A number of factors are causing more and more wealthy families to embrace direct investing, and many players in the industry are seeking to capitalize on this trend.
The trend of family offices and other accredited investors engaging in the world of direct investing is intensifying: according to a 2012 study by the Wharton Global Family Alliance, average portfolio allocations by single family offices to direct investments rose from 6 per cent in 2009 to 11.4 per cent in 2011.
And in a 2010 survey of 62 families advised by McNally Capital, 83 per cent said they are planning to increase or maintain their direct investments in private firms over the next two years, while 59 per cent said they prefer to invest in direct deals as opposed to more traditional private equity funds.
There are a number of factors driving this phenomenon, one of which relates to the digitization of business development and deal sourcing activities, making private market investments more accessible.
Meanwhile, Mark Selinger of the international law firm McDermott Will & Emery, noted how, because of the financial crisis (and the increased difficulty in raising new or follow-on funds), families have been more successful recruiting top talent away from established funds to run their direct investment activities. At the same time, families are simply seeking greater control over their investments – particularly in light of dissatisfaction with funds due to illiquidity and faltering returns, for example.
Selinger defines direct investing as: “...A family investor, either an individual or more typically a family office or family-controlled investment vehicle, investing directly in a privately-held company.”
He added: “The investment can be in a passive minority share, in common or preferred stock, or in a significant or controlling interest, which typically would be in the form of a highly negotiated preferred stock instrument. This instrument often includes control or veto rights, as well as representation on the company’s board of directors.”
On that note, direct investing is also a way into the impact investing sector, allowing wealthy individuals and families to get involved with a firm whose philosophy they are passionate about, for example.
“This is an area where we're seeing increasing involvement with families, but bringing to that a level of sophistication which makes them much more competitive and able to play in the same arena as the funds,” Selinger, a partner at McDermott in New York, told Family Wealth Report.