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Forget Hedge Funds: Direct Investments Surging Among Family Offices

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Direct investments in private companies are becoming increasingly common throughout the family office sector, according to a new report from FINTRX in partnership with Schwab Advisor Family Office.

The report says this trend has accelerated over the past decade mainly because family offices have accumulated the assets and talent required to effectively allocate capital directly into the private space.

Between 2010 and 2015, direct investment activity increased by 206%, the biggest percentage jump in this activity of any five-year year period since 1990. Annual growth continued through 2018.

As a result, 51% of family offices worldwide now consider investing directly, including 83% of single-family offices, but just 30% of multifamily offices.

In North America, the breakdown is 50% overall and 82% of SFOs versus 27% of MFOs.

Paul Ferguson, managing director at Schwab Advisor Family Office, notes in the report that when ultra-wealthy families invest in private equity funds, they can control the level of their commitment and potentially negotiate certain terms, but generally lack control over the companies purchased or timing of capital commitments and distributions.

“Direct investment, by contrast, enables the SFO to focus on buying companies of a preferred size or industry,” Ferguson says. “Then the SFO receives more transparent financial information — receiving it from the company directly instead of through a fund sponsor.”

Not only that, he says, but direct investments come without the “2 and 20″ fee structure associated with most hedge fund, which can substantially affect returns over time.

FINTRX based its report on a cross-section of data aggregated from public filings, proprietary data sources, strategic industry relationships and data mapping, among other sources.

According to the report, a desire and need to co-invest in direct investment opportunities has also increased. Forty-three percent of family offices co-invest alongside other family offices and venture capital, private equity and real estate investors.

This trend is much more prevalent among SFOs based in North America, with 51% investing directly alongside other entities.

About 61% of global family offices that directly invest allocate to some degree within the technology industry, 45% invest in consumer goods, 44% in business services, 44% health care and biotechnology, and 43% real estate.

Family offices in North America closely track these percentages.

FINTRX’s report indicates that 67% of SFOs execute direct investments regardless of funding round or type, versus 33% of MFOs. Overall, the majority of investments made by family offices occur throughout early rounds of funding, as 29.5% of family office allocations come in earlier stage seed and venture rounds.

In addition, MFOs make acquisitions and buyouts with slightly greater frequency than they partake in other stages of investments.

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