Forget Hedge Funds: Direct Investments Surging Among Family Offices
There is a major trend that has been emerging in the Family Office community over the past several years -- Direct investments in privately held companies. This trend has significantly increased since the start of the pandemic as more and more companies realize the benefits of partnering with a Family Office over a traditional private equity firm. It all boils down to a greater alignment of interest and patient capital (Family Offices are not incented to turn over money every 3 to 5 years and in most instances make better long term partners).
Between 2010 and 2015, direct investment activity by Family Offices increased by 206%, the biggest percentage jump in this activity of any five-year year period since 1990. As a result, 83% of Single-Family Offices are now making direct investments.
Direct investments enable Family Offices to focus on buying companies in an industry in which they have specific expertise -- this is referred to as strategic capital. Alpha is created through superior operations, not financial engineering.
Direct investments also come without the “2 and 20″ fee structure associated with most fund structures, which can substantially affect returns over time. This is a trend that will continue for many years.