How families engage with their capital, including how they manage and deploy it, can have significant implications for family dynamics, cohesion and purpose.
Families looking to deploy capital typically confront two choices. For decades, it has been common for families to rely on third-party managers, either large wealth management groups or individual asset management firms, to invest their capital.
One profound benefit of direct investing is that owning and operating businesses can help families recapture their legacies.
This passive approach has successfully delivered returns but leaves families with limited real discretion or involvement with their capital. As an alternate approach, families are increasingly investing directly into operating businesses to maintain an active role in managing their capital and building great companies. This active approach helps families align their purpose, values and goals while generating above-market returns.
In today’s marketplace, capital is abundant and often undifferentiated. This creates an enormous opportunity for families because family capital has inherent advantages compared to traditional capital. Family capital is both permanent and proprietary, providing significant flexibility in its deployment. It also is unbounded and unconstrained, allowing families to design and implement novel strategies to set and achieve business objectives.
What are the limitations of a passive capital approach? To start, with this rigid strategy, family capital owners can quickly become distant from the impact of their capital. Passive investing limits a family’s ability to have a direct and tangible way of creating economic and social benefits.
Moreover, passive capital deployment could not be more distinct from the hands-on engagement and active involvement key to how families built their wealth in the first place, often by starting, building and enhancing their businesses. Family offices with a passive approach can lack agility and creativity in responding to a changing market, and may miss out on attractive investing opportunities as a result.
One profound benefit of direct investing is that owning and operating businesses can help families recapture their legacies. By employing a direct investment strategy, families can reclaim their sense of purpose and regain a cohesiveness not achievable through a passive strategy. They can build better, more competitive and sustainable companies which generate higher, long-term returns on their capital. Importantly, with this approach, families can engage and motivate the next generation of family members in ways not possible with a passive approach.
While a direct deployment model has many benefits, this approach may not be right for every family. A successful direct investing platform needs the right strategy, team and processes to be in place, as well as a sufficiently large capital foundation. This model also requires an entirely different mindset and set of resources than a passive approach.
While a wholesale evolution may seem daunting to some families, even emphasizing one or two elements of a direct deployment approach with just a portion of a family’s capital will help the family move along the spectrum toward active investing. If done correctly, direct investing can help families more effectively achieve their goals, build better businesses and even begin to address societal challenges.
Families must understand that not all capital is equal and not all deployment strategies have the same impact on what families value most. Family capital brings unique advantages to family capital providers and family-owned businesses seeking a capital partner. By executing on these advantages with the right strategy and the right team, families can generate and sustain higher returns and build businesses for lasting impact while strengthening the ties that bind their family together.
Paul Carbone is the Co-Founder and President of Pritzker Private Capital. Paul also chairs the PPC Management and Investment Committees and has a particular focus on advancing the development of the family capital industry and PPC’s relationships with the market’s premier family groups. From 2012 to 2022, Paul was President and Managing Partner of Pritzker Private Capital and its predecessor.