Direct investing and operating businesses: the complete guide for billionaire families

Built on Chapter 11 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.

Single family offices put more money into direct deals today than at any point I have seen. Families want to own real businesses, use what they know about an industry, and stop paying layers of fund fees. This guide pulls together what I wrote in the book about direct investing, updated with how I explain it to families now. Each section links to a deeper page where one exists.

What counts as a direct investment

A direct investment is money put into a company, as a minority or majority owner, without going through a fee-charging private equity, venture, or hedge fund. The family picks the company, sets the terms, and lives with the result.

That simple definition covers a wide range of deals. A family might lend to a manufacturer, buy a stake in a startup, or acquire a whole company and merge it with others it owns.

Why families move into direct deals

Most families get into direct investing close to home. They buy a few competitors in the industry where they made their money. Later, many spread money across private equity funds, hedge funds, and long-only managers.

Over time, some grow tired of what they find there. Fees cut into returns. Reporting can be thin. In a blind-pool private equity fund, a family commits money and never approves a single company. The fund also works on a fixed clock of several years, while the family can think in decades.

Hedge funds raise a related concern. Under the usual model of a yearly asset fee plus a share of profits, a very large fund can earn a lot just from the asset fee. Some managers then get cautious to protect those fees. The family ends up paying high fees for average results. A few families have responded by hiring traders to run money in house.

None of this means funds are going away. Hedge funds and private equity still hold a place in most family portfolios. But the shift of energy toward direct deals is real.

Stay inside your circle of competence

The most important lesson in the whole chapter is focus. In my experience, only a small minority of billionaire families invest well across more than a few industries. The families that keep their wealth almost always stick to one, two, or three.

Investors call this staying inside your circle of competence: invest where you understand how the business makes money, and sit out the rest even when a sector is hot.

One very large family office I heard present showed what this looks like in practice. It was fully vertically integrated in consumer products and held a deep portfolio of patents. It could take an idea from prototype to mass distribution. Bets that looked wild to outsiders felt routine inside that family's niche.

Deeper page: Why billionaire families stay inside their circle of competence

The main deal structures

Families use far more structures than a simple purchase.

Debt. Some companies come to family offices because banks will not lend to them on workable terms. Debt pays interest from day one and sits ahead of equity in a failure. A family that operates in two countries may accept collateral a local bank will not. The trade-off is capped upside.

Convertible debt. A loan that can turn into equity later, often at a new funding round, a revenue mark, an IPO, or a sale. It pays income but can mean less upside and less control.

Royalties. Common with smaller manufacturers. The investor is paid a set amount on each unit sold. A royalty can justify a smaller equity stake and starts paying back money right away.

Mezzanine and lending. A small number of families act almost like a bank, lending to developers and businesses, especially when banks pull back.

Angel and venture investing. Many founders who built family fortunes identify with startups. A large share of the families I work with have made angel-style investments. Some run full venture firms.

Private equity and platforms. Active families often buy several companies in one industry and run them as a platform, sharing customers and overhead. Each new deal is picked to help the companies the family already owns.

Here is how a royalty can work in practice. A small manufacturer needs money to expand. As straight equity, the investor might ask for a certain stake. Add a royalty of a few cents on each unit sold, and a smaller stake can be fair, because the investor starts getting paid back right away. The exact terms depend on the industry and how much each side needs the deal.

On control, many families say they prefer minority stakes. In practice, active direct investors often end up with majority positions so they can protect their money and add value.

Deeper page: How billionaire families structure direct deals

Finding deals

Deal flow is a problem for almost every family office. Even famous families see fewer deals than investment banks do. A quiet office sees fewer still, especially if it has no website and avoids events and press.

Deals that arrive through bankers have usually been shown to many buyers. The best deals tend to be found directly. In the book I described five ways families do that:

A small calling team that reaches out to owners in a target sector.
Speaking at niche industry events so the family becomes a known face.
Presenting at middle market associations and describing exactly what the family buys.
Focusing on about 50 high-value relationships.
Using the better deal networks as one channel among several.

