Investing Billions - E121: What Billionaires Do Differently in Investing with Ron Diamond

Episode Date: December 17, 2024

In this episode of How I Invest, David Weisburd speaks with Ron Diamond, a renowned expert in the family office space and the founder of Diamond Wealth. Together, they explore the transformative role family offices are playing in private markets, the impending $84 trillion wealth transfer, and the challenges of professionalizing family office operations. Ron also shares his insights on governance, structural alpha, and strategies for raising grounded, ambitious children in wealthy families. A must-listen for anyone interested in the future of family offices and their potential to disrupt private equity and venture capital.

Only 25% of family offices make it to the second generation, 10% to third, and only 5% make it to third generation. Why is that? First of all, you've got huge amounts of money in inefficient hands. So just because Ty Warner and he's a brilliant businessman who sells Beanie Babies doesn't mean he has the ability to buy the Four Seasons Hotel. He got crushed on that. And so you see a lot of people who have liquidity events. And the first thing they want to do when they sell a company and they have a liquidity event is invest. And it's not the first thing they need to do.

The first thing they should do is they should talk to them to state planning attorney. The biggest obstacle for many of these family offices is the ego of the founder, the matriarch or patriarch. Because they did something really well and made a lot of money in something, doesn't mean they're good at everything. So you spend a lot of time around dozens and dozens of billionaires and their kids and

you get the sense of their family. What's the best ways to raise good kids as it relates to children who come from the ultra wealthy families? Ron, I've been excited to get you back on the podcast. Welcome to the podcast. Thank you. Great to be here. Great to have you. So tell me about the wealth transfer happening in family offices today. Well, it's massive. So I mean, currently there's approximately $10 trillion in assets in family offices. And just to kind of put that in perspective, there's roughly $6.5 trillion globally in the entire hedge fund market. So this is bigger than the hedge fund market today. But the

transfer is really what's important and what's going to be impactful. There is $84.4 trillion that's moving downstream from the baby boomers, the next gen in the next 20 years. So we're about to experience the largest transfer of wealth in history. And this will be massive. And the people who are going to be inheriting a lot of this wealth are family offices. I think you're going to see more and more family offices set up. Based on the fact that you've got 84.4 trillion coming downstream. So when we were last talking, we were talking about the wealth transfer and management of family offices.

And you mentioned there's a compensation gap between what top private equity firms are willing to pay and what family offices are willing to pay. Tell me about that. The problem is only a very few family offices can execute right now. And one of the reasons is they don't have the talent. And the reason they don't have the talent is because they don't have the compensation model right. What happens is today, I'm generalizing many family offices, if they're going to pay a kid out of Stanford MBA, $250,000 a year, many of them look at that as a cost. In other words, this cost me 250. If KKR or Palo or Blackstone hires a kid out of Stanford and they pay them 250, they look at that student

as a potential $20 million profit center, not a cost. So part of the reason is many family offices today look at this as a cost and it's not a cost center. If it's not going to be a business. So what they have to do is they have to compensate in order to get the top talent to compete with the KKRs and the Blackstones. And what that means is they have to give them part of the carry. What that means is they've got to give them lines

with Predator, forgivable loans, ways for them to be compensated. Because if you're not gonna compensate them, the top students are gonna go into the Blackstones or Carlisles or KKRs, they're not gonna go into family offices. Family offices right now, it's just not a professionally run industry. I think that's going to change. And the first thing

that has to change in order to compete directly with these other big firms is a compensation model to attract the top talent. And when you say about being a profit center for family offices, do you mean returns for the family offices? Do you mean raising funds with outside capital? I'm talking about the way that they look at it. In other words, many family offices, they've had a liquidity event, they're worth a couple billion dollars. And many of them, they take their foot off the gas pedal. And now they're at the point where, okay, now they've got their family office, they don't run it full throttle, like they did their business. And

if that's the case, it's not going to be successful. In order to do it, you have to basically run it like you ran your business. And some family offices do right now, I would say most don't. 80 to 85% of the family offices that are in the market today, in my opinion, should not exist the way they currently exist because of the way they're structured. And I think that you have to really compensate these people

in order to attract the top talent. I would go a step further and say they should be compensating more than the KKR and Apollo. A lot of the top tier talent wants to go to KKR and Apollo, not just because of the high salary and high compensation, but also for the branding and for the development of their personal brand and industry. So in many ways they should be compensating higher. What's an example of a family office that is compensating their top talent correctly? Tony and JB Pritzker with Paul Cardone. So Paul is a good friend and he is working with me. We're putting together a family office initiative at University of Chicago booth,

which we can touch on later. And what they've done, he was a very successful private equity guide, in order to bring him over, they had compensated. So what they did is they gave him part of the carry. They gave them lines of credit or loans that he could invest in. And now he's done extraordinarily well himself. But without doing that, without giving him those kind of compensation, he would never have left there. So I think that's a perfect example. And Tony even said that when I talked to him, that the reason they're able to attract people is because how they compensate them.

