How Family Offices Are Revolutionizing Direct Investment Strategies

While family offices have traditionally relied heavily on fund investments, an increasing number are pursuing direct investment strategies. This shift is driven by a desire for greater control, customization, and alignment with legacy goals beyond just returns.

The direct investment advantage has several potential benefits that make direct investing an attractive approach for family offices:

• Ability to take a more active role in governance and strategic decisions

• Lower fees compared to fund investment vehicles

• Customized structuring to meet specific investment criteria
  

According to the Global Family Office Report 2022 by Campden Wealth:

• 74% of family offices now make direct investments

• On average, direct investments account for 26% of a family office's overall portfolio
  

As family offices become more sophisticated, their appetites for increased control are growing.

Industry specialization rather than trying to be all things to all sectors, many family offices are zeroing in on specific industries where they can leverage expertise and long-term perspectives.

• 59% of family offices have a sector preference approach, per Campden's report

• Common focus areas include real estate, technology, consumer goods, healthcare and sustainability
  

By concentrating efforts, family offices can execute more effective due diligence and oversight as direct investors.

The small business opportunity An area drawing rising interest from direct investors is acquiring small businesses. Several dynamics are converging to create opportunity:

• An estimated 480,000 baby boomer business owners will want to retire each year over the next 15 years, according to Project Equity

• The saturated market favors buyers, with selling multiples declining

• High interest rates are suppressing valuations further
  

"We see baby boomers retiring as a huge chance for investors to acquire undervalued, high-quality small businesses," said Scott Hauck of Legacy Capital Fund, which focuses on this strategy.

Direct investing while compelling, also comes with significant challenges:

• Requiring larger investment minimums and capital commitments

• Need for dedicated resources to source, conduct due diligence, and oversee investments

• Managing potential conflicts of interest through separate accounts
  

Family offices must have robust governance frameworks and deep investment expertise to execute successfully.

The future of family capital even with the hurdles, many family principals view direct investing as an ideal way to leave a lasting imprint beyond just returns. As one family office principal stated in Campden's report: "Direct investment is the future of the family capital."

With greater control and ability to customize their investment approach, family offices are revolutionizing what capital stewardship means for multigenerational wealth.