Transcript
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Only 25% of family offices make it to 2nd
generation, 10% to 3rd, and only 5% make it to
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3rd generation.
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Why is that?
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First of all, you've got huge amounts of money
and inefficient hands.
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So just because Ty Warner, and he's a brilliant
businessman, sold mini babies, doesn't mean he
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has the ability to buy the Four Seasons Hotel.
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He got crushed on there.
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And so you see a lot of people who have
liquidity events.
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And the first thing they wanna do when they
sell a company and they have a liquidity event
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is invest, and that's not the first thing they
need to do.
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The first thing they should do is they should
talk to an estate planning attorney.
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The biggest obstacle for many of these family
offices is the ego of the founder, of the
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matriarch or patriarch.
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And because they did something really well and
made a lot of money in something, doesn't mean
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they're good at everything.
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So you spend a lot of time around dozens and
dozens of billionaires and their kids, and you
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get the sense of their family.
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What's the best ways to raise good kids as it
relates to children who come from the ultra
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wealthy families?
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Ron, I've been excited to get you back on the
podcast.
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Welcome to the podcast.
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Thank you.
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Great to be here.
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Great to have you.
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So tell me about the wealth transfer happening
in family offices today.
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Well, it's massive.
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So, I mean, currently, there's approximately
$10,000,000,000,000 in assets and family
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offices.
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And just to kind of put that in perspective,
there's roughly 6,500,000,000,000 globally in
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the entire hedge fund market.
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So this is bigger than the hedge fund market
today.
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But the transfer is really what's important and
what's gonna be impactful.
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There's $84,400,000,000,000 that's moving
downstream from the baby boomers to next gen in
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the next 20 years.
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So we're about to experience the largest
transfer of wealth in history, and this will be
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massive.
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And the people who are gonna be insuring a lot
of this wealth are family offices.
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So I think you're gonna see more and more
family offices set up based on the fact that
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you've got 84,400,000,000,000 coming
downstream.
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So when we were last talking, we were talking
about the wealth transfer and management of
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family offices.
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And you mentioned there's a compensation gap
between what top private equity firms are
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willing to pay and what family offices are
willing to pay.
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Tell me about that.
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The problem is only a very few family offices
can execute right now.
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And one of the reasons is they don't have the
talent.
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And the reason they don't have the talent is
because they don't have the compensation model
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right.
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What happens is today, I'm generalizing, many
family offices, if they're gonna pay a kid out
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of Stanford MBA $250,000 a year, many of them
look at that as a cost.
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In other words, this cost me 2.50.
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If KKR or Apollo or Blackstone hires a kid out
of Stanford and they pay him 2.50, they look at
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that student as a potential $20,000,000 profit
center, not a cost.
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So part of the reason is many family offices
today look at this as a cost, and it's not a
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cost center, and it's not gonna be a business.
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So what they have to do is they have to
compensate in order to get the top talent to
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compete with the KKRs and the Blackstone.
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And what that means is they have to give them
part of the carrier.
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What that means is they've gotta give them
lines of credit or forgivable loans, ways for
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them to be compensated.
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Because if you're not gonna compensate them,
the top students are gonna go into the
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Blackstones or Carlisle or KKRs.
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They're not gonna go into family offices.
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Family offices right now, it's just not a
professionally run industry.
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I think that's going to change.
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And the first thing that has to change in order
to compete directly with these other big firms
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is a compensation model to attract the top
talent.
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And when you say about being a profit center
for family offices, do you mean returns for the
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family offices?
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Do you mean raising funds with outside capital?
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I'm talking about the way that they look at it.
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In other words, many family offices, they've
had a liquidity event.
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They're worth a couple $1,000,000,000.
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And many of them, they take their foot off the
gas pedal, and now they're at the point where,
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okay, now they've got their family office.
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They don't run it full throttle like they did
their business.
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And if that's the case, it's not gonna be
successful.
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In order to do it, you have to basically run it
like you ran your business.
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And some family offices do right now.
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I would say most don't.
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80 to 85% of the family offices that are in the
market today, in my opinion, should not exist
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the way they currently exist because of the way
they're structured.
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And I think that you have to really compensate
these people in order to attract the top
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talent.
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I would go a step further and say they should
be compensating more than the KKR and Apollo.
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A lot of the top tier talent wants to go to KKR
and Apollo, not just because of the high salary
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and high compensation, but also for the
branding and for the development of their
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personal brand in the industry.
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So in many ways, they should be compensating
higher.
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What's an example of a family office that is
compensating their top talent correctly?
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Tony and JB Pritzker with Paul Carbone.
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So Paul is a good friend, and he is working
with me.
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We're putting together a family office
initiative at University Chicago Booth, which
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we can touch on later.
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And what they've done, he was a very
successful, private equity guy at Baird.
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In order to bring him over, they had to
compensate him.
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So what they did is they gave him part of the
carrier.
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They gave them lines of credit or loans that he
can invest in, and now he's done
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extraordinarily well himself.
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But without doing that, without giving him
those comp that compensation, he would never
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have left there.
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So I think that's a perfect example.
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And Tony even said that when I talked to him,
that the reason they're able to attract people
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is because how they compensate them.
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They're in it.
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He wants everybody to make money, and you have
to look at it from that standpoint because
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while the family offices are looking to make
money, the people who are working for the
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family offices are just as ambitious, and they
also wanna do well.
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And they have to be compensated.
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So I would say they've got them they nailed the
compensation model right.
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You mentioned Tony and JB Pritzker.
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JB Pritzker, governor of Illinois, also was
early contention for the Democratic candidate
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for president.
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They call their family office private capital,
not family office.
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Tell me about that.
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It's interesting.
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So when I was talking to Tony I actually did a
podcast with Tony and Paul.
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And what Tony said is the reason is right now,
family offices are very inefficient and
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fragmented and siloed, and many of the
institutions consider them whimsical.
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And most family offices are.
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So they don't wanna be lumped in with that
category.
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They wanna be lumped in with professional
firms.
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So the professional firms, if they wanna really
compete, they don't wanna call themselves a
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family office because most family offices, as
Tony says, are very whimsical, and they're not
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professionally organized.
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That's why he calls it private capital.
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There's other family offices that are very
sophisticated again who are calling it private
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capital and not family offices.
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So it's interesting that everybody's you're
hearing the term family office over and over
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and over again, And he doesn't wanna get it
dumbed down to where it is today because right
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now, it's not professionalized.
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That's why they call it private capital.
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So he doesn't want anyone to refer to what he
has as a family office.
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He wants to refer to what they have as private
capital because he's saying they're more
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professional and they're more
institutionalized.
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And that has repercussions across the board,
recruiting, branding, deal flow, or is that
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just what effect does that have downstream?
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It affects everything.
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It affects recruiting.
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It affects companies wanting to do business
with them.
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Some companies don't wanna do business with
family offices right now.
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Remember, we're very, very early in the
evolution of family offices.
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Some family offices will be, you know what?
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I'm going to Europe for 3 months, so let's you
know, I'll look at the deal when you're done.
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Well, if you've got a deal that's gonna be done
in 30 days, you don't have the luxury of
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waiting 90 days.
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In a family office, it's their prerogative.
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They do whatever they want.
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And that's the problem right now.
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They don't have a professional system.
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The family office world today has not been
professionalized.
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It's going to be professionalized, and we're
helping to do that with what we're creating at
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Booth.
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But right now, it's really not.
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And I think that family offices have to look at
things in order to attract the top people.
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You mentioned that only 25% of family offices
make it to 2nd generation, 10% to 3rd, and only
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5% make it to 3rd generation.
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Why is that?
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First of all, you've got huge amounts of money
and inefficient hands.
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So just because Ty Warner, and he's a brilliant
businessman, sold Beanie Babies, doesn't mean
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he has the ability to buy the Four Seasons
Hotel, and he got crushed on that.
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And so you see a lot of people who have
liquidity events, and the first thing they
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wanna do when they sell a company and they have
a liquidity event is invest.
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And that's not the first thing they need to do.
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The first thing they should do is they should
talk to an estate planning attorney.
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So that's the first thing.
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It's the boring stuff, but it's almost like the
foundation of a house.
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Right?
