Family offices increasingly investing in private company deals

A version of this article first appeared in CNBC’s Inside abundance newsletter with Robert Frank, a weekly escort to the high-net-worth investor and consumer. Sign up to receive upcoming editions, straight to your inbox.

Family offices are increasingly bypassing private equity funds and buying stakes in private companies directly, according to a recent survey.

Half of family offices plan to do “direct deals” — or invest in a private company without a private equity fund — over the next two years, according to a family office survey from Bastiat Partners and Kharis Capital.

As they grow in size and sophistication, family offices are becoming more confident about finding and negotiating their own private equity deals. Since family offices — the in-house capital and answer firms of high-net-worth families — are typically 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 doing direct deals through syndicates, where other investors collect the lead, “reflecting a cautious approach and reliance on the expertise of established sponsors,” according to the article.

“Family offices are being gradually recognized as an economic powerhouse in private markets,” according to the article.

The huge difficulty for family offices as they do more direct deals is so-called deal flow, or the volume of possible deals. Since most deals are either unattractive or not suitable, family offices may view 10 deals or more for every one that works, according to the article.

At the same time, family offices fiercely protect their privacy and prefer to remain largely unknown to the public. Without a public profile, they aren’t likely to be included in deal offerings or banker calls and miss out on potential investments. Fully 20% of family offices surveyed cited “excellence deal flow” as a primary concern.

One resolution, according to the article, is for family offices to begin developing more public profiles and web with each other more to attract deal flow. According to the survey, 60% view networking with other family offices as “crucial,” and 74% are “eager for more introductions.”

The other difficulty for family offices doing direct deals is due diligence, according to family office experts. When a private equity fund or company invests in a private company, they often have teams of bankers or in-house experts able to dissect a company’s financials and its prospects. Family offices typically lack the foundation for rigorous due diligence and hazard buying into troubled companies.

To formalize their deal process, more family offices are creating boards of directors and capital committees. According to the survey, 54% of North American family offices have established capital committees to help vet investments.

When it comes to their preferred private investments, they like to venture “off the beaten path,” focusing on niche and emerging asset classes. Family offices, for instance, are increasingly investing in real estate tax liens, fertility clinics, sale-leasebacks of real estate, whiskey aging and litigation financing.

“These approaches provide family offices with admission to private investments that offer attractive returns, cash yields and low correlation to traditional markets,” according to the article.