Money managers for the ultra-wealthy are eschewing traditional private equity funds and betting directly on upstart companies. According to a new report by Dentons, 63% of family offices use direct investments, and an additional 22% are interested in doing so. The law firm surveyed 188 family office respondents from 32 countries for the report.
Direct investing has gained popularity as a way to reduce fees from traditional private equity funds. That can mean taking a stake in a company directly or participating in club deals with other family offices.
Edward Marshall, global head of Dentons’s family office and high net-worth sector, said that such investment firms are especially drawn to opportunities in health care and disruptive technologies such as artificial intelligence. “Many family offices, when making these types of investments, are going to be long-term thinkers,” he said in an interview.
Family offices have boomed worldwide over the past two decades, partly because of surging fortunes across tech, finance and real estate.
The vehicles, which manage the personal capital of the ultra-rich, are lightly regulated, nimble and as public or private as the founder wants.
At family offices with direct investments, the average allocation is 37% of private equity assets under management, according to the report. The average investment is US$19 million ($25 million).
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While direct investing can give family offices greater control and more hands-on involvement in the company, it also “comes with its own set of issues,” Marshall said.
Those surveyed said they often faced difficulty obtaining high-quality deal flow, for example, and typically require in-house or external expertise to evaluate companies from highly specialised areas, like biotechnology. “The bottom line is that direct investing is hard and very resource-intensive,” he said. — Bloomberg
