More family offices eyeing direct investments

Private equity practitioners are facing increased competition from one of their most trusted sources of capital: family offices.

Direct investment strategies have become increasingly popular with large pension plans, which have the resources to staff in-house investment teams. Family offices, with relatively fewer resources, have only recently been able to start pursuing the strategy in greater numbers, observe market sources.

Ten years ago, only one in 100 transactions would face competition from a family office, said Livingstone partner David Sulaski. “Today, that has risen to one of five.”

Family offices are teaming up to have the firepower necessary to hire investment professionals and compete on deals, said Brian Jacobsen, managing partner at family-backed private equity firm Grand Crossing.

Other family offices, especially those with a particular sector focus, are at a minimum looking to have more input during the due diligence process and portfolio management post-acquisition.

Less interest in the typical ten-year fund structure is driving interest, said Jacobsen.

“Once you commit to [a fund], you don’t have a say and a lot of people don’t like the blind pool funds and the huge fees paid every year. They’ve all been looking for alternatives.”

Fund managers are finding family offices to be formidable competitors on deals because, unlike traditional private equity firms, they utilize flexible capital and hold periods, said Sulaski. This helps them “come to it with a different angle.”

The range of family offices exploring a direct investment strategy in private equity is also expanding, Sulaski noted. It used to “be just name-brand families going into private equity”, while lesser-known ones remained LPs or pursued co-investments, he said.

“That certainly has changed. I’ve seen family offices out of obscure places in Alabama, for example, with fortunes in industry, deciding to turn around and spend their capital and intelligence within those industries. It’s fascinating to see names and places you’ve never heard of, really making a name for themselves,” Sulaski said.