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So without the foundation, it it's it's more
enjoyable to see the windows being built and
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and the deck being built, not the basement.
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But without the proper foundation, it's not
gonna stand up.
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Secondly, governance.
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What is governance?
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Well, governance is super important, but it's a
soft skill, and most family offices don't look
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at that.
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Sometimes they'll scratch their head on them,
like, you've gotta get your governance right.
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And the reason families implode is not always
because family offices aren't great investors.
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Sometimes they are, sometimes they're not.
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There's no governance in place.
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And then they don't have a structure.
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Right?
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So it's haphazard.
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They don't have a strategy to do it.
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So if a family office makes their money in real
estate and they sold their company for
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$3,000,000,000, they're gonna start investing.
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They should focus on real estate, which is what
they know, and they should work with other
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families who made their money in other
industries.
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But what they do is and this is the biggest
obstacle for many of the family offices.
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I tell people this and it offends some people,
but it's true.
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The biggest obstacle for many of these family
offices is the ego of the founder, of the
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matriarch or patriarch.
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Because because they did something really well
and made a lot of money in something, doesn't
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mean they're good at everything.
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I ran a hedge fund.
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I was fairly good at that.
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I'm not good at venture capital like you are.
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I'm not good at real estate investing like Sam
Zell was.
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So understanding your lane so I think the
issues are there's no playbook right now.
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There's no you have liquidity that what are you
supposed to do, And that's what we're trying to
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change right now at Boost.
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We're trying to do it where once you've had a
liquidity event rather than start investing
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and, again, everyone's gonna be hitting them
up.
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All their friends, all their relatives, all the
people at the country clubs, they realize they
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had a liquidity event.
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It's it's in the papers, and they're gonna
start asking for money, and they're gonna start
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doing deals with with their friend, etcetera.
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I tell people you shouldn't once you've had a
liquidity event, you should wait 6 months,
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maybe a year before you make any investment and
get your governance set up, get your state
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planning structured properly.
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Once that's done, then you could start talking
about investing, but they do it backwards.
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Yeah.
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You bring up so many great points.
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There's a famous paper on governance and how
some of the top asset managers, not family
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offices, but pension funds, have unique
government structures, pension funds, like
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state of Wisconsin Investment Board or Alaska
Permanent or Utah Retirement Systems, where
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they give more flexibility for their team to
optimize around returns versus over, you know,
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sometimes arbitrary governance.
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The other issue is tax.
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The thing that connects tax and governance is
that they're very important, but very boring
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for most people.
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They're not exciting.
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They're not like investing in crypto, investing
in tech, investing in the next biotech startup,
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but they drive returns.
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Sometimes it's it's in many ways, it's a free
launch.
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Well, that's interesting.
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And, you know, it's people are always trying to
create alpha.
227
00:10:42,254 --> 00:10:42,574
Right?
228
00:10:42,894 --> 00:10:43,875
Investment alpha.
229
00:10:43,934 --> 00:10:46,095
I think in the public markets, it's next to
impossible.
230
00:10:46,095 --> 00:10:47,399
I just have money in index funds.
231
00:10:47,399 --> 00:10:50,840
I think in the private markets, private equity,
venture capital, real estate, you can create
232
00:10:50,840 --> 00:10:51,340
alpha.
233
00:10:51,399 --> 00:10:54,200
But there's something called structural alpha,
which involves taxes.
234
00:10:54,200 --> 00:10:58,860
So there's a firm we met, which is the the top
firm I've ever met that does this called HUR.
235
00:10:59,240 --> 00:11:03,034
And, basically, what they've done is they've
created a way where you could basically put
236
00:11:03,034 --> 00:11:04,714
your money in an index fund.
237
00:11:04,714 --> 00:11:07,195
But while you're doing that, they're doing long
and short.
238
00:11:07,195 --> 00:11:10,235
You're actually getting tax loss harvesting at
the same time.
239
00:11:10,235 --> 00:11:13,835
So what they've been able to do is they've
invented something in a brilliant and I went
240
00:11:13,835 --> 00:11:17,850
went up to their office a couple days ago to to
check it out because a lot of the family
241
00:11:17,850 --> 00:11:20,910
offices that I'm talking to are utilized are
using them currently.
242
00:11:21,210 --> 00:11:25,370
And, basically, what they've done is let's say
you wanna do match the S and P.
243
00:11:25,370 --> 00:11:26,590
S and P is up 15%.
244
00:11:27,049 --> 00:11:29,450
Well, their thought process is, well, they're
they're good stock pickers.
245
00:11:29,450 --> 00:11:32,924
Maybe it'll be up 50, 75 basis points higher
than the market.
246
00:11:32,924 --> 00:11:35,504
So in some years, it'll be a little down, but a
little up.
247
00:11:35,884 --> 00:11:40,365
But the main thing is that while they're
matching the market, they can kick off
248
00:11:40,365 --> 00:11:44,544
1,000,000 of dollars in losses because of how
there's long short, and they're basically
249
00:11:44,700 --> 00:11:47,660
almost identical to what the index is, and it
could be the Russell 1,000.
250
00:11:47,660 --> 00:11:48,740
It could be the S and P.
251
00:11:48,740 --> 00:11:50,059
It doesn't matter what it is.
252
00:11:50,059 --> 00:11:51,440
It's structural alpha.
253
00:11:51,500 --> 00:11:55,419
Structural alpha, how things are structured, is
gonna be a phrase that's gonna be used more and
254
00:11:55,419 --> 00:11:56,379
more going forward.
255
00:11:56,379 --> 00:11:59,845
That's interesting about AQR, the top banks,
the Goldman Sachs, the JPMorgan.
256
00:11:59,904 --> 00:12:03,924
That's been their pitch for many decades, which
is bring your money over to us.
257
00:12:04,144 --> 00:12:09,904
We'll get you another 100 basis points with tax
loss harvesting, and you'll be breakeven on
258
00:12:09,904 --> 00:12:10,500
your fee.
259
00:12:10,740 --> 00:12:15,460
So taxes, again, the reason they're so
important, credit has been like a huge area for
260
00:12:15,460 --> 00:12:17,799
family offices to go into, and it's a great
market.
261
00:12:18,019 --> 00:12:23,139
You could get 10%, 8, 12%, let's say, fairly
consistently without taking a huge amount of
262
00:12:23,139 --> 00:12:25,605
risk, and everybody's getting into the credit
game.
263
00:12:26,164 --> 00:12:29,044
The problem is and the credit was a huge
market.
264
00:12:29,044 --> 00:12:29,544
Right?
265
00:12:30,004 --> 00:12:31,065
It's a multi $1,000,000,000,000
266
00:12:31,445 --> 00:12:32,324
market right now.
267
00:12:32,324 --> 00:12:33,845
It is the hottest market right now.
268
00:12:33,845 --> 00:12:34,824
But here's the problem.
269
00:12:35,125 --> 00:12:40,660
What credit was previously was pension funds,
and pension funds don't pay taxes while family
270
00:12:40,660 --> 00:12:41,639
offices do.
271
00:12:41,860 --> 00:12:45,700
So there's a concept called PPLI, which is
private placement life insurance, which
272
00:12:45,700 --> 00:12:47,940
basically puts a tax wrapper around it.
273
00:12:47,940 --> 00:12:51,879
So now a credit fund, you might earn 10%, but
you you're in California.
274
00:12:52,115 --> 00:12:56,454
So after taxes and after everything, your net
return might be 6a half, 7%.
275
00:12:57,074 --> 00:13:01,315
By putting a private placement life insurance
product around it, and I call again, this is
276
00:13:01,315 --> 00:13:06,779
another example of structural alpha, you
basically eliminated income taxes entirely, and
277
00:13:06,779 --> 00:13:08,460
your drag is about 50 bps.
278
00:13:08,460 --> 00:13:10,240
So the value play is very simple.
279
00:13:10,779 --> 00:13:13,200
Fifty basis points, elimination of taxes.
280
00:13:13,580 --> 00:13:18,160
And, again, more and more people are learning
about this because, again, it's structural
281
00:13:18,299 --> 00:13:23,875
alpha, and it's the taxes that people really
need to understand that people have really not
282
00:13:23,875 --> 00:13:24,995
paid attention to.
