Family offices are increasingly taking on roles similar to private equity funds, directly investing in companies, according to a new survey by BNY Mellon Wealth Management. The survey revealed that 62% of family offices made at least six direct investments last year, acquiring stakes in private companies or providing loans. Looking ahead, 71% of family offices plan to make the same number or more direct investments in 2024.
The number of family offices has tripled since 2019, and their collective assets are estimated to be $6 trillion or more. This influx of capital into private companies could significantly influence private markets and the private equity sector. According to the report, “Direct investment presents exciting opportunities for family offices to leverage their unique competencies.” Often established by entrepreneurs experienced in managing private companies, family offices can offer valuable expertise and management advice alongside their financial investments.
Private companies are increasingly turning to family offices as banks tighten lending standards and private equity firms reduce deal activity. Family offices offer the advantage of patient capital, typically investing with a long-term horizon spanning decades or even generations. The report noted, “Successful private market deals capture the illiquidity premium, meaning that they can potentially achieve significantly higher returns than are available through public markets or even pooled private market investments.”
Moreover, family offices are co-investing alongside private equity firms, which can help reduce fees and increase carried interest payments. However, direct investing does come with its challenges. Family offices tend to excel in industries where they have built their fortune or possess special expertise, which can limit their investment range. Conducting thorough due diligence—analyzing the financial health and management of a company—can be particularly challenging for smaller family offices. Consequently, many family offices are seeking assistance from larger wealth management firms and deal advisors.
The survey found that while two-thirds of family offices conduct their own internal due diligence on direct investments, nearly half also seek input from investment consultants. This approach helps ensure that they make well-informed decisions and manage risks effectively.
As family offices continue to grow and evolve, their increasing role in direct investments is reshaping the landscape of private markets. By leveraging their unique strengths and expertise, family offices are positioned to make a significant impact on the companies they invest in and the broader investment community.
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