A clandestine gathering unfolded on a balmy October day in 2014. Representatives from America’s most opulent families convened at the expansive 2,500-acre ranch of Ross Perot Jr., nestled just beyond the outskirts of Dallas. While skeet-shooting was on the agenda, the true essence of this two-day soiree was to foster connections and forge alliances in the pursuit of investments.

The Family Office Network Expands

From this exclusive assembly, graced by stewards of the fortunes belonging to luminaries like Michael Bloomberg, arose a vast network encompassing 150 families. Together, they have engaged in over ten ventures, including substantial acquisitions.

Traditionally, such dealings were the purview of corporate behemoths and private equity firms. However, a disruptive force has emerged on the hallowed grounds of Wall Street—the Family Office. These clandestine entities, designed to steward the wealth of the affluent, are asserting their influence with an expanding cohort, formidable resources, and an insatiable appetite for transactions.

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The Evolving Role of Family Offices

Kenny Springfield, an executive at Perot Investments, the custodians of the multibillion-dollar Perot legacy and hosts of the Dallas rendezvous, remarked, “We’re all just starting to recognize that we should be a more important part of the investment world than we historically have been as a group.”

Throughout history, affluent families have devised ingenious strategies to safeguard and augment their wealth. The savviest among them have ventured into diverse business dealings, from acquiring vast stretches of farmland to seeding hedge funds and procuring companies. Today, their numbers are burgeoning, and a significant faction, disillusioned by exorbitant fees and lackluster performances of Wall Street money managers, are gravitating towards investments they can directly oversee through family offices.

These offices are forming alliances with buyout firms while concurrently competing with them in the pursuit of acquisitions. They are providing capital injections to startups, acquiring distressed debt, real estate, and esoteric insurance instruments. They are extending loans to companies and, on occasion, engaging in corporate skirmishes as activist shareholders.

Talent Poaching and Strategic Hires

To accomplish this, family offices are poaching top-tier talent from Wall Street. Noteworthy among these hires, Thomas Pritzker, the billionaire chairman of Hyatt Hotels Corp., in 2015, enlisted the services of Joseph Gleberman, a senior banker from the private-equity division of Goldman Sachs Group Inc., to assist in the management of his family office.

Recently, Mr. Pritzker’s family office, in conjunction with two other affluent investors, clinched a deal to acquire Hargray Communications Group Inc. for a staggering $700 million in cash. This consortium, which encompasses the family offices of Warren Stephens, a banker from Arkansas, and Jim Davis, a co-founder of Allegis Group Inc., a staffing conglomerate, stands as a testament to the formidable capabilities of family offices.

“Family offices are evolving into more institutional entities,” remarked Chuck Stutenroth of U.S. Bank’s Ascent Private Capital Management unit, a dedicated facilitator for family offices. He fondly dubs them “insti-viduals.”

For clans endowed with no less than $250 million in assets earmarked for investment, family offices have become the preferred conduit to deploy their wealth. These enclaves offer unparalleled control and a veil of secrecy. They need not register with federal regulators, provided their investment counsel is limited to descendants within ten generations of a common ancestor, along with select individuals such as key employees, adopted progeny, and former spouses. Notably, most family offices forgo the inclusion of the family name.

A Celestial Ascent of Family Offices

A constellation of notable personalities, including Oprah Winfrey, hedge-fund luminary William Ackman, and Google co-founder Sergey Brin, have established their own family offices. The Koch brothers, Charles and David, have also ventured into this domain with the inception of 1888 Management LLC, overseeing a fraction of their staggering $86 billion combined net worth.

The allure of family offices has not gone unnoticed by investment titans such as Morgan Stanley and J.P. Morgan Chase & Co., who, in recent times, have appointed senior bankers dedicated to serving family offices. The proclivity of families to directly invest in companies, bypassing the traditional fund channels, has compelled private-equity firms to extend invitations for collaboration as minority deal partners. Family offices have also been at the forefront of urging hedge funds, in which they hold significant stakes, to revise their fee structures.

Accurately tallying the number of family offices proves challenging, given their discretionary nature. According to a study by accounting powerhouse EY, there are over 10,000 such entities worldwide, with nearly half established in the past 15 years. Robert Casey of Family Wealth Alliance LLC, a distinguished consultancy based in Chicago, estimates the United States harbors over 3,000 family offices boasting in excess of $1.2 trillion in assets.

The proliferation of family offices is, in part, attributable to the surge in global wealth witnessed in recent decades. This surge is traceable to heightened merger activity and the surge in initial public offerings. Wealth-X, a data provider, reported a 6.4% surge in the global billionaire population in 2015, reaching an unprecedented 2,473. Their combined wealth surged to nearly $7.7 trillion.

Dominic Samuelson, the CEO of Campden Wealth Ltd., an organization that fosters connections among affluent families, expounds, “It used to take 100 years to make $100 million, but that process has been sped up” by entrepreneurial endeavors emanating from Wall Street, Silicon Valley, and beyond.

Campden’s research reveals that family offices preside over assets surpassing $4 trillion, a figure approaching the cumulative assets managed by private-equity firms and hedge funds, as estimated by data provider Preqin. It’s worth noting that family offices sometimes invest in these very private-equity and hedge funds.

