Estimated reading time: 2 minute(s)
By Carter Williams, Managing Director of iSelect Fund
The family office is changing. Rather than turn assets over to managers, today’s family offices increasingly prefer to invest directly, buying stakes in individual companies or acquiring them outright.
In fact, research conducted by Chicago-based investment firm McNally Capital found that 77% of family offices polled in 2014 said they preferred direct deals over private equity funds, up from 59% in 2010. McNally also found that 84% of family offices polled plan to make a direct investment in a private company in the next two years.
Reasons for this are complex and varied, but often boil down to some combination of control, diversification, and cost savings. That is, families want to choose what they invest in, they want exposure to a wider array of industries and deals than one fund manager can offer, and they want to pay less in fees.
But it’s not only family offices getting involved. Many financial advisors note a growing number of their accredited clients wanting to invest directly. The reasons are often the same as with families—control, diversification and cost savings—but the implications for advisors and their clients can be far-reaching. Because most direct investing occurs outside of the assets managed by advisors, advisors often refrain from offering advice or passing judgement on any given deal of this type. Instead, most discussions with clients revolve around risk management; specifically how an investment affects a client’s professional liability, reputational or financial risk.
This reality leaves a gap for investors. Most lack the time and expertise to fully vet incoming direct investment opportunities, have lingering concerns about the quality of their deal flow, and have advisors unable to help them sort the good from the bad.
This inbound trend is what precipitated the creation of iSelect, and it’s something we’re seeing more often.
A growing opportunity
iSelect works with family offices, trusts, financial advisors and wealth managers to help accredited investors allocate capital to early stage ventures. iSelect’s institutional-grade due diligence regime allows advisors to manage their clients’ direct investing activities.
Historically, venture returns outperform more traditional assets, yielding 21.3% net IRR over the 30-year period ending December 31, 2014. By diversifying across 20 or more startups, conducting more than 120 hours of due diligence on each investment, and actively monitoring each startup after investing, investors canimprove the likelihood of significant return while decreasing portfolio risk.
Although enticed by the performance of venture as an asset class, investors remain concerned over control, diversification, and fee dynamics. Responding to these concerns, iSelect created a product that allows accredited investors – in concert with their financial advisor – to select individual investments and co-invest with an array of leading venture capitalists, all under a success-based model based on an evergreen fund structure and lower management and success fees than typical.
For investors, this represents an opportunity to bring choice and diversification into their direct investing. For advisers, it’s a way to better serve clients.
For more further reading on this trend, see:
- Appetite for direct investment grows at family offices
- Family Offices Team Up Taking Page From Private Equity
- Wealthy Families Have $4 Trillion Up for Grabs
- More Wealthy Clients Want Direct Investments
- Yale Made 93% a Year on Venture Capital in Past Two Decades
This post was published in partnership with iSelect Fund.