283
00:13:24,995 --> 00:13:27,315
There's a guy, Michael Leibskin, who created
the industry.
284
00:13:27,315 --> 00:13:31,235
He was the founder of one of the top firms, and
he's the top guy in the industry.
285
00:13:31,235 --> 00:13:32,034
It's very simple.
286
00:13:32,034 --> 00:13:35,160
And a lot of the family offices that I work
with have spoken to him.
287
00:13:35,160 --> 00:13:37,399
They basically say, here's the thing.
288
00:13:37,399 --> 00:13:39,000
You're gonna pay 50 bps.
289
00:13:39,000 --> 00:13:39,980
That's your drag.
290
00:13:40,040 --> 00:13:41,160
You're gonna eliminate taxes.
291
00:13:41,160 --> 00:13:42,040
Does it make sense?
292
00:13:42,040 --> 00:13:45,320
Now there's certain things you can do and
certain things you can't do with it, but credit
293
00:13:45,320 --> 00:13:49,544
is not a great investment for a family office
unless they have this tax wrapper.
294
00:13:49,625 --> 00:13:52,504
If you're if you're a pension fund or the state
of California, doesn't matter.
295
00:13:52,504 --> 00:13:53,485
They don't pay taxes.
296
00:13:53,704 --> 00:13:56,764
How would you explain private placement life
insurance to a 3rd grader?
297
00:13:57,065 --> 00:13:59,865
All of these assets, like active management and
hedge funds.
298
00:13:59,865 --> 00:14:01,384
Those are, you know, sit it up.
299
00:14:01,384 --> 00:14:04,825
It's great what the return is, but, really,
what you wanna know is what's your after tax
300
00:14:04,825 --> 00:14:05,325
return.
301
00:14:05,600 --> 00:14:09,200
So what private placement life insurance does
people get spooked because they hear the word
302
00:14:09,200 --> 00:14:09,860
life insurance.
303
00:14:10,480 --> 00:14:15,519
It is, but you basically you're buying as
little life insurance as you can in order to be
304
00:14:15,519 --> 00:14:18,825
taxed as life insurance, because life
insurance, they're not taxed.
305
00:14:18,884 --> 00:14:21,205
So the tax treatment for life insurance is
great.
306
00:14:21,205 --> 00:14:26,565
So, basically, what you're trying to do is
create a product right now that is taxed as a
307
00:14:26,565 --> 00:14:28,404
life insurance product, but it's an investment.
308
00:14:28,404 --> 00:14:33,590
And more and more companies, be it Gallup, be
it Ares, be it Blackstone, all the top firms
309
00:14:33,590 --> 00:14:35,029
are getting into the space right now.
310
00:14:35,029 --> 00:14:39,290
And the reason is because private credit is
such an attractive market right now.
311
00:14:39,830 --> 00:14:41,830
It is great for the pension funds.
312
00:14:41,830 --> 00:14:45,044
It's not great for the individual investors,
and they haven't thought this through.
313
00:14:45,284 --> 00:14:50,825
Once you explain this, once people explain it,
there's almost no reason not to do it.
314
00:14:50,884 --> 00:14:55,784
What happens is most people haven't heard of
this, and the reason is pretty simple.
315
00:14:55,845 --> 00:15:00,450
The fees, the compensation for the agents, and
it's mostly life insurance agents who sell it,
316
00:15:00,610 --> 00:15:02,149
are very low for this.
317
00:15:02,210 --> 00:15:04,549
And, typically, it's very complicated also.
318
00:15:04,690 --> 00:15:09,970
So if you take a life insurance person who's
typically maybe not as educated as some of the
319
00:15:09,970 --> 00:15:14,290
financial analysts you're working with, and
maybe they're looking to get compensated more
320
00:15:14,290 --> 00:15:18,595
right away, Why would they wanna do something
that the compensation is so low and the brand
321
00:15:18,595 --> 00:15:19,815
damage is so much?
322
00:15:20,035 --> 00:15:24,595
Now what Michael Leafton has done and what
other a couple other places have done is they
323
00:15:24,595 --> 00:15:25,715
basically realize this.
324
00:15:25,715 --> 00:15:30,790
And the the large family offices, when they
come to them, this is like a new thing that
325
00:15:30,790 --> 00:15:31,690
they didn't understand.
326
00:15:31,750 --> 00:15:34,230
And the reason they didn't understand it
before, it was never brought to their
327
00:15:34,230 --> 00:15:34,730
attention.
328
00:15:35,190 --> 00:15:40,330
So it's again, it comes back to structural
alpha, and more and more of the sophisticated
329
00:15:40,549 --> 00:15:43,754
family offices understand the importance of
structural alpha.
330
00:15:43,835 --> 00:15:45,995
It's not just how much how good your return
was.
331
00:15:45,995 --> 00:15:48,254
It it's how good your return was after taxes.
332
00:15:48,394 --> 00:15:50,654
And where do you have your private placement
life insurance?
333
00:15:51,035 --> 00:15:52,174
Mike with Michael Everson.
334
00:15:52,794 --> 00:15:53,195
Hey.
335
00:15:53,195 --> 00:15:55,294
We'll be right back after a word from our
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336
00:15:55,850 --> 00:15:59,850
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345
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That's z.carta.comforward/10xpod.
346
00:16:30,399 --> 00:16:34,879
So you talked about tax loss harvesting, which
is taking losses as you're growing your assets.
347
00:16:34,879 --> 00:16:39,654
You talked about 10 30 1 exchange, which is you
take a property, it appreciates it, you sell
348
00:16:39,654 --> 00:16:43,514
it, and you replace it with another property,
and therefore don't pay the capital gains.
349
00:16:43,975 --> 00:16:48,454
Another strategy that's very popular and very
practical qualified small business stock.
350
00:16:48,454 --> 00:16:52,710
This is from the venture and startup world
where you buy a stock, you hold it, you buy a
351
00:16:52,710 --> 00:16:59,110
startup, you hold it for 5 years, and all of
the capital gains are federal income tax free.
352
00:16:59,110 --> 00:17:02,870
And in most states outside of California is
also state tax free.
353
00:17:02,870 --> 00:17:06,170
So you could have and that's up to $10,000,000
inclusion per investment.
354
00:17:06,525 --> 00:17:09,664
So you invest in $250,000 in Uber.
355
00:17:10,045 --> 00:17:11,965
You return 40 x.
356
00:17:11,965 --> 00:17:12,865
You get 10,000,000.
357
00:17:13,085 --> 00:17:14,765
All of that gain is tax free.
358
00:17:14,765 --> 00:17:14,924
Yeah.
359
00:17:14,924 --> 00:17:18,525
And we're doing I'm on the board of Fin Capital
and still laying a couple of Fintech companies,
360
00:17:18,525 --> 00:17:19,965
and that's exactly what they're doing.
361
00:17:19,965 --> 00:17:23,799
But, again, this is something that it's harder
and harder to create alpha in different
362
00:17:23,799 --> 00:17:24,299
products.
363
00:17:24,599 --> 00:17:28,599
Structure alpha is real, and it's something
that more and more people are gonna be focused
364
00:17:28,599 --> 00:17:28,919
on.
365
00:17:28,919 --> 00:17:32,200
And I think if you work in conjunction with the
estate planning attorneys and understand that
366
00:17:32,200 --> 00:17:35,740
you have to tax ramifications, the goal is not
to make 20%.
367
00:17:35,880 --> 00:17:42,394
The goal is to make 20% after taxes, and people
are focused on the pretax and not focused on
368
00:17:42,394 --> 00:17:43,695
the on the after tax.
369
00:17:43,755 --> 00:17:44,955
The pension doesn't matter.
370
00:17:44,955 --> 00:17:46,815
Family offices, it matters a lot.
371
00:17:47,035 --> 00:17:48,335
You also mentioned incentives.
372
00:17:48,394 --> 00:17:51,615
So life insurance agents don't make enough
money to deal with the hassle.
373
00:17:51,900 --> 00:17:54,859
Managers aren't really ranked on their after
tax.
374
00:17:54,859 --> 00:17:56,700
They're kind of ranked based on AUM.
375
00:17:56,700 --> 00:17:59,099
And so there there's a lot of misincentives in
the space in general.
