Family Offices Moving to Direct Investments

7 Jan

By Dennis Ford, CEO, Life Science Nation

Historically, single and multi-family offices hired asset managers to help allocate capital adroitly in order to preserve wealth for future generations. The majority of this capital was traditionally placed into the hands of asset managers that focused on conservative holdings. At the same time, however, almost every family office maintains a smaller pool of capital for riskier assets. In the past, this capital was placed into higher-risk vehicles like hedge funds and PE fund with the hope that these investments could offer outsized returns. However, as returns have slowed and, for many funds, turned to heavy losses, it has become unjustifiable for many family offices to keep their capital in an objectively broken asset class. Increasingly, the trend in family offices seems to be heading down the path of direct investment in a variety of industries. These firms are executing this strategy, with the help of trained Wall Street talent, easily plucked from PE and hedge fund firms abound in NYC, London, and Hong Kong.

Arguably, this may make sense for family offices long-term as an investor class, as most family offices are the product of entrepreneurial initiative and investment in what was, at one point, “the next big thing.” This is a documented trend that is picking up traction and may be ready to emerge full force in the near term. Due to the nature of family offices, this is particularly interesting for companies seeking to raise capital; unlike PE firms, family offices can be very quick on their feet and do not have to stick by an investment mandate if they choose not to. Family offices are flexible, and that flexibility can translate to opportunistic investment. Collectively, they are beginning to make waves with large amounts of small investments.

The rate of direct investment is increasing as family offices start to look more and more like PE, VC, and hedge funds. What’s most compelling is that they do not have to pay the “2 & 20” typically garnered by the fund managers who used to manage their money – money managers routinely get a 2% fee of all the assets they manage, and a 20% percent fee of any profit they make. Family offices, then, are doing the math of declining returns – voting with their feet, moving away from the traditional mangers, and taking it all inside (sans fees, of course!) This suggests a trend with momentum and will have some profound effects on the space over the coming years.

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