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The Rise of Family Office Direct and Co-Investing
Family offices have been on the rise for many years. Yet, as is the case of many investment structures, family offices have undergone a series of changes in recent years. Two trends in particular—the rise of direct investing and co-investing—have commanded a lot of attention recently.
The rise of family office direct investing
Family offices have been able to invest directly in private companies (as opposed to investing through a fund structure) for decades. Yet the strategy has only become prominent in recent years. The early 2010s were a key inflection point. During the five-year time period spanning 2010 and 2015, direct investment activity among family offices grew by a staggering 206%—and the growth has continued ever since—according to a study by Fintrx, a Boston-based data and research firm.
Why are family offices increasingly gravitating toward direct investing? According to Francois Botha, a strategy consultant, the growth in direct investments by family offices “can be attributed to several factors including the accumulation of assets and talent required to effect such investments on the single family office's behalf, more robust networks, as well as the greater control and decision-making ability, as well as better value and interest alignment and returns that these deals afford.”
Yet there are other nuances associated with the growth in direct investments by family offices that are not often appreciated. For example, the Fintrx study revealed that a lot of the growth in direct investment has been driven by newly created family offices—in particular those created since 2015. Two-thirds of these recently-founded offices are participating in direct investing compared to about half (52%) of those founded between 2006 and 2010 and one-quarter of those founded prior to 1985.
Another nuance relates to the type of family office. Direct investment activity has been largely driven by single-family offices (which represent about 39% of family offices globally) as opposed to multi-family offices. According to the Fintrx study, a key reason is that multi-family offices are subject to more regulatory restrictions.
The rise of family office club and co-investing
In addition to direct investments, family offices have also been increasing their club investing and co-investing activity. While the terms “club investing” and “co-investment” are often considered synonymous, there are notable differences. Club deals are typically investments made by multiple investors, wherein each of the club “members” contributes capital to the deal. Unlike co-investments, the structure of the deal tends to vary according to several factors with the group members often agreeing to terms in advance of the transaction. Co-investments, on the other hand, typically have a distinct principal investor who takes the lead and tends to incentivize other secondary investors to invest due, in part, to their expertise. Co-investments can refer to a family office investment alongside another family or a private equity fund.
Both co-investing and club investing by family offices have been on the rise in recent years. The Fintrx report found that nearly half (43%) of family offices globally who invest directly, co-invest. Why has co-investing become increasingly attractive? According to Botha:
Co-investing with other 'like-minded' family offices and organizations is often the solution to overcoming several in-house issues ranging from inadequate resources to family conflict. Boasting a host of benefits from the pooling of resources to gain access to higher-value deals and transactions, more formalized structures, and governance disciplines, benefiting from others' expertise and experience while reducing costs, broader diversification, and better risk management, among others.
Relationship intelligence is key to club and co-investing success. The better able family offices are to understand how to leverage and strengthen their connections, the more likely that the outcome of the co-investment will be favorable. As Both has explained:
These stronger, more diverse connections facilitate networking and information-sharing amongst larger numbers of family offices. This, in turn, helps those involved to diversify their investments and leverage each other's deal flow.
Tools like Affinity empower family offices to not only manage their key relationships but also help them identify the most advantageous paths to co-investing and club investing. Affinity’s smart lists allow family offices to manage key relationships. The 360 Rolodex instantly organizes the office's contacts and builds rich profiles for every person and company.
While family offices have been around for years, they have shown remarkable transformation in recent years as direct investing and co-investing have become more prevalent. And they’ve also shown resiliency. According to Dr. Rebecca Gooch, Director of Research at Campden Family Wealth, many family offices are "demonstrating their strength as nimble, responsive, and patient investors, often with cash reserves to carry them through turbulent times."