Family offices are planning big investments in private companies

Family offices are increasingly becoming their own private equity funds and investing in companies directly, according to a new survey.

A majority (62%) of family offices made at least six direct investments last year, where they buy a stake in a private company or provide lending, according to the survey of family offices by BNY Mellon Wealth Management.

An even larger number of family offices (71%), plan to make the same number or more direct investments in 2024. With the number of family offices tripling since 2019, and their total assets reaching an estimated $6 trillion or more, the flood of family office money into private companies could reshape private markets and the private equity industry.

“Direct investment presents exciting opportunities for family offices to leverage their unique competencies,” according to the report.

Family offices — the private investment arms of wealthy families — are often founded by entrepreneurs, who are skilled at running a private company, according to the report. Investing directly allows them to contribute their expertise and management advice to the portfolio companies, as well as their capital.

At the same time, private companies are increasingly attracted to family offices as banks tighten lending and private equity firms do fewer deals. Family offices have the advantage of offering more patient capital, since they’re typically investing for decades or even generations.

“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,” the report said.

Family offices are also co-investing alongside private equity firms, which can reduce the fees and increase carried interest payments.

Direct investing has its challenges, of course. Family offices typically succeed in industries where the family office built their fortune or have special expertise, which can limit their investing range. Doing proper due diligence – a deep dive into the financials and management of a company – can be difficult for small family offices. As a result, many are seeking help from larger wealth management firms and deal advisors.

While two-thirds of family offices do their own internal due diligence on direct investments, nearly half also seek input from an investment consultant.