- For a lean family office the binding constraint is attention rather than capability, which means deal quality gets confounded with calendar luck.
- The highest-leverage thing to build is not deeper diligence but a screen that costs almost nothing to run and is applied to everything, so depth is allocated by merit rather than availability.
- The screen is four questions answerable in an hour: does this fit the written policy, where did it come from and why us, is there one thing that could obviously kill it, and who is doing the work.
- In a co-investment you are not being asked to have an independent view of the business but to decide whether to trust the sponsor's view, and that needs different questions.
- A sponsor's scope decisions are more revealing than their findings, and how they handle what came back ambiguous is the best proxy for how they will handle bad news in year three.
- Check size does not change what you need to know, only what you can afford to buy — so buy one narrow piece of outside work aimed at the largest uncertainty rather than a thin version of everything.
Not the way a fund does, and the attempts to do so are where most of the difficulty comes from.
A family office moving from fund commitments into direct deals typically imports the process it has watched its managers run, discovers it takes four people it does not have, and then does one of two things. It either compresses the process until what remains is a reading of the CIM and a good feeling about the founder, or it outsources the whole thing to advisors at a cost that makes anything below an $8 million check uneconomic.
There is a third option, and it starts with being honest about which constraint is actually binding.
The constraint is attention, not capability
Two experienced people can evaluate a business. What they cannot do is evaluate eleven businesses in a quarter while also handling the reporting cycle, the manager reviews, and whatever the principal asked for on Tuesday.
The failure mode this produces is specific and worth naming: the deals that get real scrutiny are the ones that arrive when the team happens to be free. Deal quality gets confounded with calendar luck. A family office that has done six directs will often find, looking back, that the two it regrets were the two that arrived in a busy month.
Which means the highest-leverage thing a lean team can build is not deeper diligence. It is a screen that costs almost nothing to run, applied to everything, so that depth is allocated by merit rather than by availability.
The screen
Four questions, answerable in an hour from the CIM and one call, applied to every inbound opportunity without exception.
Does this fit the written policy? Not the principal's instinct — the document. Sector, size, control or minority, geography, hold horizon. Families that have not written this down are unable to say no cleanly, which is the root of most of the awkwardness in this part of the business.
Where did this come from, and why us? The most important question in family office direct investing and the one most reluctantly asked. A deal shown to you by a friend of the family has been shown to others first roughly as often as not. This is not a reason to decline. It is a reason to know where in the queue you are, because it determines what you are being asked to underwrite.
Is there one thing that could obviously kill it? Customer concentration above a third. A founder leaving with the relationships. A sole-source supplier. Revenue that is really project revenue described as recurring. Ninety minutes of looking finds most of these, and finding one does not end the conversation — it tells you what the conversation is about.
Who is doing the work, and can we see it? In a co-investment, the lead sponsor has done the diligence. Whether you can see it, in what form, and how much time you have to react to it are the terms that matter and they are negotiable earlier than most families realise.
Evaluating the sponsor's work rather than redoing it
Most family office direct exposure comes alongside a sponsor. The instinct is to re-run the analysis. The instinct is wrong on time cost alone, and it also misdirects scrutiny.
You are not being asked to have an independent view of the business. You are being asked to decide whether to trust the sponsor's view. Those need different questions.
What did they test, and what did they choose not to? The scope decisions are more revealing than the findings. A sponsor who deferred supplier diligence on a distribution business has told you something about how they think.
What came back ambiguous? Ask directly. Every diligence process produces items that were neither clean nor disqualifying. How a sponsor handles that category is the best available proxy for how they will handle bad news in year three.
What is their downside case, in events rather than percentages? Same test as anywhere. A downside case built by lowering growth assumptions is not one.
What do they own if this goes wrong? Alignment is checkable. How much of the sponsor's own money is in, at what basis, and on what terms relative to yours.
Has anyone here seen this management team before? This is where a family office's network is a genuine edge over an institutional investor's process, and it is regularly left unused because nobody thought to ask around before the deadline rather than after.
How much diligence is enough for a smaller check
The honest answer is that the check size does not change what you need to know. It changes what you can afford to buy, which is a different problem and has to be solved by sequencing rather than by shallowness.
For a $3 to $5 million position, commissioning a full advisor slate does not work economically. What does work: do the phase-one analysis internally and properly, then buy one narrow piece of outside work aimed at the single largest uncertainty. One scoped quality-of-earnings review on the revenue recognition question is worth more than a thin version of everything.
And a small check is not permission to skip the work. It is permission to buy less of it, having done more of it yourself.
The part that outlasts any individual deal
Families think in generations, which changes what is worth building.
A fund's diligence knowledge walks out with the associates, and funds have largely accepted this. A family office has the opposite structure — the capital stays, the principals turn over slowly, and the next generation inherits the portfolio without inheriting the reasoning behind it.
Which makes the written record disproportionately valuable here. Why the family passed on the third-party logistics business in 2021. What went wrong with the manufacturing investment and which question would have surfaced it. What the family has decided, over six directs, that it does not do.
That document does not exist at most family offices. It is not hard to build. It requires deciding, once, that the reasoning on each deal gets written down at the point of decision rather than reconstructed later from whoever still remembers — and it is the closest thing to a durable competitive advantage available to a two-person team.