Direct investing is gathering momentum amid a desire for returns and control, and this trend appears to be backed by findings of a Family Office Exchange survey.
A survey of family offices in the US found that 81 per cent of them have at least one person working full-time looking direct investments, a sign of how this way of making money appears to be signficant amid a thirst for returns.
The survey of 118 respondents, by Chicago-headquartered Family Office Exchange, also found that 51 per cent of advisors polled devote two or more people to direct investment evaluation and sourcing. The findings came from the 2017 FOX Global Investment Survey. (FOX has been holding a conference this week; for more details, see here.)
Direct investing typically means investors decide whether or not to invest in a specific private opportunity and have an ongoing say during the ownership period. This is distinct from the typical approach which is predicated on providing investors exposure to private opportunities indirectly by having them commit to a “blind pool” fund, whose managers decide how to invest the funds, how to manage the investments and when to exit them - an investor’s only involvement is to read annual updates and wait for a distribution. Direct investing, so its practitioners say, allows wealthy investors to have transparency, higher level of control, greater engagement during the diligence and investment management processes, and better alignment of incentives between providers of capital and managers of capital.
“Since the financial crisis, we have seen families looking for alternatives to traditional equity and bond investing and reassessing their hedge fund allocation,” Sara Hamilton, founder and chief executive of FOX, said. “Direct investing gives family offices the opportunity to invest - as a lead or co-investor - in companies they know well, and where they, on average, expect double digit returns," she continued.
Kristi Kuechler, president of the FOX Private Investor Center added: “The families focusing on direct private investing typically choose to build out their own in-house staff. Of the 118 survey respondents, the average staff of the family office is 13 full time employees, with three involved in the investment process, and two of those three focused on sourcing and evaluating direct investments."
Across all the respondents, they reported a 7.2 per cent portfolio return for 2016, which 64 per cent of them said was a satisfactory result. For comparison, the MSCI All Country World Index returned 8.2 per cent and the S&P 500 returned 9.5 per cent in 2016.
Natural resources, including commodities, had the highest return of the reported asset classes at 15 per cent average return. Domestic equities were next at 13 per cent, followed by real estate at 9 per cent and direct private equity Investments at 8 per cent average returns.
Some 57 per cent of families intend to increase their direct investments in operating businesses or real estate in 2017. Demonstrating the accelerating interest in direct investing among family offices, of the 70 family offices that shared allocation data, the average allocation to direct investments in private equity was higher than through private equity funds (7 per cent vs. 5 per cent) at the end of 2016.
Of the family offices that are allocating more than 20 per cent of their assets to private equity, the trend is even more dramatic in favour of direct investments vs. funds with average allocation to direct investments at 22 per cent direct vs. 8 per cent via funds. These private equity-focused family offices demonstrated higher overall performance than the survey as a whole at 10 per cent vs. 7.2 per cent average.
More families are moving beyond a “single pie chart” and segmenting their portfolios with different asset allocations to support different goals or risk profiles, with 58 per cent reporting doing so.
Family Wealth Report recently interviewed Tetrad Capital Partners, a firm evaluating direct investments for ultra-wealthy families. The firm said there is a lot of “hype” around direct investing at the moment but investors need to be on guard about whether they are getting good value, appreciate the risks, and understand the amount of work such an approach requires. (To see that interview, click here.)