The champagne was flowing at a Hamptons gathering last month for members of Tiger 21, an investment club for the ultrawealthy. After some schmoozing, talk turned to a hot topic: do-it-yourself dealmaking.
Some attendees invested directly in real estate. One sunk money into an amusement park (he lost big but his kid had fun, he joked).
For these and many other rich people, hedge funds, private equity and other traditional velvet-rope investments are no longer enough. They’re looking to “go direct” -- Wall Street-speak for putting their money straight into a business.
Direct investing is a well-worn strategy for billionaire families like the Dells and Pritzkers, who have multiplied their wealth by buying into private enterprises. But it’s now trickling down to mere centimillionaires, who may lack the funding and financial know-how to build their own family offices, as public-market valuations grow ever larger.
The drive is also rooted in envy: wealthy investors have watched people who took early stakes in successful startups such as Uber Technologies Inc. and Airbnb Inc. accumulate massive riches, at least on paper. Then there’s the simple prestige of owning a piece of a company and having more power, in theory, than they would in a passive investment.
‘Bit Smarter’
“Some wealthy people don’t like being in investment pools where they don’t have a say,” said Felix Herlihy, a managing director at Cascadia Capital, which specializes in the kinds of middle-market transactions family offices favor. “The thinking is by going direct their performance over time will be superior. In a way, it’s saying, ‘I’m a little bit smarter.’”
In a poll last year of 157 families with more than $250 million, 66 percent said they wanted to do more direct investing. And such deals may even become more common among the less wealthy: U.S. Securities and Exchange Commission Chairman Jay Clayton said last month he’s considering an overhaul of rules meant to protect mom-and-pop investors in order to allow them to invest in private companies.
The trouble is that going direct means different things to different people -- from buying shares ahead of an initial public offering to taking a majority stake in a business. And the risks to investors can vary wildly.
Moreover, the gap in returns between illiquid investments and highly traded stocks and bonds has never been smaller, said Michael Tiedemann, chief executive officer of Tiedemann Wealth Management.
Buyer Beware
“There’s a ton of money out there still waiting to be deployed,” he said. “If the deal has reached your desk, and it is not an industry that you were an operator in, chances are it has been looked over and passed on by those who know much more about the competitive landscape than you."