376
00:17:59,099 --> 00:18:03,420
That's a great point because so even, like,
with with AQR, basically, the CIO is not
377
00:18:03,420 --> 00:18:09,134
necessarily an ally because the CIO of the
family office typically gets paid on pretax.
378
00:18:09,134 --> 00:18:09,634
Right?
379
00:18:09,855 --> 00:18:11,154
So that's how they're compensated.
380
00:18:11,694 --> 00:18:16,015
If somebody has a mousetrap that can create
something better, and then after tax is better,
381
00:18:16,015 --> 00:18:19,615
but that's not how they're compensated, there's
subtle inherent conflict of interest between
382
00:18:19,615 --> 00:18:22,920
the CIO of the family office and the actual
matriarch or patriarch.
383
00:18:22,980 --> 00:18:28,500
So if you bring this strategy to a CIO, they
will like it, but they might not necessarily do
384
00:18:28,500 --> 00:18:28,980
it.
385
00:18:28,980 --> 00:18:32,980
If you bring it to a matriarch or patriarch,
and they're not saying this is how I'm
386
00:18:32,980 --> 00:18:35,535
compensated, they're looking at it from their
bottom line.
387
00:18:35,695 --> 00:18:36,974
They're the ones that have to do it.
388
00:18:36,974 --> 00:18:42,174
And when they understand it, I think more and
more of products like this as structural alpha
389
00:18:42,174 --> 00:18:44,414
are gonna come to fruition in the next 5 to 10
years.
390
00:18:44,414 --> 00:18:46,994
And family offices are certainly taking
advantage of this.
391
00:18:47,215 --> 00:18:51,190
To quote the late Charlie Munger, Warren
Buffett's partner, show me the incentive, and
392
00:18:51,190 --> 00:18:52,250
I'll show you the outcome.
393
00:18:52,630 --> 00:18:55,130
It is so, so, so very true.
394
00:18:55,190 --> 00:19:00,230
So you spend a lot of time around dozens and
dozens of billionaires and their kids, and you
395
00:19:00,230 --> 00:19:01,669
get to sense of their family.
396
00:19:01,669 --> 00:19:06,025
What's the best ways to raise good kids as it
relates to children who come from the ultra
397
00:19:06,025 --> 00:19:06,845
wealthy families?
398
00:19:07,305 --> 00:19:09,384
I remember when we took our daughter home from
the hospital.
399
00:19:09,384 --> 00:19:11,644
We have 2 beautiful daughters, now 21 and 24.
400
00:19:11,865 --> 00:19:14,664
We took them home, and they're, like, in a
bassinet, and, like, they didn't give us a
401
00:19:14,664 --> 00:19:15,144
playbook.
402
00:19:15,144 --> 00:19:15,305
Right?
403
00:19:15,305 --> 00:19:16,025
Like, what do you do?
404
00:19:16,025 --> 00:19:17,730
I mean, there's no playbook for this.
405
00:19:17,730 --> 00:19:21,750
I think with wealthy families, it's a
particular challenge for various reasons.
406
00:19:22,289 --> 00:19:29,250
I think children are like sponges, and they are
they learn and listen and absorb so much more
407
00:19:29,250 --> 00:19:30,150
than we realize.
408
00:19:30,289 --> 00:19:32,055
So I could tell my kids, look.
409
00:19:32,215 --> 00:19:35,975
You know, you have to treat people with respect
to the waiter and the dishwasher and the car
410
00:19:35,975 --> 00:19:37,515
wash person, whose guest is important.
411
00:19:37,735 --> 00:19:42,055
If I say that to them, but then they see me
saying, you know, treating them like, hey.
412
00:19:42,055 --> 00:19:46,470
You know, just throwing them a couple dollars
and and not even making eye contact with them
413
00:19:46,549 --> 00:19:47,829
and not even thanking them.
414
00:19:47,829 --> 00:19:48,970
They see that.
415
00:19:49,109 --> 00:19:53,609
So, basically, to answer your question, I think
it's how you act.
416
00:19:53,750 --> 00:19:56,710
Kids react to how what you do, not what you
say.
417
00:19:56,710 --> 00:20:01,130
So you could say, yes, treat everybody nicely,
but if you don't, they won't.
418
00:20:01,345 --> 00:20:05,184
If they see you go out of your way, and I
certainly do it, and I know a lot of families
419
00:20:05,184 --> 00:20:09,125
that are families that, you know, I think are
very thoughtful and very well thought out,
420
00:20:09,265 --> 00:20:13,664
there's no difference between a CEO
multibillion dollar company and your boss boy.
421
00:20:13,664 --> 00:20:17,880
I mean, we're all peep, and they make a
concerted effort to treat it like that.
422
00:20:17,940 --> 00:20:21,700
They also I think one of the things is they
live in a life of privilege, which is
423
00:20:21,700 --> 00:20:25,539
wonderful, but to keep it grounded, do you take
your kids to soup kitchen?
424
00:20:25,539 --> 00:20:29,954
You take your so people understand, the
children understand, the worst thing you could
425
00:20:29,954 --> 00:20:34,994
do with a family office or of any wealthy
family is to raise an entitled child, and
426
00:20:34,994 --> 00:20:37,414
that's the absolute worst thing you could do as
a parent.
427
00:20:37,634 --> 00:20:39,575
The opposite of entitled is gratitude.
428
00:20:39,954 --> 00:20:44,240
You wanna make people realize, yes, mom and dad
or grandma and grandpa made a lot of money and
429
00:20:44,320 --> 00:20:47,940
like, I'm grateful for that, but I'm not
entitled to it.
430
00:20:48,000 --> 00:20:52,799
So it's it's nuanced, but I think a lot of the
families take a lot of time and a lot of
431
00:20:52,799 --> 00:20:53,299
thought.
432
00:20:53,680 --> 00:21:00,595
How they act is how their kids are gonna act to
people and how they if they're philanthropic if
433
00:21:00,595 --> 00:21:04,934
you say I'm philanthropic, but they never see
you writing a check, that's another thing.
434
00:21:04,995 --> 00:21:09,619
If they see you writing checks or if they see
you doing some stuff, if if soup kitchens or
435
00:21:09,619 --> 00:21:12,920
doing some projects with other places, that's
what sinks in.
436
00:21:12,980 --> 00:21:17,539
Children understand things a lot more than we
give them credit to credit for, and I think
437
00:21:17,539 --> 00:21:18,580
that's really the key.
438
00:21:18,580 --> 00:21:22,840
Just to double click on that, there's two main
issues that happen in wealthy families.
439
00:21:23,355 --> 00:21:27,035
One is if they grow up, you would call
entitled, but really a higher standard of
440
00:21:27,035 --> 00:21:27,355
living.
441
00:21:27,355 --> 00:21:28,954
So you're on private jets.
442
00:21:28,954 --> 00:21:30,734
You're always staying at 5 star hotels.
443
00:21:31,275 --> 00:21:32,154
That's all fine.
444
00:21:32,154 --> 00:21:35,674
There's nothing inherently wrong with that
except when they wanna continue that standard
445
00:21:35,674 --> 00:21:36,734
when they get older.
446
00:21:36,980 --> 00:21:41,140
And in order to maintain that standard, you
have to have 1,000,000 of dollars every year,
447
00:21:41,140 --> 00:21:46,839
which brings you to the next dilemma, which is
if a child is used to that standard of living,
448
00:21:47,299 --> 00:21:52,224
you essentially have to give that child
capital, which takes away their kind of passion
449
00:21:52,224 --> 00:21:56,704
in life and takes away one of the greatest joys
in life, which is your career and what you work
450
00:21:56,704 --> 00:21:56,865
on.
451
00:21:56,865 --> 00:22:01,585
So I think that's kind of the dilemma, and
that's a hard needle to thread as a parent in a
452
00:22:01,585 --> 00:22:02,325
wealthy family.
453
00:22:02,625 --> 00:22:03,424
It is very hard.
454
00:22:03,424 --> 00:22:08,259
But I think if kids see you working very hard,
not to say daddy works hard, but if they see
455
00:22:08,259 --> 00:22:12,900
you working from 7 in the morning till 11 at
night and they see you, they'll model that, and
456
00:22:12,900 --> 00:22:14,660
they're gonna try to do that as well.
