concern.
One solution is for family offices to start building more of a public profile and strengthen ties with each other to attract deal flow, the report said. The survey showed that 60% believed it was “important” to network with other family offices and 74% were “craving more introductions”.
Family office experts say another challenge facing family offices doing direct transactions is due diligence. When private equity funds or firms invest in private companies, they typically have a team of bankers or in-house experts who can dissect the company’s financial health and its prospects. Family offices often lack the infrastructure for rigorous due diligence and take risks acquiring distressed companies.
To formalize the deal process, more family offices are forming boards of directors and investment committees. The survey shows that 54% of North American family offices have established investment committees to assist in the review of investments.
When it comes to their preferred private investments, they like to “go off the beaten path,” focusing on niche markets and emerging asset classes. For example, family offices are increasingly investing in real estate tax liens, fertility clinics, real estate sale and leasebacks, whiskey aging and litigation financing.
“These approaches provide family offices with access to private investments that offer attractive returns, cash yields and are less correlated with traditional markets,” the report said.
