Top Direct Investments in Private Companies (and How to Diligence Them)

For Founders & Family Offices · top direct investments in private companies

By Yuri Rutman, Writer/Director & Producer, The Violinist (Filmdemand). Educational content only — not investment advice.

Top Direct Investments in Private Companies (and How to Diligence Them)

The top direct investments in private companies share one feature: no fund, no manager, no fee layer. Direct investment is the purest form of private-market investing and the one most likely to reward or punish your judgment. Here is the landscape and the discipline it demands.

What direct investing in private companies means

Direct investment means putting capital straight into a private operating company or project rather than through a fund that pools your money with others'. You own a position in the specific business, on terms you (or a lead investor) negotiated, with direct visibility into what you hold. This is how family offices and sophisticated individuals increasingly deploy capital, because it removes fee layers and, more importantly, gives transparency and control that a blind-pool fund cannot.

The forms it takes vary. Direct equity in an operating company. A position in a single project or asset through a special purpose vehicle. Growth-stage investment in a company raising privately. Direct participation in a specific real estate development or, in entertainment, a single film or slate. What unites them is that you are backing one identifiable thing you can diligence, rather than trusting a manager to allocate across things you cannot see.

The categories worth considering

Growth-stage operating companies. Established private companies raising capital to expand — past the startup failure cliff but before any public exit. The appeal is real revenue and a real business to diligence; the risk is illiquidity and the possibility that the exit you are underwriting never comes. Access is the constraint: the best growth-stage direct deals are relationship-sourced.

Single-project and single-asset deals. A specific real estate development, an infrastructure project, or an entertainment production through an SPV. The appeal is total transparency — you are diligencing exactly one thing — and the ability to negotiate structure, including downside protection like a priority return. The risk is concentration, which is why these belong sized small.

Special situations. Buyouts of small operating businesses, distressed opportunities, or niche assets. Highest-skill category, potentially highest-return, and the one where being wrong about the operator is most punishing. Appropriate only for investors who genuinely understand the specific situation or who co-invest alongside a lead they trust completely.

The diligence discipline for direct investments in private companies

Direct investing removes the fund manager, which means you inherit the manager's job. The diligence framework is the same regardless of category, and structure comes first. Where does your capital sit — is there downside protection like a priority return or a preferred position? What is the capital structure, and what sits senior to you? Who runs the business or project, and what have they actually delivered and returned before? What specifically produces your return, on what timeline, and what is the plan if the first plan fails?

Then governance: information rights, reporting, and what recourse you have if things go wrong — critical in direct deals, where you may have less protection than a fund would negotiate on your behalf. Then tax structure and after-tax modeling. And only then, the merits of the business or asset itself. The single most common error in direct investing is falling for a compelling business and accepting a structure that leaves you exposed. A great company in a bad structure can still lose you money; a solid company in a well-structured deal is where direct investing pays off. The same ordering applies to any private placement you evaluate.

Concentration, sizing, and a worked example

Direct investing's defining risk is concentration. A fund spreads your capital across many positions; a direct investment concentrates it in one. This is simultaneously the source of the transparency advantage and the reason discipline about sizing is non-negotiable. Each direct position should be sized so its total loss is survivable, and the direct-investing satellite as a whole should be capped as a fraction of your portfolio decided in advance.

Film illustrates both the appeal and the discipline. A single-film direct investment through a 506(c) SPV gives you total transparency — you can read the exact waterfall, meet the producer, evaluate the distribution plan, and assess the specific tax profile including Section 168(k) and the pending federal 20% credit — which a blind film fund cannot. That transparency is the whole point of going direct. But it concentrates risk in one high-variance asset, which is precisely why it belongs sized small and structured with a genuine priority return. The same logic applies to any direct investment: the transparency is the reward, the concentration is the risk, and disciplined sizing plus structure-first diligence is what turns the first into an advantage without letting the second become a disaster. See the high-net-worth film primer for how that sizing works in practice.

The illiquidity you're being paid for

Every direct investment in a private company shares one uncomfortable feature: you cannot easily sell. There is no exchange, often no ready buyer, and frequently contractual restrictions on transfer. Your capital is committed until a liquidity event that may be years away and may not arrive on schedule, or at all. This illiquidity is the central risk of direct investing and the one most likely to be underweighted by investors accustomed to public markets where exit is always a click away.

The right way to hold this is to recognize that illiquidity is also the source of part of the return. You are, in theory, compensated with a higher expected return for accepting the lock-up — the illiquidity premium. That compensation is only real if you genuinely did not need the money during the lock-up, which is why direct investments must be funded exclusively from long-term capital. Fund them from money you might need, and the illiquidity stops being a premium you collect and becomes a trap that springs at the worst possible moment.

Governance is your only recourse

In a public company, a dissatisfied shareholder can simply sell. In a direct private investment, you cannot, which means the governance rights you negotiate at the outset are your only meaningful recourse if things go wrong. This makes the governance terms — information rights, reporting obligations, board or observer seats, consent rights over major decisions, and the mechanics of what happens in a cost overrun or a down round — far more important than they appear when everyone is optimistic at signing.

Negotiate them deliberately, and read them skeptically. How often, and in what detail, are you entitled to information about the business? What decisions require your consent, and which can the operator make unilaterally? What are your rights if the operator underperforms or behaves badly? A direct investment with weak governance leaves you a passive passenger with no steering wheel and no exit — entirely dependent on the operator's competence and goodwill. Strong governance will not rescue a bad business, but it gives you visibility and leverage precisely when you most need them.

The role of a lead investor

One practical way individuals access quality direct deals while managing their limits is to co-invest alongside a credible lead investor — an institution, family office, or experienced principal who negotiates terms, conducts primary diligence, and takes a board or governance role. Co-investing lets you participate in deals you could not source or structure alone, while benefiting from the lead's scrutiny and ongoing oversight. It is how a great deal of sophisticated direct capital actually gets deployed.

The essential caveat is that co-investing does not outsource your judgment; it adds a layer to diligence the lead as carefully as the deal. Who is the lead, what is their genuine track record of returning capital to co-investors, and — critically — are their incentives aligned with yours, or do they earn fees regardless of your outcome? A strong, aligned lead is genuinely valuable. A weak or misaligned one gives false comfort, lending their credibility to a deal while leaving you exposed.

The transparency you are paying for with effort

The defining trade of direct investing is transparency for effort: you accept more work in exchange for seeing exactly what you own, and that trade is only worth making if you actually use the transparency it buys. An investor who goes to the trouble of a direct investment but then fails to read the documents, diligence the operator, or negotiate the governance has taken on the effort without capturing the benefit — the worst of both worlds.

So commit to using what direct investing offers. Read everything. Understand exactly where your capital sits and what protects it. Diligence the operator as if your return depended on them, because it does. Negotiate real governance rights, because they are your only recourse in an illiquid position. And size the position so its concentration is survivable. Done this way, direct investing rewards the effort with genuine advantages — transparency, control, no fee layers, and access to opportunities that never reach the marketed channel.

Educational information only. Not investment, legal, or tax advice, and not an offer to sell or a solicitation to buy any security. Any offering is made only to verified accredited investors through definitive offering documents. Film investing involves substantial risk, including total loss of capital. Statements about Section 168(k) reflect current law; statements about a federal 20% production credit refer to pending legislation that has not been enacted. Consult your own advisors.