457
00:22:14,660 --> 00:22:16,259
So, again, they observe.
458
00:22:16,259 --> 00:22:17,960
There's these children are sponges.
459
00:22:18,019 --> 00:22:22,644
Whether they're 3 years old all the way up to,
you know, early twenties, they look at what
460
00:22:22,644 --> 00:22:24,325
their parents do, not what they say.
461
00:22:24,325 --> 00:22:30,164
And that's truly the key, in my opinion, to
raising kids that are grateful and not
462
00:22:30,164 --> 00:22:30,664
entitled.
463
00:22:31,045 --> 00:22:36,809
The best example that I've seen of this working
out well is when the kids happen to have the
464
00:22:36,809 --> 00:22:40,590
interest of working in the family office and
continuing working with their family.
465
00:22:40,970 --> 00:22:44,730
On top of that, what I've seen worked really
well is when their parents send them to
466
00:22:44,730 --> 00:22:46,509
investment banking for a couple of years.
467
00:22:46,650 --> 00:22:51,285
They send them to this boot camp, have, you
know, their entitlement beaten out of them for
468
00:22:51,285 --> 00:22:52,164
lack of better word.
469
00:22:52,164 --> 00:22:56,805
They come back very grateful for the
opportunity and very kind of wired to work hard
470
00:22:56,805 --> 00:22:57,625
for their career.
471
00:22:57,924 --> 00:22:58,164
Right.
472
00:22:58,164 --> 00:23:02,130
So I'm on the board of Crestlet, which is a
$60,000,000,000 multifamily office, and they've
473
00:23:02,130 --> 00:23:02,849
got a boot camp.
474
00:23:02,849 --> 00:23:07,009
They do exactly that for next gens, and they
take these high school kids to camp and
475
00:23:07,009 --> 00:23:08,450
basically teach them these things.
476
00:23:08,450 --> 00:23:10,769
And then they're around other kids who are in
very similar things.
477
00:23:10,769 --> 00:23:15,089
So I think educating the kids is a really,
really key thing, and I think that there are
478
00:23:15,089 --> 00:23:20,375
more and more firms are realizing the
importance of not just giving, but just
479
00:23:20,375 --> 00:23:23,335
educating them, explaining to them how it
works.
480
00:23:23,335 --> 00:23:27,174
And the earlier they understand it, the more
likely they are to be effective when they're
481
00:23:27,174 --> 00:23:27,674
older.
482
00:23:27,734 --> 00:23:31,335
So you cofounded the Family Office Initiative
at University of Chicago Booth.
483
00:23:31,335 --> 00:23:32,474
Tell me about the initiative.
484
00:23:32,740 --> 00:23:34,500
We will be working on it for a long time.
485
00:23:34,500 --> 00:23:38,819
So I started I launched the family office
initiative at Stanford University about 5 years
486
00:23:38,819 --> 00:23:39,319
ago.
487
00:23:39,380 --> 00:23:44,099
And basically, what the reason that we created
it you've been to a lot of family office
488
00:23:44,099 --> 00:23:44,579
conferences.
489
00:23:44,579 --> 00:23:46,694
Many of these conferences are simply pay to
play.
490
00:23:46,774 --> 00:23:51,335
I have a 100 families that invest alongside me
from 250,000,000 to 30,000,000,000, and they
491
00:23:51,335 --> 00:23:52,774
always ask me, oh, you're keynoting this.
492
00:23:52,774 --> 00:23:53,335
Should I go?
493
00:23:53,335 --> 00:23:54,054
I'm like, no.
494
00:23:54,054 --> 00:23:55,355
Not worth going to the conference.
495
00:23:55,414 --> 00:23:59,174
So I wanted to put together a conference there
that I would tell you or the families that
496
00:23:59,174 --> 00:24:00,599
invest with me to go to.
497
00:24:00,759 --> 00:24:05,179
So what we did is I went to Kirkland and Ellis
and I said, you guys could put it on.
498
00:24:05,240 --> 00:24:06,919
And then what I'll do is 2 things.
499
00:24:06,919 --> 00:24:10,039
I'm gonna get you world class speakers, and I'm
gonna pick the content.
500
00:24:10,039 --> 00:24:12,919
Because I wanted to create a conference that I
would go to.
501
00:24:12,919 --> 00:24:13,880
So three examples.
502
00:24:13,880 --> 00:24:15,164
We had Paul Carbone speak.
503
00:24:15,325 --> 00:24:17,825
Paul ran the family office for Tony and JB
Pritzker.
504
00:24:17,965 --> 00:24:19,244
He wasn't pitching a fund.
505
00:24:19,244 --> 00:24:21,184
He was just saying, this is how we do due
diligence.
506
00:24:21,484 --> 00:24:25,965
We had Tim Callahan, and this was during COVID,
talking about he was opining he was Sam Zell's
507
00:24:25,965 --> 00:24:27,404
partner, opining on office.
508
00:24:27,404 --> 00:24:29,805
He was selling raising money for fund 5.
509
00:24:29,805 --> 00:24:32,839
He was just opining on what he thought was
gonna happen to offices because, remember,
510
00:24:32,839 --> 00:24:35,720
during COVID, people would go back to offices
or what's gonna happen.
511
00:24:35,720 --> 00:24:40,200
And then lastly, Denise Ilitch, who from Little
Caesars, she helped to rebuild Detroit.
512
00:24:40,200 --> 00:24:43,894
She wasn't basically going to them and saying,
donate to my charity.
513
00:24:43,894 --> 00:24:44,535
Help me.
514
00:24:44,535 --> 00:24:47,595
She was just saying, if you're gonna be
philanthropic, go ahead and do it more
515
00:24:47,815 --> 00:24:49,734
strategically and more run more like a
business.
516
00:24:49,734 --> 00:24:50,795
So that was scaling.
517
00:24:50,934 --> 00:24:53,015
But then about 3 years, it got very political.
518
00:24:53,015 --> 00:24:57,174
So I met with I was having lunch with Michael
Milken and with Steve Kaplan, who runs one of
519
00:24:57,174 --> 00:24:58,535
the top professors at Booth.
520
00:24:58,535 --> 00:25:00,529
And I said I wanted to move this over to Booth.
521
00:25:00,829 --> 00:25:03,089
And that was sort of, like, the start of it.
522
00:25:03,230 --> 00:25:09,869
And what we've done is Paul Carbone and myself
and a few other people are basically putting
523
00:25:09,869 --> 00:25:13,250
together an initiative at the University of
Chicago Booth.
524
00:25:13,465 --> 00:25:18,025
And what we're trying to do is we've got Steve
Kaplan as sort of the inside person who's
525
00:25:18,025 --> 00:25:19,144
helping spearhead it.
526
00:25:19,144 --> 00:25:24,184
We put together an advisory board of or family
a council of 40 of the wealthiest families in
527
00:25:24,184 --> 00:25:24,664
the country.
528
00:25:24,664 --> 00:25:26,365
These are average AUM of $5,000,000,000.
529
00:25:27,529 --> 00:25:31,529
And the goal is several fold, and I think what
we're creating at Boost is gonna be the most
530
00:25:31,529 --> 00:25:34,750
important thing that we're doing, that I'm
doing in the family office world.
531
00:25:34,809 --> 00:25:39,049
Because family offices are inefficient and
fragmented and siloed, how do you change that?
532
00:25:39,049 --> 00:25:42,515
How do you get them where if they go to a
conference and people realize, like,
533
00:25:42,515 --> 00:25:44,914
multibillionaire's there, everyone's not
pitching them?
534
00:25:44,914 --> 00:25:47,414
The only way to do it, in my opinion, is
through a university.
535
00:25:47,714 --> 00:25:51,955
Now what we're doing with Boost is, first,
we're gonna have a course coming out in
536
00:25:51,955 --> 00:25:53,900
December, taught by professor Eaton.
537
00:25:53,900 --> 00:25:55,259
It's called the family office.
538
00:25:55,259 --> 00:26:00,480
We're gonna teach these kids at Booth about
family offices, about permanent capital.
539
00:26:00,619 --> 00:26:06,454
We're gonna have a conference in May, very
limited, maybe 200, 250 people, exclusively
540
00:26:06,595 --> 00:26:07,394
family offices.
