Rich families go solo on deals, moving away from private equity

FAMILY OFFICES, which manage the financial and personal affairs of the wealthy, are increasingly taking stakes in companies and committing staff to such efforts rather than investing in private-equity funds.

About 81% of offices have at least one fulltime employee sourcing and evaluating direct investments, according to an annual survey by the Family Office Exchange released Wednesday. Of the 118 offices polled, firms had an average of three employees involved in the investment process, two of whom had some responsibility for direct stakes.

Driving this push is the perceived lack of returns elsewhere, said Kristi Kuechler, president of the organization’s private-investor center. The average family office surveyed reported a 7.2% return last year and there’s less conviction that stocks, bonds and hedge funds will provide stellar returns. In fact, those surveyed reduced their allocation to hedge funds on average in 2016 and most don’t plan to increase it this year.

“The one place family offices think they can still generate double-digit returns is in operating businesses and real estate,” Ms. Kuechler said.

Direct investing in companies has become increasingly popular among wealthy families that see value in sidestepping private equity firms’ fees, which typically are 2% for annual management and 20% of profits. Going direct can also give families more say in investments and allow them to hold stakes longer than many funds permit.

The strategy requires manpower to find opportunities and investigate their financials, and then complete the transactions and manage stakes. In some cases family offices are teaming up on deals, said Ms. Kuechler. “That’s a huge trend,” she said.

It also means family offices need to ramp up their deal-making expertise. Such firms are already competing more for investment talent