The Rise of Family Offices as Private Equity Funds

Family offices are undergoing a transformation, moving away from traditional investment strategies and towards becoming their own private equity funds. A recent survey conducted by BNY Mellon Wealth Management revealed that a significant majority of family offices are now opting to make direct investments in private companies. This shift in strategy is driven by the desire to leverage their unique competencies and actively contribute to the growth and success of portfolio companies.

The survey found that 62% of family offices made at least six direct investments last year, signaling a growing trend towards direct investment in private companies. Furthermore, 71% of family offices are planning to make the same number or even more direct investments in the coming year. With the number of family offices tripling since 2019 and their total assets estimated to be $6 trillion or more, the influx of family office money into private companies has the potential to reshape private markets and the private equity industry.

One of the key advantages of direct investment for family offices is the ability to provide not only capital but also expertise and management advice to portfolio companies. Family offices, often founded by successful entrepreneurs, can leverage their industry knowledge and experience to drive growth and create value in the companies they invest in. Additionally, family offices are known for offering patient capital, with investment horizons spanning decades or even generations, leading to potential higher returns compared to public markets or pooled investments.

Despite the many benefits of direct investing, family offices also face challenges in this new strategy. Family offices typically excel in industries where they have built their wealth or possess specialized expertise, limiting their investment opportunities. Conducting thorough due diligence on potential investments, including analyzing financials and management, can be particularly challenging for smaller family offices. As a result, many family offices are turning to larger wealth management firms and deal advisors for assistance in conducting proper due diligence.

Family offices are also increasingly co-investing alongside private equity firms, which can help reduce fees and increase carried interest payments. This collaboration allows family offices to leverage the expertise and resources of private equity firms while maintaining autonomy in their investment decisions. By working together, family offices and private equity firms can capitalize on mutual strengths and create value for their portfolio companies.

The rise of family offices as private equity funds represents a significant shift in the investment landscape. Family offices are seizing the opportunity to invest directly in private companies, leveraging their expertise and industry knowledge to drive growth and create value. While there are challenges to overcome, the potential rewards of direct investment are substantial, and family offices are well-positioned to capitalize on this evolving trend in the private equity industry.