541
00:26:07,394 --> 00:26:08,515
So think about this.
542
00:26:08,515 --> 00:26:10,535
You typically go to a family office conference.
543
00:26:10,835 --> 00:26:14,775
It's 95% service providers, maybe 3 to 5%
family offices.
544
00:26:15,154 --> 00:26:19,255
Here, it's a 100% family offices, 0 service
providers.
545
00:26:19,519 --> 00:26:24,000
So the goal of what we're trying to create at
Booth is to educate these kids because my
546
00:26:24,000 --> 00:26:29,379
belief is that today, the top kids out of Booth
or Harvard or Stanford or different
547
00:26:29,440 --> 00:26:33,365
Northwestern, they wanna get into private
equity or venture capital or real estate.
548
00:26:33,365 --> 00:26:35,044
Nobody wants to go into a family office.
549
00:26:35,044 --> 00:26:36,664
Nobody knows what a family office is.
550
00:26:36,804 --> 00:26:42,164
But with 84,400,000,000,000 coming downstream
and having permanent capital, it's my belief
551
00:26:42,164 --> 00:26:46,980
that in 5 to 7 years, the first choice of these
kids out of school is is gonna be to work for a
552
00:26:46,980 --> 00:26:47,539
family office.
553
00:26:47,539 --> 00:26:48,099
I could be wrong.
554
00:26:48,099 --> 00:26:51,640
It might be 10 years, but that's going to
happen because of the wealth transfer.
555
00:26:52,019 --> 00:26:58,914
So we're trying to create an ecosystem where we
can have a network of family offices with other
556
00:26:58,914 --> 00:27:04,595
family offices without an agenda under the
auspices of a research institution, which is
557
00:27:04,595 --> 00:27:07,955
one of the best in the world at University of
Chicago Booth, where they're gonna educate.
558
00:27:07,955 --> 00:27:09,315
Again, they don't have to make a profit.
559
00:27:09,315 --> 00:27:10,595
Their goal is not to profit.
560
00:27:10,595 --> 00:27:12,599
Their goal is to educate and to do research.
561
00:27:12,679 --> 00:27:16,919
In order to keep this level, in order for
family offices to truly disrupt private equity
562
00:27:16,919 --> 00:27:20,759
and venture capital, which I think they will,
you have to start somewhere.
563
00:27:20,759 --> 00:27:24,519
And I think what's gonna happen is booth is the
first, but it's not gonna be the last.
564
00:27:24,519 --> 00:27:28,424
You're gonna see more and more of these
schools, top schools, create these family
565
00:27:28,424 --> 00:27:32,345
office initiatives, and then it'll be called
the family office center because that's what
566
00:27:32,345 --> 00:27:35,404
the kids are doing based on the fact that
there's 84,000,000,000,000 coming downstream.
567
00:27:35,784 --> 00:27:36,825
We chatted about this.
568
00:27:36,825 --> 00:27:40,904
You mentioned that my alma mater, Harvard, and
also MIT and Princeton reached out to you
569
00:27:40,904 --> 00:27:42,329
wanting to do similar initiatives.
570
00:27:42,329 --> 00:27:44,509
Why are universities so interested in the
space?
571
00:27:44,970 --> 00:27:47,369
Because it makes sense, and that's really what
they're trying to do.
572
00:27:47,369 --> 00:27:48,650
It it's really the next thing.
573
00:27:48,650 --> 00:27:53,289
So when I graduated Northwestern in 1987, they
didn't call it private equity.
574
00:27:53,289 --> 00:27:55,630
They call it leveraged buyouts, and it was a
new industry.
575
00:27:55,914 --> 00:28:01,674
And then Steve Kaplan was at Booth, was very,
very early on, and basically realizing that
576
00:28:01,674 --> 00:28:04,634
private markets are gonna disrupt the public
markets.
577
00:28:04,634 --> 00:28:07,914
Because the public markets if you have a
publicly traded company, and I used to run a
578
00:28:07,914 --> 00:28:12,029
hedge fund, and you've gotta report to me every
90 days or now an analyst on Wall Street,
579
00:28:12,029 --> 00:28:14,049
there's no way you could run your company
efficiently.
580
00:28:14,349 --> 00:28:18,670
So private equity and venture capital in the
late eighties kinda took off, and Steve Kaplan
581
00:28:18,670 --> 00:28:21,250
at Booth realized was a visionary and realized
this.
582
00:28:21,470 --> 00:28:24,855
And knowing that the alignment of interest is
much better.
583
00:28:24,855 --> 00:28:26,535
2% covers the overhead.
584
00:28:26,535 --> 00:28:29,015
20%, I make money if you make money.
585
00:28:29,015 --> 00:28:34,555
So that industry exploded, and Steve Kaplan at
Booth was one of the earlier guys doing it.
586
00:28:34,695 --> 00:28:37,914
Now fast forward 30 years, we're at the next
iteration.
587
00:28:38,400 --> 00:28:43,119
We believe that family offices are not gonna
replace, but are gonna disrupt private equity
588
00:28:43,119 --> 00:28:47,140
and venture capital, and the reason is they've
got something called patient capital.
589
00:28:47,359 --> 00:28:52,654
So if you look at how companies are financed
today, company a private equity firm will buy a
590
00:28:52,654 --> 00:28:56,355
company, privately owned companies that's owned
by a family for 3 generations.
591
00:28:56,735 --> 00:28:57,375
They're gonna hold it.
592
00:28:57,375 --> 00:29:00,095
And I could tell you off upfront when they're
gonna sell it.
593
00:29:00,095 --> 00:29:04,255
They're gonna sell it in 3 to 5 years because
that's a compensation model on how the people
594
00:29:04,255 --> 00:29:06,480
who for the private equity firms compensate.
595
00:29:07,019 --> 00:29:10,940
Private equity firm 1 will then sell it, and
oftentimes, they'll sell it to private equity
596
00:29:10,940 --> 00:29:11,599
firm 2.
597
00:29:11,659 --> 00:29:15,740
And they'll pay it, and they'll do it, hold it
for 3 to 5 years, and send send it to perhaps
598
00:29:15,740 --> 00:29:17,099
another private equity firm.
599
00:29:17,099 --> 00:29:21,599
So over the course of 20 years, if you look at
this, this could change hands 4 times.
600
00:29:21,855 --> 00:29:26,575
But if you look at the taxes and the friction
and the disruption in business versus a family
601
00:29:26,575 --> 00:29:33,154
office, if you simply buy it, hold it, let it
compound, it's not even close.
602
00:29:33,615 --> 00:29:36,569
The problem is that very few families can
execute right now.
603
00:29:36,649 --> 00:29:39,849
What we're trying to do at Booth is make it
where more and more families can.
604
00:29:39,849 --> 00:29:44,250
Because as more and more families can and take
advantage of what their real value is, which is
605
00:29:44,250 --> 00:29:48,169
permanent capital, patient capital, this is
gonna completely disrupt.
606
00:29:48,169 --> 00:29:51,015
Again, not gonna replace, but disrupt the
private equity model.
607
00:29:51,015 --> 00:29:56,695
And what's happened with private equity firms
is they've in general, it's become it's almost
608
00:29:56,695 --> 00:29:57,734
become an AUM game.
609
00:29:57,734 --> 00:30:00,295
True in venture to an extent, but much more in
private equity.
610
00:30:00,295 --> 00:30:01,414
It's become an AUM game.
611
00:30:01,414 --> 00:30:05,355
So I had a friend, I think I told you this
before, who did a roll up of logistics
612
00:30:05,414 --> 00:30:07,079
companies, and he needed a 150,000,000.
613
00:30:07,460 --> 00:30:08,919
The placement agent got a 500,000,000.
614
00:30:09,379 --> 00:30:13,700
And he just wanted 150, and the placement agent
was, like, dumbfounded why he wouldn't want it.
615
00:30:13,700 --> 00:30:19,539
And wrote down on paper, 2% of a 150,000,000
equals x, 2% of 500,000,000 equals y.
616
00:30:19,539 --> 00:30:20,519
What am I missing?
617
00:30:20,674 --> 00:30:23,494
And my friend who has been incredulous said,
here's what you're missing.
