How can Family Office Investors safely execute more Direct Deals?

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By Mike Ryan, BPN Co-Founder and CEO
Many family offices are run by people with tremendous insight and great judgment; people who can source attractive investment opportunities and make great final decisions — thinking through the risk/return and deciding whether and how much to invest. Family offices also have permanent capital, longer investment horizon and the ability to be flexible on deal structure. What a lot of family offices don’t have is a team dedicated to direct investing with a full time focus on the research, analysis and monitoring of their direct deals.

Nonetheless, direct investing has been all the rage with a nearly 4x increase (to $100bn+) in direct deals by family offices over the past decade with 94% of Family offices planning to increase or maintain direct private equity (and venture) activity in coming years, according to UBS with data supported by Pitchbook. What’s behind this trend? It appears that the desire to reduce or avoid the traditional “2 & 20” fee structure PE and VC Funds charge is a major factor (right or wrongly). That said, direct investing also offers an important benefit in terms of allowing the family to control the timing of their investment and harvesting in the context of their overall portfolio, cash flow needs and tax position. Some families take comfort that many of their direct deals have been “co-investments” offered to them by their Fund managers, without pausing to deeply consider that incentives differ between fund managers and LP co-investors or that LP co-investments carry about 20x the risk per dollar invested.  Lastly, the 10-year bull market which made most investing – direct or otherwise – a successful endeavor fueled increased confidence to “go direct.” 

Strong PE and VC Funds have well-trained analysts working full time to  vet, model and underwrite each deal, a serious investment committee reviewing each final investment decision, and a person or team assigned to monitor each holding over its life; While these processes are not perfect, and the benefits of direct deals can be well worth it when done right, it seems unwise to “compete” for returns with professional investor’s unless you have either a serious research team or powerful analytical tools supporting your own decisions.  

How can Family Office direct investors get the “best of both worlds” – the fee reduction, timing control and capital efficiency of direct investing, with the professional research, analysis and monitoring required to prudently manage capital and maximize returns?  One answer is to hire a larger staff capable of doing outstanding research and develop your own analytical tools, all of which may consume millions of dollars and thousands of hours. Another is to work on a deal-by deal basis with Bulletpoint.network (BPN) to leverage your own insight, capitalize on the research available from your managers, staff and network, and utilize the BPN research team and patented software platform to give you justified confidence in every direct investment you pursue. Either approach, or a combination of both, could make sense, but making illiquid direct investments without a serious process in place seems like a dangerous path.

For more detail on the dramatic rise in direct investing among institutional LPs as well as Family Offices, check out The Rise of Direct Investing by Institutional LP's and Family Offices.