The evolution of family office direct and co-investing

Family offices have been gaining traction for many years and they’re not slowing down. In fact, the number of family offices globally has tripled since 2019. There are now over 4,500 family offices that collectively manage an estimated $6 trillion or more in assets.

Many expect this growth to continue. Pitchbook estimates that over $100 trillion will be passed down to younger generations over the next 25 years, most of which will funnel through family offices.

Yet, as is the case with many investment structures, family offices have undergone a series of changes in recent years. While their allocation to alternative investments remains relatively consistent, two trends in particular—the rise of direct investing and co-investing—have commanded a lot of attention.

The appeal of alternatives

Compared to other investors, family offices tend to have more concentrated exposure to alternative assets—including private equity, private real estate and infrastructure, hedge funds, and venture capital. Why? They typically have longer investment horizons, higher risk tolerances, and less liquidity needs, making higher-yielding alternatives an attractive asset class.

According to a survey by Goldman Sachs, family offices allocated an average of 44% of their portfolios to alternatives in 2023. Although this is 2% less than the 2021 average, it remains a significant portion of their portfolios. Looking ahead, investment in alternatives is expected to increase, with 48% of family offices expecting to boost their allocation to private equity in the next year.

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The evolution 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. Between 2010 and 2015, direct investment activity among family offices grew by a staggering 206%—and the growth has continued—according to a study by FINTRX, a Boston-based data and research firm.

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 much of the growth in direct investment has been driven by newly created family offices—in particular those established since 2015. Two-thirds of these recently-founded offices participated in direct investing compared to about half (52%) of those founded between 2006 and 2010 and one-quarter of those founded before 1985. 

Since then, direct investing has remained a popular choice amongst family offices, with 80% of family offices globally engaging in direct investments in 2023. Addressing market conditions in their 2023 Global Family Office Survey Insights report, Citi says,

“Larger family offices were less likely to be pausing direct investments due to economic uncertainty than smaller ones (33% [compared to] 43%), probably reflecting their greater risk tolerance.”

On the other hand, smaller family offices (managing less than $500 million in AUM) were more sensitive to market conditions in 2023. Citi notes,

“Smaller family offices were also more likely to be taking other precautionary measures such as strengthening due diligence, reviewing existing portfolio company updates more closely and setting aside capital to support those companies, perhaps because they have embraced these practices already.”

The benefits of direct investing

Why are family offices increasingly gravitating toward direct investing? According to Josipa Majic Predin, it has to do with increased involvement and control: “This shift towards direct investment strategies is underpinned by the desire for greater flexibility, higher returns, and a more impactful contribution to the economy.”

In their Family Office Investment Insights Report, Goldman Sachs notes other advantages of direct investing:

“The possibility of more strategic involvement, access to management, increased control over investment selection, or the perception of lower or no direct fees. Given the resources needed to source and evaluate these opportunities, we find that family offices with larger asset bases are more easily able to justify the incremental cost and manage the potential risks, such as concentration, that are associated with direct investing.”

The evolution of family office club and co-investing 

In recent years, family offices have also been increasing their club investing and co-investing activity. While the terms “club investing” and “co-investing” are often considered synonymous, there are notable differences.

What is club investing?

Club deals involve multiple investors, where each investor or “club member” contributes capital to a deal. Unlike co-investments, the structure of club deals tends to vary based on several factors, with group members often agreeing to terms before transacting. 

By joining forces, these investments often allow family offices to access larger deals that may otherwise be beyond the scope of their individual resources.

What is co-investing?

Co-investments, on the other hand, tend to involve a lead investor who incentivizes secondary investors (like other family offices or private equity funds) to participate—due, in part, to his or her expertise. 

Both co-investing and club investing by family offices have gained traction in recent years, particularly when it comes to real estate investing. UBS notes that family offices allocated 19% in co-investments to physical real estate in 2023. 

Why is co-investing 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.”

How relationship intelligence can help family offices

While family offices have been around for a long time, they have shown remarkable resilience and transformation in recent years as direct investing and co-investing have become more prevalent.

By using relationship intelligence, family offices can better understand how to strengthen their connections and maximize the value of their networks. Tools like Affinity empower family offices to not only manage their most important relationships but also identify the most advantageous paths to investment opportunities.

Affinity also helps speed up the research and diligence process by providing an instant snapshot of a target investment’s competitors and industry landscape—enabling faster and more informed due diligence.

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