618
00:30:23,634 --> 00:30:28,534
If I do what you want me to do, there won't be
a fun tip because I can't deploy the other 350.
619
00:30:28,835 --> 00:30:31,075
That's a microcosm of what's wrong with the
industry.
620
00:30:31,075 --> 00:30:32,294
And, again, I'm generalized.
621
00:30:32,434 --> 00:30:33,299
There are a lot.
622
00:30:33,380 --> 00:30:34,500
You can't create alpha.
623
00:30:34,500 --> 00:30:36,820
You can create out the short term by financial
engineering.
624
00:30:36,820 --> 00:30:39,539
I can financial engineer in any company make
money short term.
625
00:30:39,539 --> 00:30:40,900
But you create true alpha.
626
00:30:40,900 --> 00:30:43,559
You need to operate in core operators.
627
00:30:43,619 --> 00:30:44,420
Family offices.
628
00:30:44,420 --> 00:30:46,875
Family offices operated something at some
point.
629
00:30:47,115 --> 00:30:50,634
So in order to create the alpha, and that's
what we're trying to create at Booth, it has to
630
00:30:50,634 --> 00:30:54,394
be not just financially engineering these
companies, but operation operating these
631
00:30:54,394 --> 00:30:54,894
companies.
632
00:30:55,035 --> 00:30:59,355
Just to play devil's advocate, I hear you when
you say that private equity firms are flipping
633
00:30:59,355 --> 00:31:01,515
these privately owned companies every 3 to 5
years.
634
00:31:01,515 --> 00:31:04,019
But isn't that a feature?
635
00:31:04,019 --> 00:31:05,859
In other words, pressure makes diamonds.
636
00:31:05,859 --> 00:31:08,099
They have this intense focus for 3 to 5 years.
637
00:31:08,099 --> 00:31:09,880
They have to return to their LPs.
638
00:31:10,420 --> 00:31:11,619
Isn't that a positive thing?
639
00:31:11,619 --> 00:31:12,980
Why is that a negative thing?
640
00:31:12,980 --> 00:31:14,339
So let's say you're the company.
641
00:31:14,339 --> 00:31:15,859
You're the you you make garage doors.
642
00:31:15,859 --> 00:31:16,359
Right?
643
00:31:16,615 --> 00:31:19,674
And you sell to and you keep some of the money
in in the deal.
644
00:31:19,974 --> 00:31:25,095
The reason is that if you're selling the
company every 3 to 5 years, right, they're
645
00:31:25,095 --> 00:31:30,134
looking to turn it and the disruption in a lot
of times if people are looking these employees
646
00:31:30,134 --> 00:31:31,835
are family to a lot of these places.
647
00:31:31,940 --> 00:31:36,420
So if you sell to a private equity firm, not
always, but many instances, the first thing
648
00:31:36,420 --> 00:31:40,359
they're gonna do is cut costs, cut costs, cut
costs, maybe add some leverage, etcetera.
649
00:31:40,819 --> 00:31:43,240
The family offices look at things through a
different lens.
650
00:31:43,460 --> 00:31:49,065
If you're looking to how can this company go
from year 1 to year 20 and be the most
651
00:31:49,065 --> 00:31:54,825
profitable, objectively, not subjectively, but
objectively, the family office permanent
652
00:31:54,825 --> 00:31:56,845
capital is a superior model.
653
00:31:57,144 --> 00:32:00,825
The problem, like I said, is very few family
offices can do that.
654
00:32:00,825 --> 00:32:03,690
So, yes, it's a better model, but most can't do
it.
655
00:32:03,690 --> 00:32:08,730
What we're trying to create at Booth is a way
to educate these family offices where it's not
656
00:32:08,730 --> 00:32:11,049
just the Pritzker's, the Crown's, the Dells
that could do that.
657
00:32:11,049 --> 00:32:12,970
It's more and more families that could do it.
658
00:32:12,970 --> 00:32:15,950
If you're successful, what's the result of your
family office initiative?
659
00:32:16,424 --> 00:32:17,144
Several fold.
660
00:32:17,144 --> 00:32:21,065
1, I think it's gonna fundamentally change the
way companies are financed going forward, and
661
00:32:21,065 --> 00:32:24,125
we'll educate the next generation of students
at these schools.
662
00:32:24,345 --> 00:32:26,845
Right now, again, it's still a new industry.
663
00:32:26,904 --> 00:32:29,880
68% of family offices that exist started since
2000.
664
00:32:29,960 --> 00:32:31,400
And a half started since 2008.
665
00:32:31,400 --> 00:32:32,940
So it's a very, very new industry.
666
00:32:33,240 --> 00:32:37,720
And so the goal is to, a, educate, b, do
research.
667
00:32:37,720 --> 00:32:39,019
There there's just no metrics.
668
00:32:39,240 --> 00:32:41,500
When people have a liquidity event, what do
they do?
669
00:32:41,880 --> 00:32:45,884
We wanna create something where you gotta get
governance down, you gotta get estate planning
670
00:32:45,884 --> 00:32:48,144
down, you've gotta do a, b, c, d.
671
00:32:48,365 --> 00:32:52,444
And then once you start investing, which is how
you're gonna increase the capital, here's how
672
00:32:52,444 --> 00:32:53,904
you do it with permanent capital.
673
00:32:54,045 --> 00:33:00,400
So the goal is, I think, an entire new
industry, even though Tony will call himself a
674
00:33:00,400 --> 00:33:06,240
family office, our hope is if we get this right
and we still have to execute, then in 5 to 7
675
00:33:06,240 --> 00:33:08,960
years, he'd be happy to call his firm or family
office.
676
00:33:08,960 --> 00:33:10,579
Right now, he's not justifiably.
677
00:33:11,684 --> 00:33:16,164
But in 5 to 7 years, if we get it right, he
will be happy to say we have a family office
678
00:33:16,164 --> 00:33:17,704
because it won't be considered whimsical.
679
00:33:17,845 --> 00:33:20,024
It will be institutional, and it will be
professional.
680
00:33:20,085 --> 00:33:23,365
What is some advice you give family offices
today that are looking to improve their returns
681
00:33:23,365 --> 00:33:24,089
from day 1?
682
00:33:24,329 --> 00:33:28,809
1, focus on what you where you make your money
and where you got strength, and then outsource
683
00:33:28,809 --> 00:33:29,210
the rest.
684
00:33:29,210 --> 00:33:32,169
So it's easy if you make your money in real
estate.
685
00:33:32,169 --> 00:33:34,349
Like, you're very good in venture capital.
686
00:33:34,569 --> 00:33:36,569
Venture capital was the hardest asset class to
do.
687
00:33:36,569 --> 00:33:38,984
Unless you're doing it full time, in my
opinion, you shouldn't do it.
688
00:33:38,984 --> 00:33:41,244
If you do it full time, it's a phenomenal asset
class.
689
00:33:41,384 --> 00:33:45,224
But because you have all you've made your money
in real estate, don't start investing in
690
00:33:45,224 --> 00:33:47,785
venture without somebody who's an who's an
expert in that.
691
00:33:47,785 --> 00:33:53,349
So what what happens is family offices don't
necessarily stay in their lane.
692
00:33:53,730 --> 00:33:55,649
Greg Lawson has a family office.
693
00:33:55,649 --> 00:33:57,190
He was a CEO of Walgreens.
694
00:33:57,649 --> 00:34:00,789
He's fairly good at not understanding the
health care system.
695
00:34:00,929 --> 00:34:06,515
I'd rather invest with him than Neil Bloom in
in real estate on a health care deal.
696
00:34:06,515 --> 00:34:09,474
I invest with Neil Bloom for share in a real
estate deal.
697
00:34:09,474 --> 00:34:14,594
So I think what people have to realize is you
made money in a particular vertical, focus on
698
00:34:14,594 --> 00:34:16,295
that, stay in that lane.
699
00:34:16,514 --> 00:34:21,210
The other ones either outsource to a
multifamily office, or if you wanna keep
700
00:34:21,210 --> 00:34:25,289
everything internal in a single family office,
find people who are smarter than you in
701
00:34:25,289 --> 00:34:26,090
different verticals.
