Family offices have been around for years – longer than private equity firms. However, in recent years the number of family offices has exploded. According to Preqin, the number of family offices in the world tripled between 2019 and 2024, managing upwards of $6 trillion in assets. By 2030, Deloitte Private expects the number of family offices to be larger than the number of hedge funds.

This growth has been positive in many ways for private equity, providing new avenues for fundraising and capital formation. But it is also a double-edged sword.

As the amount of family offices has risen, there has been a parallel trend of family offices increasingly shirking third-party managers for direct investment mandates. According to FINTRX, direct investing from family offices more than doubled between 2010 and 2015. And according to a Deloitte survey in May, the average allocation for direct investments for a family office was 17%, nearly twice the allocation to third-party private equity managers (10%). 

Private equity firms aren’t strangers to increased competition – there were 4,300 new private equity funds launched in 2021 alone. While the market has contracted and growth has stalled, it is still growing: 2023 saw 1,300 funds enter the scene. 

However, the competition from a family office differs greatly from another buyout fund in the market.

A different model

“[Family offices] don’t have to follow the fund model that requires a sale every five years or so. This [model] forces PE owners to be more short-term focused — something that turns off a lot of entrepreneurs,” said Bryan Graiff, a partner at consultancy Armanino.

Speaking from a seller’s point of view, Katherine Hill Ritchie, a director and board member of Nottingham Spirk, an innovation firm with a family office, explained on an EY podcast: “Who’s going to be my investor, and what is my purpose? Do I care if it’s sold again in five to seven years, or does this family’s portfolio of companies really have great overlap with mine and maybe I don’t mind if they keep it for 20 or 30 years? Or maybe I’m just looking for an exit and I want the highest price.”

More often than not, sellers are more interested in the investment relationship than the ticket price. According to the National Center for the Middle Market, in 2022, 76% of portco owners said it was an “extremely/very important consideration relative to the sale” to be able to stay involved with their company post-facto. Additionally, more than half of them listed family legacy and maintenance of their organization’s culture during the sale process as key concerns.

What this means is that it's more important for private equity firms to woo portco leaders. 

“The rise of the family office has really changed how PE firms go to market,” Graiff explained. “New competition from family offices has forced some PE firms to take a closer look at human capital and leadership.”

As we reported in July, the rise in human capital projects for third-party PE advisors has been stark. BluWave, a value creation and due diligence consultancy focused on midmarket PE, has seen interest in human capital-based projects for value creation more than double since Covid, making up 48.4% of all value creation projects requested by their clients between Q1 2020 and Q2 2024 – the number one most-requested type of project.

Hold on…

And it’s not just human capital – lengthier holding periods could also be a part of the fallout. One study of European private equity firms has found that the average holding period there has grown from four to five years to a solid six years. In the US and Canada, the average hold time is now over seven years.

The study says that the challenging exit environment alone cannot explain the phenomenon, at least when it comes to European PE – what might be able to, though, is the increase in competition in the European private equity market.