Private equity remains the single largest alternative-asset allocation for most sophisticated family offices. What's changed over the last decade is how offices access the asset class. The old model — invest in a handful of top-quartile GPs and wait — has fragmented into four distinct strategies, each with different economics, different staffing requirements, and different governance implications.
Strategy 1: Fund-of-Funds / Primary LP Commitments
The classic approach. Your office commits capital to a GP's fund. You pay 2% management fees plus 20% carry on realized gains. You get diversification across the GP's portfolio, access to deal flow you couldn't source yourself, and zero operational burden.
Best for: offices that want exposure without sourcing bandwidth. Families new to private markets. Smaller offices that can't justify direct-deal infrastructure.
Trade-off: highest all-in cost. A 20-year study would typically show 3–5% of gross return lost to fees in primary LP allocations.
Strategy 2: Co-Investments
The sweet spot for many offices. You commit to a GP's fund, and in exchange get the right (not obligation) to invest additional capital directly into specific deals the GP sources — typically at no fee and no carry. You're riding the GP's sourcing and diligence for free on the co-invest portion.
Well-structured co-invest programs can halve your effective fees while preserving most of the return profile. The catch: co-invest access is a negotiated privilege, not automatic. You need existing LP relationships and the operational capability to say yes quickly (typically 2–3 week windows).
Strategy 3: Direct Investing
You source the deal. You diligence the deal. You negotiate the deal. You monitor the company post-close. This is the full "becoming a PE firm without outside LPs" move.
Economics: zero management fee, zero carry, 100% of upside. Risk: you're also absorbing 100% of downside, and the operational commitment is substantial — usually 3–8 investment professionals plus operating partners and diligence consultants.
Most direct-investing family offices we see operate in one of two modes. Specialists focus on a sector where the family has existing expertise (a tech-wealth family investing in growth-stage software, a healthcare-wealth family investing in life sciences). Generalists build broader sourcing networks and cap fund sizes at $100–200M per vehicle.
Strategy 4: Secondaries
The underappreciated lever. Secondaries — buying LP positions from other LPs at a discount — let offices get exposure to mature private portfolios without the J-curve. Typical discounts in public-market stress cycles run 20–40% of NAV.
The challenge is access. Secondaries are a relationship business; the best deals don't hit the open market. Offices that build secondary-focused relationships with placement agents, secondaries-focused funds, and other LPs can tap a flow of opportunities that public pricing rarely reflects.
The Staffing Question
How do you know when to shift from primary LP to co-invest to direct? Staffing is the practical gate. A co-invest program needs a dedicated analyst who can turn around diligence in two weeks. A direct-investing program typically needs a partner, two associates, and access to operational consultants. Below $300M in PE allocation, staffing a full direct team rarely pays back the carry savings.
Portfolio Construction Guidelines
- Vintage diversification. Commit across 4–6 vintages. Over-concentration in one vintage compounds the cycle-timing risk.
- Sector tilts with conviction. If the family has a genuine edge, lean in. If not, favor diversification across industries.
- Watch the pacing. Commit-and-call dynamics mean your actual PE allocation lags your commitment by 3–5 years. Plan accordingly.
- Monitor the denominator. When public markets correct, your PE allocation looks proportionally bigger. Decide in advance whether you rebalance down or ride it.
- Build secondaries capacity. Even a 10–15% secondaries sleeve within PE can smooth returns meaningfully over 10+ years.
For the broader strategy frame: Family Office Investing Strategies. For the infrastructure to support direct investing: Family Office Wealth Management.