URL: /direct-investments-family-office-guide

Understanding direct investments for family offices

A family office is a private company that provides wealth management services for high-net-worth individuals (HNWIs) and families. The primary goal of a family office is to manage and preserve the family’s wealth across generations. [1]

These offices cater to the specific needs of a wealthy family, including investment management, estate planning, tax services, philanthropic management, and sometimes personal services like household management or travel arrangements. [1]

There are two main types of family offices: single-family offices (SFOs), which serve only one family, and multi-family offices (MFOs), which serve multiple families. Family offices typically offer a higher level of personalized service than traditional wealth management firms, as they are closely aligned with the family’s long-term interests and values.

With that in mind, families that require highly tailored services should go for SFOs. MFOs tend to be less focused in comparison because they work for multiple families.

Family offices have increasingly turned to direct investments as a strategic approach to grow and preserve client capital. In this article, BAM Capital will explore direct investments: what they are and why family offices are drawn to them.

What are direct investments?

Direct investments involve investing capital directly into a company or asset, not through a fund or other intermediary. This can include purchasing a stake in a privately held business, funding startups, investing in real estate, or investing in other tangible assets.

For HNWIs, direct investments can offer the potential for higher returns, greater control over investment decisions, and the ability to leverage personal expertise and networks. However, they may also come with higher risks, less liquidity, and often require substantial capital, making them more suitable for those tolerating complex financial engagements. [2]

The two most common types of direct investments for family offices are venture capital and private equity.

Venture capital (VC)

Direct investments in venture capital (VC) are increasingly attractive to high-net-worth individuals seeking high returns and diversification outside traditional asset classes.

Venture capital involves investing in early-stage startups and emerging companies that exhibit high growth potential. These investments offer the possibility of substantial returns, but they can also come with a higher level of risk compared to more established asset classes like stocks and bonds. [3]

For HNWIs, direct participation in VC can provide access to innovative sectors such as technology, healthcare, and green energy, often at the forefront of industry disruption and advancement.

Wealthy families that engage in direct venture capital investments might benefit from more control and influence over their investments than pooled investment vehicles like VC funds.

With the help of their family office, they can select specific companies or entrepreneurs they believe in and may even take active roles in advising or mentoring the startups. For those who are well-versed in a particular industry or have a high tolerance for risk, direct investments in venture capital can be a rewarding way to grow wealth. [3]

Private equity (PE)

Private equity is often grouped with venture capital and hedge funds as an alternative investment. Like VC, private equity is becoming more popular among family offices as they help wealthy families diversify their portfolios and achieve higher returns. [4]

Instead of investing directly into a promising startup, private equity involves investing directly in private companies, often through buyouts, venture capital, or growth equity. These investments typically offer the potential for substantial returns, as private companies are less regulated and can be more nimble in responding to market changes.

For HNWIs, the allure of private equity lies in the opportunity to be involved in the growth and development of companies, often gaining access to unique investment opportunities that are not available in public markets.

Investors should remember that, much like venture capital, this asset class involves committing significant capital for years—which is why they are limited to institutions and those with high net worth. [4]

While the potential for high returns is a strong motivator, family offices must determine if this strategy aligns with the family’s values, financial goals, and risk tolerance. They must also carefully consider the due diligence process, as the success of a private equity investment largely depends on selecting the right opportunities and partners.

Why family offices are drawn to direct investments

Family offices have increasingly been drawn to direct investments as a strategic approach to preserving and growing their clients’ capital. Unlike traditional investment routes that rely heavily on third-party managers or funds, direct investments may provide family offices more control over their assets, greater transparency, and the potential for higher returns.

This hands-on approach allows them to tailor investments to align with the family’s specific values, objectives, and risk tolerance.

Control and influence

Direct investments can extend family offices greater control over their investments. Unlike investing in a fund, where fund managers make decisions, direct investments can allow family offices to influence the company’s strategic direction. [5]

Alignment of interests

In direct investments, the interests of the family office and the company are often closely aligned. Family offices can work directly with the management team to achieve common goals, such as long-term growth and value creation. [5]

Potential for higher returns

While riskier, direct investments can offer higher returns than traditional investment avenues. The potential upside can be significant for family offices with the resources and expertise to manage these investments.

Tax efficiency

Direct investments can also be more tax-efficient than other forms of investment. Family offices can structure deals to optimize their tax position, such as through holding companies or trusts. [5]

Challenges of direct investments

As mentioned earlier, direct investments are not without risk. Family offices have to navigate notable challenges.

One primary concern is the level of risk involved. Unlike diversified investment portfolios, which spread risk across various assets, direct investments often involve concentrated bets on specific companies, real estate projects, or other ventures. This concentration can lead to substantial losses if the investment underperforms or fails.

Direct investments also require a deep understanding of the market and industry. HNWIs may not always have the expertise or time to analyze potential investments thoroughly. However, this is mitigated by the financial expertise of family offices. [6]

Another significant challenge is the liquidity of direct investments. Unlike stocks or bonds, which can typically be bought and sold quickly on public markets, direct investments often involve illiquid assets.

