Family Offices & PE Funds: Finding Top Deals & Saving on Fees
- Ultra-high-net-worth families are increasingly choosing to invest directly in private companies, bypassing customary private equity funds to avoid fees and gain greater control, though this strategy requires significant...
- Many family offices are seeking to buy stakes in private companies directly,according to a recent survey by Citi.
- Detail: Private equity funds typically charge management fees and a percentage of profits, which can substantially reduce overall returns.Direct investing allows family offices to retain more of the...
Family offices Increase Direct Private Company Investments
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Ultra-high-net-worth families are increasingly choosing to invest directly in private companies, bypassing customary private equity funds to avoid fees and gain greater control, though this strategy requires significant in-house expertise.
The Shift Away From Traditional Private Equity
Many family offices are seeking to buy stakes in private companies directly,according to a recent survey by Citi.
Detail: Private equity funds typically charge management fees and a percentage of profits, which can substantially reduce overall returns.Direct investing allows family offices to retain more of the investment gains. However, sourcing and vetting deals requires a dedicated investment team and substantial due diligence.
Example: The Citi survey found that 48% of family offices are already making direct investments, and another 32% are planning to do so in the next year. This indicates a growing trend towards greater control and cost efficiency in private equity investing.
A Hybrid Approach: Co-Investing with Private Equity
Family offices are adopting a strategy that combines the benefits of both private equity funds and direct investing by backing PE funds while together investing directly alongside them in specific deals.
Detail: This co-investment approach allows family offices to leverage the deal-sourcing expertise and due diligence capabilities of established private equity firms while still maintaining a direct ownership stake and reducing overall fees. It provides access to proprietary deals that might or else be unavailable.
Example: A family office might commit capital to a private equity fund focused on technology investments, and then separately invest directly in a specific technology company identified by the fund. This allows the family office to benefit from the fund’s expertise while also enjoying the potential for higher returns from the direct investment.
The Cost of In-House Expertise
While direct investing offers potential benefits, it necessitates building or hiring a capable in-house investment team.
Detail: Sourcing proprietary deals, conducting thorough due diligence, and managing investments require specialized skills and experience. The cost of assembling and maintaining such a team can be substantial, potentially offsetting some of the savings from avoiding private equity fees.
Example: A family office seeking to invest in healthcare companies might need to hire professionals with backgrounds in medical research, regulatory affairs, and financial analysis. The salaries and benefits for these experts can represent a significant expense.