Family offices continue to reassess traditional approaches to asset allocation, ultimately shying away from the conventional methods of portfolio construction. At an increasing rate, these savvy wealth vehicles are plunging into direct investment opportunities to utilize the many advantages they permit - such as having greater control over investments or saving on costly fees paid to intermediaries - to name a few. As we continue to monitor the direct investment activity within the family office landscape, we have highlighted a dramatic shift from private equity fund allocations to direct investments. Continue reading for further insight...
The advantages of allocating to private equity fund managers.
Private equity firms around the world are often known for one distinguishing feature: adding value for their investors. Often regarded as viable vehicles to gain increased exposure to private investments, private equity fund managers make it possible for accredited individuals and institutional investors to directly invest in and acquire equity ownership in promising companies. "The firms’ standard practice of buying businesses and then, after steering them through a transition of rapid performance improvement, selling them. That strategy, which embodies a combination of business and investment-portfolio management, is at the core of private equity’s success." Prior to the tech boom, these entities were considered highly attractive to investors and entrepreneurs, as they were the primary resource (at the time) with the intricacies necessary to improve management, logistics and other essential components of a business - which often takes years to develop. To provide fruitful turnarounds for developing ventures, private equity funds are well-equipped with the knowledge and resources needed to enhance operations and ensure successful investment returns. Many investors prefer opportunities in the private market as opposed to the public market given the overall inefficiencies of the space. These inefficiencies provide investors with greater opportunity to generate above market returns.
Why has there been a shift from private equity fund allocations to direct investments?
In the past decade or so, family offices around the world have begun reassessing their investment approaches with an enhanced demand for transparency and control. This in turn led to greater emphasis on direct investments in private companies. Utilizing our FINTRX-Buy-Side product - which offers full transparency into the direct investment activity of nearly 3,000 family offices worldwide - we continue to see a radical shift in direct investment activity of these private wealth entities. Because family offices have become larger and more sophisticated, many have been able to adopt in house, the services and advantages of traditional private equity funds.
With an increased number of first generation family offices entering the space, these entities are less removed from entrepreneurial experience. This direct exposure to creating and growing successful businesses has resulted in the family office space being more adept in making effective private investments."Twenty to thirty years ago, family offices would have been made up of a lot more old money. All the growth in family offices is going to come from more entrepreneurial and new wealth." Their deep-rooted domain knowledge leads to higher quality investments and an increased volume of deal flow.
What makes direct investments so appealing to family offices?
Family offices are increasingly making direct investments given the many advantages this opportunity presents. As family offices increasingly allocate directly, they are given more control over their portfolios. Circumnavigating traditional private equity funds gives family office investors the chance to directly determine which companies to invest in. This method eliminates costly fees charged by intermediaries with an increased opportunity to target companies whose values, experiences and philosophies closely align with that of the families or individuals involved. "Family offices are keen to use their permanent-capital status to more fully align their interests with investment strategies that deliver true cash-on-cash value maximization rather than shorter-term internal rates of return metrics." Family offices look to identify lucrative, disruptive opportunities to deliver guidance, strategic introductions, and capital. Seeing that family offices do not have limited partners to answer to - with wide ranging objectives and demands - they are able to deploy the patient capital necessary for companies to evolve and expand. This ultimately aligns the best interest of all parties involved.
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