Real estate, private equity, and venture capital investments can tie up capital for extended periods, sometimes years, before a return is realized. This lack of liquidity can be problematic for families needing to access cash quickly or who prefer to maintain a flexible investment portfolio. [6]

Access to premier real estate investment opportunities for accredited investors: Multifamily syndication

With the right strategies and expertise, family offices can successfully leverage direct investments to meet a family’s long-term financial goals.

While direct investments are growing in popularity among family offices, they also commonly recommend one type of investment: multifamily syndication. Real estate, in general, is considered a great addition to any investment portfolio, but it’s no secret that owning real estate can present challenges.

While multifamily syndication is not a direct investment, it can help diversify a family’s investment portfolio. Real estate syndication also solves many of the problems that investors typically encounter when investing in real estate, namely property management and the substantial capital required.

Thanks to their numerous units and residents, multifamily properties such as apartment communities and condominiums are primarily associated with solid and predictable cash flow for a lone investor. However, these large real estate properties can be too expensive and risky. They also tend to be much more challenging to manage than a single-family property with only one resident.

This is where multifamily syndication comes in.

Real estate syndication involves multiple investors pooling their financial resources to acquire a single real estate property. With several investors joining in, the idea of risk is significantly lowered, and more significant investment properties become more accessible. [7]

There is also the benefit of property management. Typically, purchasing real estate will require you to become a landlord and handle all the residents’ concerns and the property’s day-to-day needs. This can be time-consuming if you have no experience being a landlord.

But with multifamily syndication, the owner/operator handles property management for you. They are the ones who serve as the general partner (GP) in the deal, putting everything together from start to finish. The owner/operator or sponsor will be the one to locate the property, conduct due diligence, and look for accredited investors who will provide most of the capital needed to purchase the real estate property. [7]

As limited partners (LPs), investors have limited responsibilities. In exchange for their investment, they can earn a share of the property’s cash flow, which may be distributed monthly or quarterly. Depending on the deal structure, they may earn a share of the equity upon resale. Remember that every deal is different, so due diligence is still necessary. [7]

Due to its nature, multifamily syndication is a reputable way for HNWIs to add real estate to their portfolio and enjoy the benefits of owning a property without the headaches that usually come with it.

This is a true passive real estate investment because the owner/operator creates and executes the business plan. Investors can just sit back, relax, and enjoy their investment. This is why it is usually highly recommended by family offices.

That said, most of these deals are exclusive to accredited investors. Accredited investors have the financial sophistication and investment knowledge to assess these deals properly. They also have the annual income and net worth to protect themselves financially if a deal fails. This is why the U.S. Securities and Exchange Commission (SEC) limits real estate syndication deals to accredited investors.

Work with BAM Capital for an award-winning multifamily real estate team

Even multifamily syndication has its unique set of challenges. Like venture capital and private equity, these deals struggle with illiquidity because they tend to hold on to capital for several years. This means accredited investors need to be comfortable with not having access to their funds for some time. That said, multifamily syndication can be a great source of consistent cash flow.

Multifamily syndication’s potential risks and benefits highlight the importance of working with a trustworthy owner/operator. Accredited investors should choose an owner/operator they can trust. After all, the owner/operator will make all the decisions in the real estate syndication.

Work with BAM Capital. This Indianapolis-based owner/operator is known as a leader in its industry, with an undeniable track record for excellence. In fact, BAM Capital now has over $1.2 billion AUM and ~6,500+ units. [8]

This is thanks to the award-winning investment strategy used by BAM Capital that mitigates investor risk while creating forced appreciation.

BAM Capital prioritizes institutional-quality real estate properties that are Class A, focusing on multifamily properties with proven upside potential and in-place cash flow. [8]

As a vertically integrated company, BAM Capital can add value and guide investors through every step of the syndication process, from acquiring the property to managing it. [8]

No investment is without risk. Before making financial decisions, consult your investment advisor or speak to a BAM Capital investment team member.

Schedule a call with BAM Capital and invest today if you are an accredited investor who wants to enjoy passive income and all the other benefits of being in multifamily syndication.

 

 

Sources:

[1]: https://www.privatebank.bankofamerica.com/articles/managing-your-family-legacy-through-a-family-office.html

[2]: https://www.investopedia.com/terms/d/direct-investment.asp

[3]: https://www.forbes.com/advisor/investing/venture-capital/

[4]: https://www.investopedia.com/terms/p/privateequity.asp

[5]: https://www.forbes.com/sites/francoisbotha/2020/02/21/5-reasons-why-family-offices-are-focusing-on-direct-investments/

[6]: https://www.dentons.com/en/services-and-solutions/family-office-direct-investing-survey/direct-investing-and-its-challenges

[7]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important

[8]: https://capital.thebamcompanies.com/