Executive Summary
Family offices have emerged as one of the most influential and fastest-growing investor segments in global capital markets. With aggregate assets under management estimated at over $6 trillion worldwide, family offices wield significant influence over investment trends and capital allocation. This report examines the evolving investment strategies of family offices, with particular focus on their increasing allocation to alternative assets including private equity, real estate, infrastructure, and direct investments in operating companies.
Our research, based on interviews with over 100 family office principals and investment professionals, reveals several key trends reshaping the sector. Family offices are increasingly sophisticated in their investment approaches, building internal capabilities that rival institutional investors in certain asset classes. Allocations to alternatives continue to grow, with many family offices now investing 40-60% of their portfolios in non- traditional assets. Direct investing is accelerating, driven by desires for control, alignment, and cost efficiency.
The implications for capital seekers and investment managers are significant. Family offices represent a differentiated and increasingly important source of capital, offering longer time horizons, more flexible mandates, and often a genuine interest in building lasting relationships with portfolio companies and management teams. Understanding how to access and work effectively with family office investors can create substantial value for companies seeking capital and sponsors seeking co-investment partners.
The Evolving Family Office Landscape
The family office sector has grown dramatically over the past two decades, driven by the unprecedented wealth creation among entrepreneurs, executives, and inheritors of legacy fortunes. The number of single-family offices worldwide is estimated to exceed 10,000, with thousands more multi-family offices serving aggregated pools of family wealth. This proliferation reflects both the scale of wealth accumulation and families' increasing preference for dedicated structures to manage complex financial affairs.
Family offices vary enormously in scale, sophistication, and investment approach. At one end of the spectrum are mega family offices managing tens of billions of dollars with institutional- quality teams spanning every asset class and geography. These organizations function similarly to endowments or sovereign wealth funds, with robust governance structures, sophisticated risk management, and diversified global portfolios. At the other end are smaller family offices that may be managed by a small team or even a single individual, focusing investments in areas where the principal has personal expertise or interest.
Geographic distribution of family office wealth has shifted considerably over the past decade. While North America and Europe remain home to the largest concentration of family office assets, Asia-Pacific has emerged as the fastest-growing region. The entrepreneurial wealth created in China, India, Southeast Asia, and other emerging markets is increasingly being institutionalized through family office structures. Middle Eastern family offices, often connected to multigenerational merchant families or natural resource wealth, represent another significant and active investor segment.
Generational transition is reshaping family office investment priorities and approaches. As wealth transfers from founders to second and third generations, investment strategies often evolve to reflect different risk tolerances, values, and interests. Next- generation family members frequently bring fresh perspectives on technology, sustainability, and impact investing. These generational dynamics create both challenges and opportunities for families and for investment managers seeking to build lasting relationships.
Growing Allocations to Alternative Assets
Family offices have dramatically increased their allocations to alternative assets over the past decade. Our research indicates that the average family office now allocates approximately 45% of its portfolio to alternatives, up from roughly 25% a decade ago. Some of the most sophisticated family offices allocate 60% or more to non-traditional investments, viewing public market exposure as primarily providing liquidity rather than return generation.
Private equity represents the largest alternative allocation for most family offices. Within private equity, allocations span venture capital, growth equity, and buyouts, with the specific mix reflecting family backgrounds, risk preferences, and return objectives. Many family offices that created their wealth through entrepreneurship maintain significant allocations to venture capital, viewing these investments as both financially motivated and personally engaging. Buyout fund investments appeal to family offices seeking more stable return profiles and professional management of capital.
Real estate is often the second-largest alternative allocation, reflecting family offices' appreciation for tangible assets, income generation, and inflation protection. Many family fortunes were originally built in real estate, and subsequent generations often maintain significant exposure to the asset class. Investment approaches range from direct ownership of trophy properties to diversified fund commitments across property types and geographies.
Infrastructure has emerged as an increasingly important allocation as family offices seek stable, long-duration cash flows with inflation linkage. The energy transition is driving particular interest in renewable power infrastructure, with many family offices viewing these investments as combining attractive financial characteristics with positive environmental impact. Fund investments, direct investments, and co-investments all feature in family office infrastructure portfolios.
The Rise of Direct Investing
Perhaps the most significant trend in family office investing is the growth of direct investments in operating companies. Motivated by desires for control, alignment, and cost efficiency, family offices are increasingly bypassing traditional fund structures to invest directly in businesses. Our research indicates that over 70% of family offices now make direct investments, and for many, direct deals represent a majority of their private equity exposure.