702
00:34:26,090 --> 00:34:30,890
So all I've done in my my business model, I've
just found people that were smarter than me in
703
00:34:30,890 --> 00:34:35,734
real estate, in venture capital, in private
equity, in all these different things, and let
704
00:34:35,734 --> 00:34:37,195
them do what they do and delegate.
705
00:34:37,335 --> 00:34:41,195
And as long as you can take your ego out of the
equation, it's not complicated.
706
00:34:41,574 --> 00:34:42,695
And it's not just ego.
707
00:34:42,695 --> 00:34:45,355
It's also just being penny wise, pound foolish.
708
00:34:45,710 --> 00:34:48,589
Another way to say that is pay your damn fees
in the private markets.
709
00:34:48,589 --> 00:34:50,190
You mentioned you index in the public markets.
710
00:34:50,190 --> 00:34:53,869
I love index funds in the public markets
because the returns are pretty efficient.
711
00:34:53,869 --> 00:34:58,589
But in the private markets, you're either
paying your 2 and 20 to a top private equity
712
00:34:58,589 --> 00:35:03,144
fund, or you could lose 70% of your returns on
a zero fee structure.
713
00:35:03,285 --> 00:35:04,325
And that's exactly what happened.
714
00:35:04,325 --> 00:35:08,005
So post crash, pre COVID, when interest rates
were 0, I don't care what you invested in.
715
00:35:08,005 --> 00:35:09,125
You probably made money.
716
00:35:09,125 --> 00:35:11,445
It wasn't easy, but it was certainly easier to
make money real estate.
717
00:35:11,445 --> 00:35:14,280
But private equity, venture capital, stock
market, everything went up.
718
00:35:14,599 --> 00:35:17,800
3 years ago, when they started jacking up
interest rates, family office said, well, wait
719
00:35:17,800 --> 00:35:18,119
a minute.
720
00:35:18,119 --> 00:35:19,640
Why do I need to hire you, David?
721
00:35:19,640 --> 00:35:22,199
I know you're a smart guy, but you charge 2 and
20.
722
00:35:22,199 --> 00:35:24,920
If I could make money and not pay any fees,
it's better.
723
00:35:24,920 --> 00:35:26,594
And they made money until they did.
724
00:35:26,675 --> 00:35:27,875
And 3 years ago, that changed.
725
00:35:27,875 --> 00:35:31,635
And as they started jacking up rates in a lot
of private equity deals, they're not only not
726
00:35:31,635 --> 00:35:33,074
making money, they're losing money.
727
00:35:33,074 --> 00:35:34,434
In venture capital, they're losing money.
728
00:35:34,434 --> 00:35:36,215
In real estate, they're way over their skis.
729
00:35:36,514 --> 00:35:42,650
So what happened is they had a false sense of
confidence, hubris, ego, whatever you wanna
730
00:35:42,650 --> 00:35:44,989
call it, because they're like, I could do this
myself.
731
00:35:45,050 --> 00:35:47,130
There's a skill set to doing what you do.
732
00:35:47,130 --> 00:35:51,050
There's a skill set to doing what private
people do or what what real estate people do or
733
00:35:51,050 --> 00:35:52,590
what private equity people do.
734
00:35:52,764 --> 00:35:57,965
And now I think how this is gonna play out is a
lot of these family offices who are now not
735
00:35:57,965 --> 00:36:02,125
making money and realize there's a skill set to
doing what you do are pulling back, and they're
736
00:36:02,125 --> 00:36:05,244
gonna stay in their lane, and they're gonna
outsource to the experts like you or like the
737
00:36:05,244 --> 00:36:06,989
real estate people or the private equity
people.
738
00:36:07,070 --> 00:36:11,469
To quote the 10000 hour rule, it takes 10000
hours to have mastery of something.
739
00:36:11,469 --> 00:36:15,550
And what typically happens in any asset is you
get pretty smart pretty quickly.
740
00:36:15,550 --> 00:36:17,489
You could get pretty smart in a couple years.
741
00:36:17,710 --> 00:36:22,275
You get smart in 5 years, but it takes a
decade, several decades to have mastery.
742
00:36:22,275 --> 00:36:24,594
And that's where really the return that's where
the alpha is.
743
00:36:24,594 --> 00:36:26,034
But it's also in relationships too.
744
00:36:26,034 --> 00:36:26,195
Right?
745
00:36:26,195 --> 00:36:30,034
So if you if if you're you've got relationship
with a bunch of venture capital people and a
746
00:36:30,034 --> 00:36:31,574
bunch of people in different industries.
747
00:36:32,000 --> 00:36:36,639
If I came in and try tried to compete with you
and I'm not a venture capital person, it's not
748
00:36:36,639 --> 00:36:39,119
that I don't have the knowledge, which I don't,
or the skill set.
749
00:36:39,119 --> 00:36:40,179
I don't have the relationships.
750
00:36:40,639 --> 00:36:42,639
So the relationships are really key too.
751
00:36:42,639 --> 00:36:45,914
And the key with family offices, they're not
just money.
752
00:36:45,914 --> 00:36:51,135
It's a strategic partner who can help you with
vendors, with customers, and things like that.
753
00:36:51,195 --> 00:36:53,295
They're operators and not financial engineers.
754
00:36:53,515 --> 00:36:59,799
So what our goal at Booth is to create an
ecosystem where we could take I think that the
755
00:36:59,799 --> 00:37:03,719
private equity, the venture capital, you know,
that was an entire industry which took off the
756
00:37:03,719 --> 00:37:07,819
last 20 years, and it was super successful for
many, many people.
757
00:37:08,119 --> 00:37:10,859
That we're at the second inning in the
evolution of family offices.
758
00:37:11,000 --> 00:37:14,954
And what we're trying to do at Booth is we're
trying to say, this is actually an industry.
759
00:37:15,014 --> 00:37:19,175
It's not a frivolous thing that you have a lot
of money and you just invest where you do.
760
00:37:19,175 --> 00:37:19,994
There's metrics.
761
00:37:20,375 --> 00:37:21,355
There's analysis.
762
00:37:21,414 --> 00:37:22,214
There's education.
763
00:37:22,214 --> 00:37:24,795
There's research, and that's what we're trying
to do at Booth.
764
00:37:25,175 --> 00:37:28,590
How would people keep up with everything that
you're doing that wanna follow you?
765
00:37:28,750 --> 00:37:33,150
We have familyofficeworldmedia.com is kind of
the media platform that we've created.
766
00:37:33,150 --> 00:37:33,969
So it's familyofficeworldmedia.com.
767
00:37:35,390 --> 00:37:39,630
And I put out a lot of content on LinkedIn as
well, so, you know, I I like to do that.
768
00:37:39,630 --> 00:37:42,050
But I I do think that it's important for
everybody.
769
00:37:42,430 --> 00:37:43,570
Giving is important.
770
00:37:43,655 --> 00:37:45,574
You gotta give back, and you've gotta educate.
771
00:37:45,574 --> 00:37:50,054
And that's another reason why we're trying to
do this at Booth because education is really
772
00:37:50,054 --> 00:37:50,554
important.
773
00:37:50,855 --> 00:37:54,214
Teaching students to me, I taught a class at
Harvard.
774
00:37:54,214 --> 00:37:57,514
I taught a class at couple other schools
recently at Oxford.
775
00:37:57,989 --> 00:38:03,670
And the whole point is I get a lot of joy out
of giving back because I know I've been
776
00:38:03,670 --> 00:38:04,170
fortunate.
777
00:38:04,630 --> 00:38:09,190
And by working with these universities, a lot
of people who've had a certain degree of
778
00:38:09,190 --> 00:38:14,315
success want to give back, and I think that's
something that we all have to do, and I think
779
00:38:14,315 --> 00:38:17,275
giving back and paying it forward is something
that's very important.
780
00:38:17,275 --> 00:38:19,514
And that's another reason why we're all doing
this at Booth.
781
00:38:19,514 --> 00:38:21,694
Well, thank you, Ron, for jumping back on the
podcast.
782
00:38:21,755 --> 00:38:22,815
Hope to see you soon.
783
00:38:22,954 --> 00:38:23,674
Great to see you.
784
00:38:23,674 --> 00:38:24,074
Thank you.
785
00:38:24,074 --> 00:38:24,815
Thanks, Ron.
