How Do Family Offices Structure Investments in Private Companies?

Family offices structure private company investments by choosing how capital is provided, what ownership or repayment rights the family receives, and how much involvement it wants. Common approaches include debt, equity, convertible financing, and co-investments alongside a fund. The terms should fit the company's needs and the family's ability to assess and oversee the position.

Choose the Form of Capital

Debt financing provides capital that the company agrees to repay under defined terms. It may appeal to a family office seeking an income component and a position senior to equity, though the company's ability to repay and the terms of the loan still matter. Equity gives the family an ownership stake and potential participation in the company's value if it grows or is sold.

Some transactions combine debt and equity, or use convertible debt that may convert into ownership under agreed conditions. Other investments provide growth capital or support an acquisition strategy. Each format allocates risk and potential return differently. Work with the company and experienced advisers to understand the rights, obligations, and mechanics in the documents.

Decide How Much Control to Seek

A family office may take a minority position or seek control. A minority investment can limit the family's operating role, while a majority position may give it more influence over the business. The right choice depends on the opportunity, the family's expertise, the management team, and the protections negotiated for the investment.

Some families invest in related businesses to build a platform of operating companies. Existing holdings may inform future acquisitions when the businesses can benefit from shared customers, marketing, staff, or other capabilities. This requires a clear operating rationale and a team prepared to manage the holdings. Direct ownership also requires the family to source, evaluate, fund, monitor, and eventually exit an investment. Review why family offices prefer direct investments alongside the responsibilities that come with them.

Consider Co-Investment Structures

A family office can invest alongside a private equity fund through a co-investment. The fund may have sourced and assessed the company, while the family invests directly in the transaction. This can give the family exposure to a company without carrying the full sourcing and diligence burden on its own. The family still needs to understand the deal, the fund's role, and the terms of its participation.

Co-investment economics vary with the relationship between the fund manager and investor, the expenses involved, the family's participation, and the structure. Discuss fees, expenses, information rights, governance, timing, and how the family's position relates to the fund's investment. For more on this approach, see what co-investing means for family offices.

Match Terms to the Company and Family

Deal structuring involves assembling the resources a business needs and deciding how risks and rewards are shared among the capital providers. The family office should understand the company's capital needs, the rights it receives, the role it will play, and what happens if the business performs differently than expected.

Private company documents can involve legal and tax specifics. Talk with your attorney and CPA about those details before committing. Keep the family's investment criteria and capacity in view, and choose a structure the office can monitor over the life of the investment.

Read next: What size checks do family offices write into private companies?

The benefit to the SFO making a co-investment is clear: The investor can invest directly, thus circumventing the typical fund structure and the fees that cut into its return on investment.

Sources: The Single Family Office. Informational only, not financial, legal or tax advice.