Despite the pandemic, 2020 was a record-setting year for the wealthiest people in the world. In 2020, personal wealth surged by $5 trillion, producing more new billionaires than ever before. “Going direct” has become a trend over the last couple of years. It represents not only a shift of companies operating in the private tech and consumer space, but also a shift in family office investments. Family offices have become more sophisticated, and a passive Limited Partner (LP) structure may no longer the most practical. Wealthy families are investing directly in private companies. Direct investing happens through single-family and multi-family offices.
Today’s environment is characterized by low interest rates, unstable geopolitical conditions, and unpredictable financial markets. In this environment, wealthy families seek better returns, which often lead them to consider direct deals.
Why are direct deals appealing?
Direct deals provide greater decision-making authority, better transparency, and more control over other investment drivers. Direct investing gives family offices the opportunity to better align their objectives and interests with their investment strategies. Reduced fees and costs are also significant drivers of the direct-investment trend. Family offices have begun to broaden their networks, just like their private equity peers have done. They have done this to keep up with market trends and to stimulate proprietary deal flow. Direct deals also invite opportunities for themed collaboration, such as sustainable and impact investing. Such forms of investing are especially appealing to younger generations.
Family offices have characteristics that differentiate them from typical direct-deal investors. Direct investing has emerged as an important tool for family offices that aim for higher returns and more control. Because they are not restrained by strict mandates, family offices provide more flexibility than institutional investors. A family’s experience in a given industry can also give them an edge over the competition when chasing deal flow.
Is coinvesting sustainable?
Family offices must continue to focus on building out their platforms and budgets, just as private equity platforms do. However, the cost of this effort cannot be spread across several investors, since the office only has one client. This puts added pressure on investors to make profitable deals with high returns.
This trend shows the emergence of a new cooperative investing model in which family offices new to direct deals work with others who do have direct-deal experience. Larger family businesses are often willing to partner with smaller family offices while scaling up. Furthermore, these partnerships help disintermediate private equity funds and transfer knowledge while building a direct-deal team. Many family offices are eager to co-invest: 49% want to do more co-investing, while 44% want to maintain their current co-investing activity.
However, there are several challenges to co-investing. One of these challenges is the difficulty of identifying attractive deals. Other challenges are performing due diligence and aligning a given family office’s values and objectives with those of potential partners.
What is the best way to make direct deals?
Firstly, direct investments can be difficult. Family offices must build an in-house team to generate deal flow and provide operational support for their investments. Building a team internally can cause an inefficient use of resources. A well-considered process with assistance from external advisers can help family offices achieve desired results without committing long-term capital upfront. Family offices are often in contact with independent sponsors, investment funds, and other family offices. With the help of experts, family offices can leverage these connections profitably, helping ensure a steady deal flow.
For independent sponsors in Europe, family offices are a desirable source of capital, especially for smaller deals. The independent sponsor structure is mutually beneficial. Family offices find it appealing because they acquire controlling powers over the company’s investment terms, investment decisions, and projects.
It takes time to develop a successful direct investing strategy. Cap Expand Partners advise your company about complementary partners. We support clients in areas such as strategic partnership negotiations. With our expertise and resources, we will help you find the best opportunities for your corporate strategy. We can assist you in going direct, as the current trend toward such deals is likely to endure.