The white paper went on to cite transparency as another reason direct investing is beneficial. “Families are getting away from black box investing, where they give their money to a private equity firm as a traditional limited partner and let them do as they please,” said Steven Thayer, a partner at Handler Thayer LLP, which provides legal services to family offices. “After the Great Recession of 2008, people really started paying attention to what was going on inside that black box. Family offices didn’t want to cross their fingers and hope that the outside investors were making the right investments. They really wanted more control over the investments that were being made.”

The Trend Is Increasing

The trend of direct investing is increasing and has been for a number of years. PitchBook, a research and data collection firm, reports a substantial increase in direct investments by family offices. It recorded 97 such deals in the United States in the past five years, compared to 56 in the previous five years. And these figures are likely a fraction of the real total, given that family offices tend not to share information about their transaction activity.

A 2014 UBS and Campden Wealth family office report disclosed that about 80 percent of family offices had participated in coinvesting as a solution for direct investing. Many family offices see coinvesting as win-win because they get to invest directly in deals alongside an investment firm or family office that created its wealth in a specific industry, and, at the same time, do not have to pay any extra fees. The other benefit is that they also do not have to hunt for the deals themselves, which often entails raising their profiles in the marketplace—and many family offices are loathe to do so.

Challenges Of Direct Investing

So if direct investing is a trend for family offices due to potential higher returns, transparency, and lower fees, then why are all families not doing this? Ultimately, it comes down to the family offices’ resources, expertise, deal flow and acumen to successfully execute a direct investment strategy.

The challenges and risks of investing directly are many, according to experts. Family offices that attempt to invest directly by luring managers from high-paying funds to run their operations are not always successful in their efforts. The other option is to manage everything in-house, but to do so they have to have an (1) understanding of the industry, (2) ability to do the proper due diligence, (3) underwriting ability and 4) expertise or the skill set to fully evaluate the opportunity. Any missteps in this process could cause an acquisition to turn south, which ultimately could put a dent in the family fortune. 

A Direct Investment Solution

After becoming a part of the family office community and speaking with hundreds of families, family office CIO’s, family office legal professionals and many patriarchs, I believe that the best way to invest directly is to invest alongside a family office that has created its wealth in the specific industry that you want exposure to.

If you want to invest in the oil and gas industry, find a family that you can invest next to. Investing next to or with a family is not the same as investing with a fund that is investing other people’s money. When investing alongside a family, you are invested with the patriarch’s own capital. In addition, you are able to piggyback in an area in which the family’s knowledge, expertiseand track record were created—benefits that one could never put together like the family has over the last 30 or more. And, unlike private equity firms or funds, families do not feel the pressure from investors to get out of a deal in a certain time frame, which allows for better investment decisions than those in which fund managers may force exits at certain times.