Midsection of business professionals discussing ideas while sitting in office lobbyKlaus Vedfelt | Digitalvision | Getty ImagesA version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.Many investment firms of ultra-rich families are keen to buy stakes in private companies directly rather than through private equity funds, which come with fees and less control.Cutting out the middleman can come at a steep cost, though, and requires hiring an in-house investment team to source proprietary deals. But family offices have found a way to have their cake and eat it too by backing PE funds while investing directly alongside them. Under these kind of deals, family offices make large fund commitments in exchange for the right to invest additional capital on their own to individual portfolio companies. They typically pay reduced management or performance fees on their co-investments, and the PE fund handles the burden of sourcing and due diligence.These co-investing arrangements have grown in popularity over the past decade, lawyers to family offices and fund managers told Inside Wealth. This trend has been fueled by family offices seeking out more direct investments and PE firms facing challenges raising capital.”The ability to share the burden, share the costs and, in some cases, rely on the private equity funds to source, [do] diligence, execute and manage those investments, is extremely attractive to families who want that exposure to direct investing, but don’t necessarily want to build all that on their own balance sheet,” said Scott Beach, who chairs Day Pitney’s corporate and business law department and the family office practice.By teaming up with private equity funds, family offices are able to get stakes in companies they would not be able to buy outright, according to Michael Schwamm, partner at Duane Morris and co-chair of its family office practice. “Private equity funds will almost always outbid family offices, at least in the middle market,” he said. “With the vast majority of families we deal with, most of them recognize they will never be highest bidder in room.”PE sponsors have become more willing to negotiate co-investment right …
