A recent report prompted questions on how and why single and multi-family offices contrast in their enthusiasm for the direct investing approach, and what sort of incentives and pressures shape their attitudes.
(An earlier version of this report appeared in Family Wealth Report, sister news service to this one. The original report is global in scope, so the analysis here should interest readers in all regions where family office investment is conducted. Also, here is a reminder to readers to check out Highworth Research, the data and analytics firm tracking family offices. You can register for a trial for its data here.)
When a recent US report showed that single family offices are far more likely to make direct investments than their multi-family office counterparts, it naturally prompted thoughts as to why.
The study, produced by FINTRX, a family office data, research, and intelligence platform, and sponsored by Charles Schwab, shows that the lion’s share of single family offices around the world consider direct investing, a noticeable trend fuelled by the desire for superior yields and to reduce intermediaries’ fees. (A separate report by UBS in 2019 estimated that within the average private equity portfolio, 54 per cent of investments were direct.)
The FINTRX report estimates there are about 3,500 to 5,000 family offices throughout the world that have one or more employees and some form of external investment activity. Some 39 per cent of these are single family offices, and 61 per cent are multi-family offices. Out of that population, 83 per cent of the single family offices expect to allocate assets directly. With MFOs, however, the picture is almost the reverse – 70 per cent are not making direct investments and only 30 per cent are considering doing so. Across all FO types, 50.9 per cent are considering the direct route and 49.1 per cent are not doing so.
While exact financial sums are difficult to pin down – direct investments don’t have to be disclosed like a large stake in a listed company – one can speculate that the total runs to trillions, given the size of the world’s private equity sector alone, for example. (There is an estimated $2.44 trillion of unspent capital in PE, aka “dry powder”. Assuming that a fraction of that is in direct investing, it is still a big number.)