Deeper page: Five ways billionaire families find proprietary deals

Diligence: the 40-hour rule

Investors who spend more time on diligence tend to earn more. So do investors who stay in industries they know, and those who meet with their companies often.

A formal family office should require at least 40 hours of diligence on every direct deal, in writing. That means background checks, reference checks, and fact-gathering, not just a good meeting.

At 40 hours a deal, one full-time professional can review about one deal a week. That math drives how families staff their teams.

Deeper page: The 40-hour due diligence rule

Contracts and legal work

The paperwork in a direct deal depends on the company's age, the founder's experience, and the lawyers involved. Common documents include a private placement memorandum, a term sheet, a subscription or stock purchase agreement, and a shareholder agreement.

Legal costs grow with the size and complexity of the deal. Small companies short on cash may try to cut corners here. Make sure your own lawyers confirm that nothing important rests on a handshake.

A rule I still use: if the other side wrote the contract and says it is ready to sign, slow down. If you can be the one who drafts first, you gain an edge across many deals.

The five big risks

Technology risk. The product may not work as promised. One fix is to invest in tranches tied to milestones, such as a working prototype and then revenue targets.

Market risk. Customers may not want the product yet. Invest in what you understand and test demand with real customers.

Competitive risk. Bigger players or copycats can crowd the company out. Build barriers like brands, patents, domain names, and thought leadership.

Management risk. The biggest risk in young companies. The founder may not be the right CEO as the company grows. Add a strong operator if needed and check the leaders below the CEO.

Finance risk. Growth often needs more money. Avoid early terms that scare off later investors.

Deeper page: Backing the right management in a family office deal

Planning the exit

Most direct deals end in a sale to a company in the same market or to another investor. Some end in a management buyout or an IPO. In emerging markets with thin public markets, investors may be paid back from earnings over time.

Results in private investing are lopsided. Many exits lose money, and only a small share return many times the money. Longer holds tend to do better, and many deals need several years to work.

To raise value before a sale, learn what buyers pay for, show strategic value beyond revenue, clean up the balance sheet, and get more than one buyer interested. Structure can also close gaps on price.

Deeper page: How billionaire families plan the exit before they buy

The seven common mistakes

Thin diligence.
Ignoring future funding rounds.
No exit plan.
Fighting too hard on price.
Putting all the money in up front.
Throwing good money after bad.
Not having your own attorney review everything.

Expect a rough spread of results. In my experience, only a small share of direct deals do very well, a few make some money, and many lose money or stall. That is why focus and diligence matter so much, along with staged funding.

Deeper page: Seven direct investing mistakes wealthy families make

Staffing the program

Families staff direct investing in one of three ways. Some build an in-house team. Some hire an investment bank or M&A firm to act as an outsourced chief direct investment officer. Others co-invest with funds or join club deals while their own people learn.

The right choice depends on how many deals the family wants to close and how much control it wants. Legal fees, outside experts, and broken deals all add to the cost. Compare the total against the fund fees the family pays today.

Deeper page: What a direct deal team really costs a family office

Engaging the family

Direct investing is not only about returns. It can pull family members back into the work of the family. Sitting in on diligence and meeting managers teaches the next generation how businesses run and how markets are changing. Executives who run these programs often say the work is a lot of fun.

A short checklist

Write down the one to three industries where your family has an edge.
Pick a structure that fits what you need most: income, upside, or control.
Build at least one proactive sourcing channel.
Require 40 hours of diligence on every deal.
Stage the money and tie it to milestones.
Plan the exit before closing.
Have your own attorney read every document.

This guide is general information, not legal, tax, or investment advice. Speak with a qualified attorney and advisor before making any direct investment.

Questions and answers

What is direct investing for a family office? Investing straight into companies, as a minority or majority owner, without a fee-charging fund in between.

Why are billionaire families doing more direct deals? To lower fees, gain control, use their industry knowledge, and match their long time frames.

How many industries should a family invest in? In my experience, the families that keep their wealth usually focus on one to three.

How much diligence should a direct deal get? I use at least 40 hours as a firm minimum.

What is the biggest risk in direct investing? For younger companies, management risk.