Why larger family offices get the prized deals…and smaller ones don’t

Larger family offices are increasingly competing against business development companies and hedge funds for the best opportunities for private direct investments, says a capital markets specialist. But it looks like smaller family offices are being kept out of the party because they don’t have the resources to compete.

Bo Powell, senior managing director at Ernst & Young Capital Advisors, said the bigger family offices have in recent years really expanded their repertoire of what they are looking to go after as they search for yield. Speaking on a webcast organised by EY on family office megatrends, Powell said family offices are increasingly doing deals involving hybrid structures. “Recent hybrid structures could involve a debt to equity proponent that might involve a convertible debt instrument, or it could be a debt instrument paired with warrants.”

Other variations, added Powel, could involve a debt instrument as a co-investment with another investment group.

But Powell said to be meaningful in this market you need to be prepared to write a $25 million cheque at the low end. “The amount of work needed to get involved in investments of around $5 million to $10 million sometimes outweigh the benefits. You need size to justify the work.”

So, the limited partner structure at a private equity fund might still be the best option for smaller family offices, despite ongoing concerns from these investors about fees, transparency, and lock-in periods.