Enthusiasm for direct investing has risen and sometimes retreated amid the gyration of interest rates before, during, and after the pandemic.

Almost two-thirds (64 per cent) of respondents to a global survey of 282 professionals at single-family offices expect to make six or more direct investments in the coming year, rising 10 per cent from those reporting doing so in the past 12 months.

However, the findings from BNY Wealth, issued yesterday, found that family offices have limited resources for undertaking direct investing in-house, encouraging them to use external consultants or co-invest alongside others. 

Enthusiasm for direct investing has risen and sometimes retreated amid the gyration of interest rates before, during, and after the pandemic. In the past decade, there has been plenty of talk about how single-family offices have become involved in direct investing, avoiding the fees associated with a fund-based approach, and rolling up their sleeves to make decisions directly. This news service has heard that enthusiasm remains at elevated levels. An argument one hears is that families who made their fortunes in a specific sector such as tech or real estate are ideally placed to invest in it. On the other side, they need to avoid risk concentration or the hubris of over-confidence in their own ability.

In its 28-page study, BNY Wealth found that 46 per cent of respondents to the survey said they plan to make six to 10 investments in the next 12 months; 18 per cent intend to make more than 11 such investments, 6 per cent plan none at all, and 30 per cent expect to make between one to five.

“Deep alignment of interests and values between a family office and investees is a crucial consideration, evidenced by a 52 per cent increase in those citing “alignment of interests” compared to last year. Direct investing is a patient, long-term practice, and one in which mismatched priorities or strategic frictions can prove major obstacles to unlocking anticipated returns,” the study’s authors said.

Examining the case for co-investing as a way of playing the direct route, with added help, the report said: “The demand for co-investments is likely to grow. This study finds strong demand for direct investment exposure but also highlights important barriers that are constraining expansion into the sector. Understaffing is emerging as a significant bottleneck for direct investing programmes, especially among US offices, where 44 per cent cite it as a key challenge, an 83 per cent year-over-year rise.

Asked about the major challenges of direct investing, the single-largest example given by family offices overall was “it is time-consuming”; about the same share of US family offices said “our office is understaffed” as a reason. Other reasons included “our office needs to find the right operator/GP”; “lack of operating expertise;" and “direct investments are not scalable.”

Private markets
In other topics, the BNY Wealth report said that over the past 12 months there was a 34 per cent rise in professionals at family offices planning to hike private equity exposure. The largest family offices are the keenest on the asset class, with 69 per cent intending to boost exposure.

“In line with last year’s study, private equity is the central portfolio pillar, with the combined universe of fund, direct and venture capital investments accounting for 28 per cent of current allocations,” the report said. 

On the fashionable digital assets space, 74 per cent of investment professionals have either invested in cryptos or are thinking about it – a 21 per cent rise in 12 months.

Artificial intelligence is a prominent theme – 83 per cent of investment professionals say it is one of their highest conviction themes. More than half (52 per cent) of family offices use AI to make investment decisions.

Changing tack, the report also looks at the use of luxury assets – such as fine art, jewellery and sports-related investments – as a way of spreading risk. The asset class has room to grow as new opportunities in professional sports team ownership and media rights emerge. Growing inflation anxiety may also add to the appeal of assets with inflation hedging potential.

On assets under management, the report said that 44 per cent of respondents had $250 million to $499 million; 22 per cent said they had $500 million to $999 million; 24 per cent said $1 billion to $4.9 billion, and 10 per cent said they had $5 billion or more in AuM. The survey showed that 63 per cent of those surveyed are in the Americas, 26 per cent in Europe, the Middle East and Africa, and 9 per cent in Asia-Pacific.