Many wealthy throw lifeline to businesses

During the pandemic, wealthy families have continued to use their investment pools, known as family offices, to gain access to the type of highreturn opportunities once reserved for institutional investors. But they are taking a more handson role in those financial decisions.

These family offices have chosen to bypass private equity and venture capital funds — which have high minimum investments and sizable fees — to invest directly in companies, either by themselves or with other significantly wealthy families, a report released this month found. And they are taking a greater entrepreneurial role in their investments, which would not have been possible if they had put their money into large funds for other people to manage.

Direct investment in businesses began to rise after the last recession, climbing 206% from 2010

to 2015. Last year, it grew 11%.

Now, half of all family offices in the world make direct investments in companies, according to the report, which was released by Fintrx, a data and research company, and sponsored by Charles Schwab’s family office arm. That number jumped to 83% for singlefamily offices, compared with offices that serve multiple families, with many of those investments focused on areas where the family had originally made its money.

“Family offices add value in times of crisis,” said Russ D’Argento, founder and chief executive of Fintrx. “That’s a big component of how they stand out and can be different from other fund structures.”

To be sure, the wealthy are able to invest differently in the pandemic from everyone else. Millions of Americans are worried about paying their bills and not being evicted from their homes.

For the wealthiest families, however, what has been an economic and health crisis for others is an opportunity to make money by throwing a financial lifeline to distressed businesses. The stock market may have rebounded quickly as investors looked past growing hot spots around the country, but these family offices are betting that the public markets are overvalued and that more predictable and steadier returns are to be had through private investments.

“There’s been an incredible recovery in the stock market, but how do

I commit more to the public markets when I’m looking at these valuations and it’s still a rocky road ahead?” said Eric Becker, who made his wealth by investing in health care companies and more recently founded Cresset Capital, a multifamily office.

The interest in direct investments has grown in the pandemic. There was a short pause when the initial stayathome orders were issued, but interest has begun to rise again, especially among newer family offices, or those formed in the last five years that still retain their entrepreneurial natures.

“Once the data started coming in and talk about therapeutics began, people started seeing a path toward normalcy,” Becker said. “Whether it’s two years, a year, six months out, it didn’t matter. They could see that path, whether it was distressed companies or companies that just needed some capital.”

The Fintrx report found that families generally invested in industries similar to those in which they had made their initial wealth. Technology led the way, with techfunded family offices committing 82% of their direct investments to tech companies. Real estate families were second with more than twothirds of their investments in real estate.

“Families initially invest in the same areas where they have experience,” said Paul Ferguson, managing director of the Schwab Advisor Family Office, which sponsored the Fintrx report. He added that family offices could help preserve private businesses through their investments.

“They have a lot of capital to invest, and they’re in a pretty unique position because of the longterm nature of their investing,” he said. “This is where their patient capital is very important.”

Simply having wealth, of course, does not make someone a good investor. Direct investing has its critics, who say the strategy is far riskier than its proponents admit.

For one, private equity firms have trillions of dollars sitting in their funds and are already looking for deals. So when someone with an investment opportunity approaches a family worth hundreds of millions of dollars, alarm bells go off.

“We’re always wary when someone pitches us an idea,” said Paul Karger, a cofounder and managing partner of TwinFocus, which works with 40 families that collectively have put $7 billion at the firm. “The first question is, how did this Texas oil deal miss everyone in Texas and end up on our doorstep in Back Bay Boston?”

Having sufficient selection options is something that even large private equity funds have to consider; many of them examine hundreds of deals before investing in one. But when it comes to direct investments, Karger said, he also is wary if professional investors are not part of the deal.

Karger said his firm advised most families to participate in direct investing through deals in commercial real estate — like apartments — that are easier to value and come loaded with tax advantages. He also counsels his clients to invest in deals through private equity funds and focus on the funds’ performance, not on the fees they charge, which are typically a 2% management fee and a 20% cut on an investment’s return.

“There’s a cost to doing something right,” he said. “If you pay peanuts, you get monkeys.”