By Russ Alan Prince, Contributor to Forbes
Directly investing in small and middle-market companies is becoming more appealing to family offices. While many still commit monies to private equity and venture capital funds, there is a strong and growing interest in doing direct deals. While some of these are “club deals,” the majority of direct investment opportunities are brought to family offices through the financial and legal professionals in their networks.
“Family offices make much higher allocations to alternatives in general, and private equity in particular, than typical high-net-worth investors or wealth management firms,” explains international family office authority Hannah Shaw Grove, a founder of Private Wealth magazine. “Many times the source of wealth behind a family office is a privately-held company, so family members know how important these types of investments can be and are accustomed to the unique nature of private equity deals.”
Surveys of family offices indicate that, for the most part, they are doing quite well as investors in small and middle-market companies. Risks and costs considered, the returns from these investments are proving to be superior to many of their other investments.
This perspective was reinforced by a recent survey conducted by ACG New York, the largest association of middle-market deal-making and corporate professionals in New York, with more than 1,000 members across all industry sectors. The findings indicated that family offices are currently seeing a great deal of success in the middle-market. According to Martin Okner, Chairman of ACG New York and Managing Director of global strategic advisory firm, SHM Corporate Navigators, “The survey of 218 members of the association found that almost a third of them attributed this to the fact that family offices have more flexibility in terms of deal structure. About a quarter said it was because they have the ability to hold such investments for a longer period of time than most private equity firms, and 22 percent thought it was their strong access to capital.”
Family offices and the ultra-wealthy families they represent have distinct advantages when investing in private companies. “While a majority of companies still see Private Equity firms as the right partner, certain sellers are attracted to the fact that family offices have lived the challenges they face as operators and the unique dynamics associated with running a family business,” says Okner. “Also, family offices are able to be more flexible in deal structures than other types of investors. These dynamics are fueling a large increase of direct investment activities among family offices.”
Small and middle-market companies like the advantages associated with family offices; combine that with the investment success family offices have achieved through private equity and it’s clear that direct investing is going to intensify. “Venture and private investing are hot topics among family offices and young, wealthy inheritors,” says Grove. “Today the appetite for direct investing and co-investing is much greater than we’ve seen in the past and the demand for interesting and exclusive deals is escalating. This has all the signs of a fundamental shift in how significant private wealth will be deployed moving forward.”