(Bloomberg News) Daniel Lubin,
whose family wealth comes from a maker of diaper-rash cream built by his
grandfather and later acquired by Pfizer Inc., is taking more control
of his fortune.
Lubin, 52,
chairman of Upsher Asset Management, a so-called single-family office
that oversees the assets of his family and three others descended from
his grandfather, is shifting capital from outside funds into direct
investments. Family offices increased their direct allocations to
private companies and real estate last year to an average of 11 percent
from 6 percent in 2009, according to a study to be released today by the
Wharton Global Family Alliance.
“If you have
a third or half of your portfolio where you’re paying 2 and 20,
suddenly you’re saying, ‘You know what, these guys are eating up half of
my return,'” Lubin said of fees charged by many private equity and
hedge funds, traditionally 2 percent of assets and 20 percent of
profits. “That doesn’t make any sense. There’s got to be a better way.”
Single-family offices are investing directly because of declining fund
returns and concerns that some outside managers charge high fees and may
have conflicts of interest, according to Wharton. The offices generally
are dedicated to the investment oversight and financial planning of one
clan. They usually serve families worth at least $100 million, such as
those of computer maker Michael Dell and Microsoft Corp. co- founder
Bill Gates.
Upsher Asset
Management devotes about 7 percent of its assets to direct investments
in private companies or real estate, compared with none five years ago,
said Lubin, who is also managing partner of the New York-based
venture-capital firm Radius Ventures LLC.
‘Profound Changes’
“There are
profound changes that occurred as a result of the 2008 and 2009 economic
recession and financial crisis,” said Raphael “Raffi” Amit, chairman of
the Wharton Global Family Alliance, a unit of the University of
Pennsylvania’s Wharton School in Philadelphia that focuses on wealthy
families and their businesses.
Families
reported a fivefold increase in their allotments to art collections and
precious metals, which made up 5 percent on average in 2011, according
to the study.
They cut
their average outlay for private equity funds to 9 percent from 11
percent two years earlier. The average portion in hedge funds stayed the
same at about 12 percent, while investments dedicated to funds of funds
dropped to almost zero.
Conflict Potential
“We see
almost a move completely out of fund of funds,” Amit said. “These trends
are a result of poor performance of fund of funds and the deep concern
that family offices have about conflicts of interests at large
financial-service companies. That’s something that the big banks have to
take notice of.”
Funds of
hedge funds lost an average of 3 percent annually in the four years
through 2011, according to Bloomberg’s indexes for funds. Funds of funds
seek to minimize risk a client would have from investing with a single
manager. They generally add a layer of fees on top of the cost of the
underlying investments. Funds of funds charge an average 7.6 percent
performance fee and 1.3 percent management fee, according to data
compiled by Bloomberg.
The Wharton
report is based on a survey of 106 families from 24 countries conducted
last year. About 41 percent of the respondents were based in the
Americas. Amit declined to release country-specific data to preserve
confidentiality. Sixty-three percent of respondents held more than $500
million in assets.
Privacy, Control
Advantages
of single-family offices include privacy, control and customization.
There probably are about 400 in the U.S. with more than $500 million in
assets that provide investment management, administrative and family
services as independent firms with their own staffs, Amit said.
“People were
a little less focused on what it cost to invest and what we were paying
managers to get their expertise,” before 2008, said Lubin. Since then
many family offices have become more focused on risk management,
liquidity and fees as returns declined.
Along with
paying management and incentive fees, clients in private-equity and
hedge funds may be required to commit their money for a period of years.
The median
private-equity fund that made its first investment in 2003 produced a 12
percent internal rate of return as of the end the first quarter,
compared with 8.8 percent for funds that started in 2008, according to
data compiled by Seattle-based researcher PitchBook Data Inc.
Real Estate
Lubin’s
family office brought in a new adviser for its hedge-fund strategy,
hired managers to add investments in commodities and precious metals,
and is building its own real estate portfolio, he said. The firm has
done more direct deals in industries it’s familiar with such as health
care since the financial crisis rather than using a fund that may charge
high fees and have a lock-up period.
The single-family office this year purchased units in New York’s condominium market to rent, he said.
“We will continue to methodically add to the portfolio over the next several years,” Lubin said.
“Families
found that some of their providers really were conflicted” by fees from
certain products or trading revenue, said Laird Pendleton, co-founder of
the CCC Alliance LLC, a private consortium of single family offices
based in Boston. “People are in-sourcing much of that now.”
Adding Staff
Single-family offices saw a 25 percent increase in staff hired to select
investment managers and a 12 percent expansion in those dedicated to
monitoring performance, according to the Wharton study.
Pendleton
also is co-founder and principal of Cairnwood Cooperative Corp., an
office that manages his family’s wealth into its sixth generation.
Pendleton, 57, said his great- grandfather in 1883 started Pittsburgh
Plate Glass Co., known today as PPG Industries Inc. The family has
increased its direct investments in venture capital and private
companies since 2008, he said.
“The crisis
showed that a lot of hedge funds and other investments in the
alternative area are really a handshake deal,” Pendleton said. “There is
in many cases a very weak mechanism for being able to go in and remove
your assets from a fund.”
He and Lubin declined to disclosed their family offices’ assets under management.
Dell, Gates
Dell, the
founder, chairman and chief executive officer of computer maker Dell
Inc., formed a money-management firm called MSD Capital LP in 1998
dedicated to investing his family’s assets. The firm has more than $12
billion under management and a staff of about 80 people. It is focused
solely on investments for the family in asset classes including publicly
traded securities, private equity and real estate.
Todd Fogarty, a spokesman for New York-based MSD, declined to comment on the firm’s investments.
Cascade
Investment LLC is the personal holding company dedicated to Microsoft
co-founder Gates’s investments. The Kirkland, Washington-based firm
oversees about three-quarters of Gates’s $64.6 billion fortune,
according to data compiled by the Bloomberg Billionaires Index. Bridgitt
Arnold, a family spokeswoman, declined to comment.
About 52
percent of single-family offices reviewed their investment policies this
year, compared with 40 percent in 2011, according to a separate study
released yesterday by the Family Wealth Alliance, a research and
consulting firm. About 27 percent made changes such as placing more
emphasis on capital preservation, short-term liquidity and
diversification, said Robert Casey, senior managing director for
research at the Wheaton, Illinois-based firm.
Ideal Structure
The Family Wealth Alliance study is based on responses from 34 offices, Casey said.
The most
successful single-family offices are structured with investment-policy
statements, succession-plan documents, education for younger generations
and staff dedicated to selecting investment managers and monitoring
portfolios, the Wharton study found. High performers had a five-year net
return of more than 6 percent annually, Amit said.
“A family
can have the best investment advice, estate planning, legal and
accounting advice at their disposal,” Pendleton said. “If they have a
weak family governance system they can wipe out $1 billion in short
order.”