The economics of direct investing are compelling for family offices with sufficient scale and capability. By eliminating the 2% management fee and 20% carried interest typical of private equity fund structures, family offices can retain substantially more of the value creation from successful investments. For a family office making $100 million in direct investments annually, the fee savings compared to fund investments can exceed $2 million per year before considering carry.
Beyond economics, direct investing offers family offices greater control over capital allocation and portfolio construction. Family offices can be highly selective about sectors, geographies, and company stages, building portfolios that reflect their specific views and preferences. They can also size individual investments more aggressively when conviction is high, rather than accepting the diversification constraints of commingled fund portfolios.
Building direct investment capability requires significant organizational investment. Successful family office direct investing programs require sourcing networks to identify attractive opportunities, investment professionals capable of conducting thorough due diligence, and board-level engagement with portfolio companies over extended holding periods. Family offices that have built these capabilities often partner with like-minded investors on transactions, sharing both diligence burden and investment risk.
Investment Preferences and Decision Criteria
Family offices exhibit distinct investment preferences that differentiate them from institutional investors and private equity funds. Time horizon is perhaps the most significant distinction. Without the fund life constraints that require traditional private equity firms to exit investments within five to seven years, family offices can take genuinely long-term views on value creation. Many family offices explicitly target permanent or semi-permanent ownership of businesses they admire, viewing exits as optional rather than required.
Management quality and alignment rank as the most important selection criteria for most family offices making direct investments. Having often built businesses themselves, family office principals understand the critical role of management teams in value creation. They seek leaders who demonstrate integrity, capability, and genuine commitment to building lasting enterprises. Cultural fit between management teams and family office principals often proves as important as financial considerations.
Sector preferences vary widely among family offices, often reflecting the backgrounds and interests of principals. Technology investments appeal to many family offices, particularly those led by principals who built wealth in the tech sector or who employ next-generation family members with technology backgrounds. Healthcare attracts interest for its defensive characteristics and positive social impact. Consumer businesses appeal to family offices that value brands and tangible products.
Environmental, social, and governance considerations are increasingly important in family office investment decisions. Many family offices, particularly those led by next-generation principals, explicitly incorporate sustainability criteria into their investment frameworks. Impact investing, once a niche activity, has become mainstream among family offices seeking to align their capital with their values. This trend creates opportunities for companies with strong ESG credentials to access differentiated capital sources.
Accessing Family Office Capital
For companies seeking capital, family offices represent an attractive and differentiated investor segment. The combination of long time horizons, flexible mandates, and genuine interest in business building creates value beyond mere capital provision. However, accessing family office investors requires understanding their preferences and engaging them appropriately.
Relationship-driven origination remains the dominant pathway to family office capital. Unlike institutional investors who maintain visible presence and published mandates, many family offices prefer to remain discreet about their activities. Warm introductions from trusted advisors, fellow principals, or portfolio company executives often prove essential to gaining attention and engagement. Building genuine relationships over time, even when specific investment opportunities are not under discussion, creates the foundation for eventual partnership.
Presentation and communication should reflect family offices' distinct perspectives and priorities. Family office investors typically appreciate straightforward discussion of business fundamentals, management philosophy, and long-term vision. The highly packaged and precisely timed presentations designed for institutional fund marketing often feel inappropriately transactional to family office principals who view investments as relationships rather than mere financial transactions.
Process design for capital raising involving family offices should accommodate their distinctive decision-making approaches. Family offices often move deliberately, taking time to build conviction and develop relationships before committing capital. Artificial urgency or competitive pressure tactics that might motivate institutional investors can backfire with family offices, who may simply walk away from processes they find unpleasant or transactional.
Conclusion
Family offices have established themselves as a permanent and increasingly important force in global capital markets. Their growing allocations to alternatives, expanding direct investment programs, and distinctive investment preferences create both opportunities and challenges for capital seekers and investment managers.
For companies seeking capital, family offices offer differentiated value including long time horizons, flexible structures, and genuine partnership orientation. For investment managers, family offices represent both sophisticated limited partners and potential co-investment partners for attractive opportunities. Success in engaging family offices requires understanding their perspectives, building genuine relationships, and respecting their distinctive approaches.
Palmstone Capital maintains extensive relationships across the global family office community and regularly facilitates introductions and investments that serve both capital seekers and family office investors. Our understanding of family office investment preferences and decision-making processes enables us to create productive connections that generate lasting value for all parties.