Family offices are still keen on direct deals but retreat from startup, early-stage investing

A recent Citi Private Bank survey reveals significant optimism among family offices regarding future returns, with 45% anticipating 5-10% and 38% expecting over 10% for 2025, driving continued direct investments in private companies focused on long-term thematic trends like AI. While 70% reported direct deals, overall bullishness for direct private equity has decreased from last year, leading to increased selectivity, a preference for growth-stage investments, and opportunistic acquisitions of illiquid assets in the secondary market, often with a focus on acquiring controlling stakes.

Analysis

A Citi Private Bank survey of 346 family offices reveals a nuanced but broadly optimistic outlook, with 83% of respondents anticipating annual returns exceeding 5% for 2025. This sentiment fuels continued allocation to private markets, although with greater selectivity than in previous years. While 70% of firms made direct investments over the past year, this figure is down from 77% previously, and net bullishness on direct private equity has fallen sharply from 36% to 15%. This moderation is driving a strategic shift towards growth-stage companies and away from seed and early-stage ventures, a trend particularly pronounced among North American offices. The investment thesis is increasingly thematic, targeting long-term trends like artificial intelligence and new energy infrastructure, which are often best accessed privately. Concurrently, family offices are leveraging their stable cash flows, with 75% owning controlling stakes in operating businesses, to act as opportunistic buyers in the secondary market. They are acquiring illiquid assets from institutional investors, with North American family office interest in secondaries increasing from 19% to 29%, signaling a strategic move to capitalize on current market dislocations.

Key Decisions for Investors

• General Partners seeking capital from family offices should pivot their focus towards growth-stage, thematic, and secondary strategies, as appetite for seed and early-stage investments has demonstrably weakened.
• Investors should note the divergence between high headline return expectations and falling bullishness on direct private equity, suggesting that future returns are expected to come from highly selective, alpha-driven strategies rather than broad market appreciation.
• The increased activity of family offices in acquiring controlling stakes and secondary assets indicates a prime opportunity for co-investors to partner with this patient capital base, particularly in sectors like AI, energy, and infrastructure.
• Public market investors should monitor private valuations in key themes being targeted by family offices, as this sustained private investment may influence M&A activity and public company comparables in those sectors.