Family Office Direct Investment Insights For 2023 And Beyond

Family offices face growing challenges as changes in the investment landscape intensify. Inflation, recession, geo-political risk and their effects on the global economy top the growing list of threats influencing how family offices invest in 2023 and beyond.

In October 2022, 188 individuals from 32 countries participated in the Dentons Family Office Direct Investing Survey. The findings reveal that while many family offices are braced for the worst as investors, they are also searching for the best opportunities in direct investments and private markets. Private equity has garnered rising allocations within family office portfolios in previous years and remains a primary focus.

According to Edward Marshall, Dentons’ Global Head of Family Office, “The report provides actionable, differentiated, and valuable insights to our clients and the broader family office community as investment strategies for 2023 are refined.” Marshall also points out that data often lacks comparability, “Family offices now have data where they can evaluate their direct investment-related activities against peers of their own size and geography.”

Key Findings Uncovered Some Interesting Insights

Below are five key insights extrapolated from the survey’s data warranting consideration by those involved with family office direct investment strategies.

1. Direct investments in Strategic Asset Allocation versus Tilted- and Tactical Asset Allocation

Strategic Asset Allocation (SAA) is often a starting point when reviewing a portfolio’s architecture. However, the current environment emphasizes the growing importance of family office asset allocation at both a strategic and tactical level to ensure an institutional yet dynamic investment approach. This safeguards long-term investment strategies and frees up assets for diversion to short-term investments that may offer higher returns.

For family offices reviewing the strategies employed within their portfolios, two approaches may be worthy of consideration within this intricate mix. They should be selected according to the family’s investment and overall objectives.

A Tilted Strategic Asset Allocation wherein the family tilts direct investments into a specific region or key competency to further reduce risk or optimize returns. A Tactical Asset Allocation may also assist in adjusting longer-term allocations to minimize risk or benefit from short-term market movements.

2. Direct control and operational risk

Dentons survey data reveals that many respondents struggle with operational risk and control. This extends into family offices’ direct investment activities.

When it comes to direct investment strategies, those formulating and executing these need to clearly understand the family office’s financial return goals, risk tolerance, and how these investments will fit within the family’s current portfolio. The diversification of investments within this category is also vital to lower risk.

Direct investment risk can be further reduced by identifying opportunities with strategic synergy with the family or the family office’s core activities. This allows the family to leverage vital competencies, experience, network, and more to help their direct investments during difficult times.

3. Opportunity to partner in unique investment vehicles when stepping outside of a key focus area

The Dentons report indicates that family offices seek deep expertise in external partners when investigating direct investments. Where family offices have built up significant sector expertise, there is a considerable opportunity to package this expertise into unique fund vehicles.

Family offices can then open their own funds so that others can invest in these. This makes it easier for family offices to step outside of their key focus area and further diversify their portfolios.

4. Relying on direct investment referrals alone isn’t sustainable long-term

A key component in the success of any family office’s direct investment strategy is attracting the right deals at the right stages. As this is a critical success factor, there is a pressing need to move beyond only referrals from a close network to more formalized deal sourcing and evaluation capabilities to build and ensure the sustainability of the deal flow pipeline.

Actively seeking out investment prospects that align with the family office’s interests and expertise beyond the immediate family office referrals network can be achieved in several ways, including investing directly, limited partnerships, equity crowdfunding, syndication and joining angel groups and networks. In addition, joining industry associations within the family’s sphere of interest and influence may also yield connections that lead to well-aligned direct investment opportunities.

5. Successful direct investments require sufficient resources and due diligence

Entering into direct investments, even via fund vehicles, demands substantial resources and capabilities from a family office. According to Denton’s research, the ability to conduct adequate due diligence is a crucial challenge for family offices.

For those facing due diligence challenges, co-investing alongside other family offices that can take the lead in this regard may be a practical solution. Still, attracting and retaining top talent remains a critical success factor. In an increasingly competitive environment, family offices must work harder to attract the top people, partners, and investment opportunities than ever before. Creativity, transparency and connection when it comes to recruitment drives, flexibility when it comes to incentivization options, and interest alignment are all key in this regard.

In tumultuous times like the present, direct investments may also offer the most viable avenues of opportunity, growth and returns for family offices. When strategically designed and executed based on the family office’s interests and expertise, direct investments afford the family office many benefits. These include cost savings on fees, greater control and transparency surrounding investments, enhanced ability to customize risk exposure, and next-generation engagement.

Family offices that are mindful of the insights gleaned from the Dentons data and invest the necessary resources, conducting sufficient due diligence and implementing sound governance will find themselves in a strong position in 2023 and beyond.