Why Wealthy Investors Prefer Direct Investing

TruePoint Capital

Interior designers have two kinds of clients – one who is hands-on and another that defers largely to the discretion of the designer.

​​The hands-on client wants to be actively involved in selecting and procuring the furniture, fixtures, and equipment (FF&E) that ultimately go into their living or workspace. Once the FF&E is selected, the hands-on client is happy to let someone else do the actual installation work. They don’t need to do the heavy lifting.

There’s the hands-on client; then there’s the hands-off client who will blindly trust the interior designer’s taste and choices – often without consideration for cost.

In the private investing world, there are also two types of investors – one type is involved in selecting and procuring the asset. At the same time, the other blindly trust someone else to procure the assets that ultimately make up a portfolio. The first type of investor is the direct investor, and the second type of investor is a fund investor.

In a direct investment, the investment is made into a single, specific asset. This may often be through a holding company, but the investor knows precisely where their capital will be invested and deployed. In private real estate, direct investing means investing in a specific property. In private equity, direct investing means investing in one particular private company.

Like the hands-off interior design client, fund investors defer to the discretion of a fund manager. They invest into a fund that then invests on behalf of many investors into a portfolio of assets – multiple properties or private companies.

Why do the wealthy prefer direct investments?​

The wealthy investor’s preference for direct investments is rooted in the fact that the investor has very clear investment goals and objectives. Direct investments appeal to the wealthy because direct investments reduce or eliminate many of the management fees associated with funds and because the investments can align more closely with their own values, objectives, and mindset.

Investing in a fund is less attractive to wealthy investors because there is less likelihood of the meeting of the minds when it comes to aligning their investment strategy and interests with those of fund managers.

Take, for example, the following real estate-focused investor. This investor’s main investing criteria are:​

  • Multifamily Assets Only;

  • 10% Annual Cash-On-Cash Distributions; and

  • 5% Annual Growth.

With direct investing, it is more likely that this investor will be able to identify a specific asset that meets the investor’s minimum investment criteria instead of investing in a fund allocated to multiple assets across multiple market segments.

Direct investing doesn’t mean the investor does all the work in private investing. It just means investing in a specific asset.

Like the hands-on interior design client who is happy to let someone else do the heavy lifting of installation, once the direct investor has procured an asset that aligns with their investment objectives, that investor is happy to defer to the expertise of a sponsor/manager who does the actual heavy lifting involved with the management of the asset and day-to-day operations.