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Family office direct investing is on the rise

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According to a study by Campden Wealth, an independent research company, family offices manage about $4 trillion globally. That amount is growing as more families sell out of their founding businesses and, with the proceeds, look for opportunities in wealth preservation, philanthropic activities and increasingly, asset management that includes direct investment in private companies and investment funds.

The evolution of family offices

Family offices have historically entered deals as limited partners in funds, relying on asset managers to perform due diligence on would-be investments. But larger family offices are now building out their investment infrastructures in-house to assimilate  professional investment firms, giving them greater control of their money and the ability to make their own investment decisions.

The number of professionals employed by these offices is dependent on the assets under management and the needs of the family members. Staff are responsible for everything from paying bills, filing taxes and managing finances to family wealth planning and coordinating activities with outsourced investment professionals. Some offices are adding their own investment professionals to the internal roster.

Growth in direct investing

The data shows that direct investing by family offices has grown more than 100% in the last decade. The number of completed deals by family offices since 2008 is trending higher, and the average capital investment per deal grew to $4.8 million in 2018 from $1.3 million in 2008, according to deal tracker PitchBook. PitchBook reports that family office deals span all industries, but are skewed toward health care and information technology.

 

Power to the family

According to Bloomberg, millennials are set to inherit about $30 trillion from their parents in the coming decades. As families pass down wealth and investment responsibilities to the younger generations, lack of investment knowledge by the new generation is one reason why a built-out internal investment infrastructure is important for the growth of the family office.

In addition, private equity firms are likely to face more competition as family offices engage in more direct investment. Middle market companies looking to sell some or all their business should be prepared for a family office to knock on their doors.

This article was originally published on The Real Economy Blog.

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