Carol Bernick, heir to the fortune stemming from the hair-care empire Alberto Culver Co., offers a compelling case study. In 2002, her family established an office, bearing the moniker of Polished Nickel Capital Management LLC, to oversee assets beyond their stake in Alberto Culver. Initially nameless and staffed by a lone employee, its ranks swelled following the spin-off of a beauty-supply business in 2006. In 2011, Alberto Culver was acquired by Unilever PLC for a staggering $3.7 billion. Polished Nickel Capital Management LLC’s assets burgeoned, currently boasting 14 employees and a portfolio of investments in tandem with other families and private-equity firms.

Transitioning from Hedge Funds to Family Offices

Since 2011, approximately three dozen hedge funds have transitioned into family offices post the return of clients’ investments, as reported by The Wall Street Journal. Soros Fund Management is counted among their ranks, citing mounting regulatory constraints as a pivotal factor. U.S. regulators now mandate hedge-fund firms with assets surpassing $150 million to divulge their strategies and the extent of their holdings.

John Arnold, the energy trader, shifted his focus to his family office and philanthropic endeavors in 2012 after shuttering his hedge fund, Centaurus Energy Master Fund. Half a year ago, his family office collaborated with a unit of Goldman Sachs, alongside select pension funds, in the $4.5 billion buyout of Cabela’s Inc., an outdoor-sports gear retailer, by Bass Pro Shops. This deal is currently awaiting finalization.

Allen Gibson, entrusted with managing Mr. Arnold’s multibillion-dollar fortune, remarks, “Where can we capture outsize returns and protect our capital? The only way to do that is in the private world.”

The Expansion of Club Deals and Investment Strategies

Networks of family offices, akin to the consortium orchestrated by Perot Investments, are sprouting up to facilitate private-equity-style “club deals” and deliberate on investment strategies. The Perot assembly predominantly comprises families wielding no less than $1 billion in assets, including the family offices of Messrs. Bloomberg and Soros, according to insiders. Executives from the Perot family office conceived this initiative after encountering a deal that necessitated more capital than they were initially inclined to invest.

Ward McNally, a descendant of Andrew McNally, co-founder of the renowned atlas publisher Rand McNally, extols the discreet yet influential nature of family offices. The McNallys established their own office subsequent to the sale of Rand McNally to private equity in 1997. In 2008, Mr. McNally established McNally Capital LLC, drawing funds from his family and a global network of approximately 800 families to engage in collective investments in companies. Mr. McNally divulges that every one of the approximately 300 families he met with last year expressed keen interest in participating in direct deals.

In a November deal, private-equity firm BC Partners finalized a $2 billion transaction to acquire dozens of data centers from CenturyLink Inc. Notably, their partners in this venture included Longview Asset Management, a family office overseeing the construction-related wealth of the Bechtel family from Chicago, whose fortune is estimated at $7 billion, partly stemming from a stake in General Dynamics Corp.

Another compelling instance is Hillspire LLC, a family office entrusted with managing over $5 billion for Eric Schmidt, the chairman of Alphabet Inc., Google’s parent company. In 2014, Hillspire acquired a fifth of the hedge fund D.E. Shaw Group for approximately $500 million.

Family Offices in Luxury and Consumer Brands

Family-backed investors boast ownership, in whole or in part, of luxury brands such as Jimmy Choo and Four Seasons Holdings Inc., as well as trendy consumer enterprises like the parent company of the packaged coconut-water brand, Vita Coco. While their ownership often remains discreet, certain family offices have garnered attention by initiating activist campaigns.

In May, the family office of David Bonderman, a founding partner of private-equity firm TPG Capital, voiced discontent with the management of Sorrento Therapeutics Inc., a cancer-drug company in which the family office held a stake. Wildcat Capital Management LLC, the voice of dissension, implored Sorrento’s board to implement a range of changes, including the dismissal of the CEO. Subsequently, Sorrento enlisted advisors to explore “strategic alternatives.”

Banking behemoth Goldman Sachs intensified its focus on family offices last year, recognizing that they were missing out on merger deals involving these enigmatic entities. They began by identifying 750 potential targets, eventually narrowing it down to 27 families believed to possess both the inclination and the means to directly acquire companies.

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Alison Mass, co-head of an investment-banking group at Goldman Sachs, attests, “We treat these family offices the same way we treat [buyout firms such as] Bain or Advent.”

Among the families drawing the gaze of Wall Street are Quadrant Capital Advisors, a $14 billion New York firm investing on behalf of Colombia’s Santo Domingo family, and Fremont Group, entrusted with overseeing the construction-related wealth of the Bechtel family.

Goliaths of the buyout industry, Blackstone Group LP and KKR & Co., have dispatched executives to court families with bespoke investment opportunities. Certain private-equity firms extend funds that commit to investments over a more extended period than the conventional private-equity timeline, along with co-investment opportunities.

KKR’s co-CEOs, Henry Kravis and George Roberts, issued a mandate to every employee to identify five affluent families the firm could engage for business, igniting a surge in family clients. Jim Burns, spearheading KKR’s individual-investor business, observes, “It’s an ocean of wealth.”

Corrections & Amplifications

A representative for George Soros’s family office did not attend an October 2014 gathering of wealthy families hosted by Perot Investments. A prior story erroneously indicated otherwise. Mr. Soros’s family office subsequently became involved in Perot’s networking endeavor.

Source: https://www.wsj.com/articles/the-new-force-on-wall-street-family-offices-1488991396