Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Family Offices for Direct Dealmaking
Transcript
- Lucas: So there's this quiet shift happening among the ultra-wealthy that doesn't get nearly the attention it deserves. Families with a hundred million dollars or more are increasingly deciding they don't need to pay traditional private equity firms to manage their money. They're building their own deal teams — single-family offices that invest directly into companies, real estate, and private credit. Luna: Right — cutting out the middleman. But isn't that a huge operational lift? I mean, you're essentially running a mini private equity shop. Lucas: It is. But when you run the math, the incentive is massive. Take a family with $500 million in deployable capital. If they put that into a typical PE fund, they're paying roughly 2 percent management fees and 20 percent carried interest on profits. Over a ten-year fund life, that's roughly $100 million in fees and carry they never see again. Luna: So by going direct, they keep that $100 million in the family. That's a compelling number. Lucas: Exactly. And it's not just cost savings. Direct dealmaking gives families control over asset allocation, timing, and exit decisions. They're not forced into a fund's rigid timeline — they can hold an investment for five years or fifteen, depending on the opportunity. Luna: Who's doing this well? Give me a real example. Lucas: The Pritzker family — you know, the Hyatt hotel fortune — is a textbook case. Their single-family office, the Pritzker Group, manages over $30 billion and invests directly across private equity, real estate, and credit. They've built an internal team of over 100 professionals. They don't rely on outside fund managers; they source, underwrite, and manage deals themselves. Luna: And they've been at it for decades. But for a family just now moving to direct investing, there's a learning curve. Lucas: Absolutely. The first step is often co-investing alongside established PE firms. That lets the family see deal flow, learn the diligence process, and build relationships without going it alone. Over time, they lead deals themselves. Luna: Is there a minimum net worth where this starts to make sense? I've heard $100 million thrown around. Lucas: That's the rough floor for a dedicated single-family office with a few investment professionals. But for direct dealmaking — actually leading transactions — $500 million is more realistic. You need critical mass to cover the fixed costs: salaries for experienced deal partners, legal and accounting support, data infrastructure. Luna: What about the $50 million family? Are they locked out of this trend? Lucas: Not entirely. Multi-family offices are increasingly offering co-investment clubs. A group of families pools capital and shares deal flow, due diligence, and even staff. It's a way to get some of the benefits without the full overhead. Luna: That makes sense. But there's a risk I don't hear people talk about enough — key person risk. If your family office's star dealmaker leaves, your whole investment program is compromised. Lucas: That's the single biggest vulnerability. A traditional PE firm has multiple partners, succession plans, institutional processes. A single-family office might have one or two senior investors. If they walk out the door, the family's capital is literally unmanaged. Luna: So how do families mitigate that? Lucas: Some are building deeper benches — hiring three or four senior investors instead of one. Others are using a 'family council' governance structure that separates investment decision-making from family politics. And some families are buying minority stakes in boutique PE firms to get access to talent and deal flow without going full DIY. Luna: Interesting. So it's not an either-or. It's a spectrum from fully passive in funds to fully active direct investing. Lucas: Exactly. And the trend is accelerating because technology is lowering barriers. Deal-sourcing platforms like Axial and DealCloud give families access to vetted opportunities. Data rooms, virtual data analytics — you don't need a huge team to evaluate a deal anymore. Luna: What about regulation? Family offices have that exemption from SEC registration under the Dodd-Frank Act, as long as they meet certain conditions. Does that create a regulatory moat? Lucas: It does. A family office that serves only one family and doesn't hold itself out as an investment adviser can avoid the Investment Advisers Act. That's a huge advantage — less compliance cost, less disclosure. But if they start taking outside capital, even from friends or other family branches, they risk losing that exemption. Luna: So the Pritzkers stay private. But what about the newer generation of wealth — tech founders who sold their companies? Are they going direct? Lucas: Yes, and often with a twist. Many are creating what's called a 'strategic family office' — they invest in companies where their operating experience can add value. A former SaaS founder might buy a software company and actively improve it, rather than just writing a check. Luna: That's a different skill set from a traditional PE investor though. The failure rate for first-time direct investors is high. Lucas: It is. Data from the Family Office Exchange shows that families who've been direct investing for less than five years have an average internal rate of return that's two to three percent lower than those with more than a decade of experience. There's a real learning curve. Luna: What about tax efficiency? Does direct investing offer advantages there? Lucas: Potentially. When you invest through a fund, you lose control over the timing of taxable events. The fund decides when to sell, triggering capital gains. With direct investing, the family controls the exit — they can hold assets long-term, harvest losses, and structure investments through vehicles that optimize for their specific tax situation. Luna: But you also lose the diversification a fund provides. A family office putting $50 million into one deal is taking concentrated risk. Lucas: Right, and that's why most sophisticated families still maintain a core portfolio of funds and only allocate 20 to 30 percent to direct deals. It's a barbell strategy: low-cost passive indexes for liquidity, funds for diversification, and direct deals for outsized returns. Luna: So the direct dealmaking trend isn't about replacing funds entirely. It's about selectively disintermediating where the family has an edge. Lucas: Exactly. And that edge often comes from industry expertise. A family that built a fortune in healthcare can identify better biotech investments than a generalist PE firm. They can source deals before they hit the market, negotiate better terms, and add operational value post-acquisition. Luna: Which brings us back to talent. How are family offices competing for top investment professionals when they can't offer the same upside — carried interest — that a traditional PE firm can? Lucas: It's a challenge. Many family offices now offer incentive compensation tied to the performance of the direct investment portfolio. Some give key employees a co-investment opportunity — they can put their own capital alongside the family's. A few have even created synthetic carried interest plans that mimic PE economics. Luna: But the family still retains control. That's the balancing act. Lucas: Exactly. And if today's episode gave you a clearer picture of how the ultra-wealthy are rethinking their investment approach, that's exactly the kind of insight we try to deliver here. The way these conversations stay ad-free is listener support. If you found value, you can buy us a coffee at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep this resource going for everyone. And we genuinely appreciate it. Lucas: So back to the future of direct dealmaking — I think we'll see more families moving in this direction, especially as the next generation takes over. Millennial and Gen X heirs are often more comfortable with direct investing, having grown up with venture capital and angel investing as part of the cultural conversation. Luna: And they're less patient with high fees. That's a generational shift that fund managers are going to have to contend with. Lucas: Absolutely. The family office direct dealmaking trend is still in its early innings, but the trajectory is clear. For wealth managers and advisors, understanding this shift is essential — because the clients who are doing it are the ones who don't need traditional advice anymore. Luna: Unless advisors can provide the deal sourcing or co-investment access that families can't get on their own. Lucas: That's the opportunity. The family office model is evolving, and the advisors who adapt will remain relevant. Those who don't may find themselves on the outside looking in.