Family Offices Bypass Private Equity, Embrace Direct Private Company Investments

The landscape of private investment is shifting, with family offices increasingly opting to bypass traditional private equity firms and invest directly in private companies. A groundbreaking new survey from Bastiat Partners and Kharis Capital reveals that a significant portion of family offices – those in-house investment firms managing the wealth of high-net-worth families – are actively pursuing “direct deals,” demonstrating a growing confidence in their ability to source and manage these investments independently. This strategic shift underscores a maturing level of sophistication among family offices and offers insights into the future of private market investments.

Key Takeaways: The Rise of Direct Deals in Family Office Investing

• Surge in Direct Deals: Half of all family offices surveyed plan to engage in direct private company investments (without using private equity intermediaries) within the next two years.
• Syndicate Preference: Over half (52%) favor participation in syndicates, where other established investors take the lead, highlighting a preference for shared risk and leveraging existing expertise.
• Deal Flow Challenges: A major hurdle is securing access to quality investment opportunities (“deal flow”). Many suitable deals remain elusive, forcing offices to assess numerous prospects before identifying a viable investment.
• Privacy Concerns and Networking: Family offices’ emphasis on privacy often limits their access to deal flow. Addressing this requires increased networking and development of a more public profile among family offices.
• Due Diligence Expertise: The lack of robust in-house due diligence capabilities presents another challenge. To mitigate this risk, many are establishing formal investment committees and boards of directors.
• Niche Investment Strategies: Family offices are increasingly attracted to alternative asset classes like real estate tax liens, fertility clinics, sale-leasebacks, whiskey aging, and litigation financing.

The Growing Confidence of Family Offices

The survey’s findings highlight a significant trend: **family offices are becoming increasingly self-sufficient in their private investment strategies.** This confidence stems from several factors. First, many family office founders have entrepreneurial backgrounds, providing them with a deep understanding of the businesses they are investing in. This intrinsic knowledge allows them to effectively assess risk and identify opportunities that might be missed by more traditional investment vehicles. Second, the increasing size and sophistication of family offices have enabled them to build internal teams and resources capable of handling the complexity of direct private equity deals.

The report underscores the growing significance of family offices within private markets, labeling them as an **”economic powerhouse.”** This isn’t simply a matter of growing capital pools but also a display of expertise and a strategic move away from the dependence on traditional intermediaries like private equity funds. These funds, while experienced, often charge hefty management fees and may not always align perfectly with the long-term vision and unique risk appetite of individual family offices.

Overcoming the Deal Flow Hurdle

One of the most significant barriers to direct investing is access to suitable deals. The survey reveals that **20% of family offices identified “quality deal flow” as a major concern.** The problem isn’t just a lack of deals in the market, but rather a lack of visibility for family offices. Their preference for privacy, while understandable, often means they are excluded from the networks and deal pipelines that other investors readily access. Private equity firms and investment banks are naturally predisposed to pitch deals to those with well-established public profiles. This creates a “Catch-22” situation: lacking a wider network inhibits deal flow, hindering the growth of reputation that could enhance access to the flow.

The report suggests that a solution lies in increased networking between family offices and the creation of more public profiles. **A significant majority (60%) view cross-family-office networking as “important,” and 74% are “eager for more introductions.”** Developing these connections could directly increase deal flow, but it also addresses another pertinent issue: the trust inherent in relationships between family offices.

Due Diligence: A Critical Consideration

Aside from deal flow, the complexities of due diligence pose a major hurdle. Established private equity firms often possess extensive teams of experts to thoroughly vet prospective investments. Conversely, many family offices may not have the same depth of resources dedicated to rigorous due diligence, possibly leading to **risky investments in underperforming businesses.**

The report reveals that **54% of North American family offices now have established investment committees** to reinforce their investment processes. The creation of these committees and even full boards of directors is a strong indication of a maturing investment approach. These committees provide a framework for formalized risk assessment, collaborative decision-making, and the overall enhancement of due diligence procedures, mitigating potential issues with less experienced teams.

Expanding Beyond Traditional Asset Classes

The survey highlights another noteworthy trend: **a movement by family offices into alternative investment strategies.** Rather than solely focusing on traditional equities or bonds, family offices are increasingly venturing “off the beaten path,” exploring less conventional asset classes. This diversification signifies a broader risk management strategy and a recognition that high returns can be achieved across varied market sectors.

Examples provided include investing in **real estate tax liens, fertility clinics, sale-leasebacks, whiskey aging, and litigation financing.** These investments often offer intriguing returns, generate cash yields, and exhibit reduced correlation to traditional market fluctuations. In essence, these less-liquid, unconventional assets diversify portfolio risk and potentially deliver more attractive and consistent returns in the long run.

Conclusion: A Paradigm Shift in Private Investing

The survey’s findings point to a fundamental shift in the private investment landscape. Family offices are no longer simply passive players relying on intermediaries. **They are evolving into increasingly powerful and sophisticated actors, directly shaping private market activity.** This transformation is driven by both their growing financial strength and a maturing confidence in their internal capabilities. Addressing the challenges of deal flow and due diligence requires proactive solutions like enhanced networking and the formalization of investment processes. However, the ability of family offices to move directly into niche market deals points to a new era for private market investments, signifying entrepreneurial innovation and a shrewd search for high-yield, low-correlated returns.