A version of this text first appeared in CNBC's Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Sign as much as receive future issues straight to your inbox. Family offices that make direct investments in private firms could also be taking over more risks than they realize, based on a brand new survey. According to the 2024 Wharton Family Office Survey, direct deals, through which family offices acquire stakes in private firms directly slightly than through a non-public equity manager, are popular amongst family offices and represent a growing share of their portfolios. However, many don’t reap the benefits of their strengths as investors. And they increasingly lack monitoring and deal sourcing. According to the survey, only half of family offices making private direct investments have private equity professionals trained to structure and discover the most effective private deals. Additionally, based on the survey, only 20% of family offices that do direct business take a board seat as a part of their investment, suggesting they lack rigorous oversight and oversight. “The jury is still out on whether this strategy will work,” said Raphael “Raffi” Amit, a professor of management on the Wharton School who founded and leads the Wharton Global Family Alliance. Direct deals have develop into considered one of the most well liked investment trends for family offices. According to a recent survey by Bastiat Partners and Kharis Capital, half of family offices plan to shut deals in the following two years. Many family offices see direct investing as a path to the upper returns that personal equity traditionally offers, but without the fees because they’re investing themselves. They may draw on their experience running a non-public business, as many family offices were founded by entrepreneurs who built and sold family businesses. However, the survey suggests they might not be taking full advantage of their experience. Only 12% of the family offices surveyed said they invested in other family businesses. Amit said the outcomes may show that family offices simply see higher opportunities in firms that aren’t family-owned. Family offices pride themselves on their patient capital, investing in firms for a decade or more to profit from their “illiquidity premium.” However, when family offices compete to speculate in private firms, they often emphasize that they don't need a fast exit like private equity firms. The majority of family offices surveyed (60%) said their overall investment time horizon is greater than a decade. When it involves direct business, their theory seems to differ from their practice. Almost a 3rd of the family offices surveyed stated that their time horizon for direct business was only between three and five years. About half said they invest with a six- or 10-year time-frame, and only 16% said they invest over 10 years or longer. “They are not taking advantage of the unique aspect of private capital – its more permanent and flexible nature,” Amit said. Family offices prefer syndicated and “club deals,” through which families team up with other families to make an investment or take a backseat to a non-public equity firm leading the investment. When asked how they found direct business, most responded through their skilled network, through their family office networks or that they were self-generated, based on the survey. They also tend to speculate in later stages slightly than seed or startup rounds. According to the survey, 60% of deals were Series B or later rounds. When deciding which company to speculate in, family offices place emphasis on the management team and leadership of the product. A full 91% said the most important criterion was the standard and experience of the management team. Amit said that while family offices could prove successful of their direct operations, the dearth of skilled staff, short time horizons and lack of board seats were “puzzling”. “It will take a few years to find out whether this will be successful,” Amit said.
Family offices that make direct investments in private firms could also be taking over more risks than they realize, based on a brand new survey.
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