They're in it. He wants everybody to make money. And you have to look at it from that standpoint because while the family offices are looking to make money, the people who are working for the family offices are just as ambitious and they also want to do well. And they have to be compensated. So I would say they've got them, they nailed the compensation model right. You mentioned Tony and JB Pritzker. JB Pritzker governor of Illinois also was early contention for the democratic candidate for president. They call their family office private capital, not family office.

Tell me about that. It's interesting. So when I was talking to Tony, I actually did a podcast with Tony and Paul. And what Tony said is the reason is right now, family offices are very inefficient and fragmented and siloed. And many of the institutions consider them whimsical. And most family offices are. So they don't wanna be lumped in with that category.

They wanna be lumped in with professional firms. So the professional firms, if they wanna really compete, they don't wanna call themselves a family office because most family offices, as Tony says, are very whimsical and they're not professionally organized That's why he calls it private capital. There's other family offices that are very sophisticated again or calling it private capital and not family offices so it's interesting that everybody's you're hearing the term family office over and over and over again and

He doesn't want to get it dumbed down to where it is today, because right now, it's not professionalized. That's why they call it private capital. So he doesn't want anyone to refer to what he has as a family office. He wants to refer to what they have as private capital, because he's saying they're more professional and they've more institutionalized it. And that has repercussions across the board recruiting branding, deal flow, Or is that just, what

effect does that have downstream? It affects everything. It affects recruiting, it affects companies wanting to do business with them. Some companies don't want to do business with family offices right now. Remember, we're very, very early in the evolution of family offices. Some family offices will be, you know what, I'm going to Europe for three months, so let's, you know, I'll look at the deal when you're done. Well, if you've got a deal that's going to be done in 30 days, you don't have the luxury of waiting 90 days. In a family office, it's their prerogative.

They can do whatever they want. And that's the problem right now. They don't have a professional system. The family office world today has not been professionalized. It's going to be professionalized, and we're helping to do that with what we're creating at Booth. But right now, it's really not. And I think that family offices have to look at

things in order to attract the top people. You mentioned that only 25% of family offices make it to the second generation, 10% to third, and only 5% make it to third generation. Why is that? First of all, you've got huge amounts of money in inefficient hands. So just because Ty Warner and he's a brilliant businessman, he sold Beanie Babies, doesn't mean he has the ability to buy the Four Seasons Hotel. He got crushed on that. You see a lot of people who have liquidity events. The first thing they want to do when they sell a company and they have a liquidity event

is invest. That's not the first thing they need to do. The first thing they should do is they should talk to the state planning attorney. That's the first thing. It's the boring stuff, but it's almost like the foundation of a house, right? So without the foundation, it's more enjoyable to see the windows being built and the deck being built, not the basement. But without the proper foundation, it's not going to stand up. Secondly, governance. What is governance? Well, governance is super important, but it's a soft skill. And most family offices

don't look at that. Sometimes they'll scratch their head on like, you've got to get your governance right. And the reason families implode is not always because family offices aren't great investors. Sometimes they are, sometimes they're not. There's no governance in place. And then they don't have a structure, right? So it's haphazard. They don't have a strategy to do it. So if a family office makes their money in real estate and they sold their company for $3 billion, they're going to start investing. They should focus on real estate, which is what they know, and they should work with other families who made their money in other industries. But what they do is, and this is the biggest obstacle for many of the family offices, I

tell people this and it offends some people, but it's true. The biggest obstacle for many of these family offices is the ego of the founder, of the matriarch or patriarch. Because they did something really well and made a lot of money in something doesn't mean they're good at everything. I ran a hedge fund. I was fairly good at that. I'm not good at venture capital like you are. I'm not good at real estate investing like Sam Zell was. So understanding your lane. So I think the issues are there's no playbook right now. There's no, you have liquidity, what are you supposed to do?

And that's what we're trying to change right now at Booth. We're trying to do it where once you've had a liquidity event rather than start investing, and again, everyone's gonna be hitting them up. All their friends, all their relatives, all the people at the country clubs, they realize they had a liquidity event, it's in the papers, and they're gonna start

asking for money and they're gonna start doing deals with their friends, et cetera. I tell people you shouldn't, once you've had a liquidity event, you should wait six months, maybe a year before you make any investment and get your governance set up, get your state planning and structured properly. Once that's done, then you can start talking about investing, but they do it backwards. Yeah. You bring up so many great points. There's a famous paper on governance and how some of the top asset managers, not family offices, but pension funds have unique government structures, pension funds like state of

Wisconsin investment board or Alaska permanent or Utah retirement systems, where they give more flexibility for their team to optimize around returns versus over sometimes arbitrary governance. The other issue is tax. The thing that connects tax and governance is that they're very important, but very boring for most people. They're not exciting. They're not like investing in crypto, investing in tech, investing in the next biotech startup, but they drive returns. Sometimes it's in many ways, it's a free lunch. Well, that's interesting. And people are always trying to create alpha, right? Investment alpha. I think in the public markets, it's next to impossible.

I just have money in index funds. I think in the private markets, private equity, venture capital, real estate, you can create alpha. But there's something called structural alpha, which involves taxes. So there's a firm we met, which is the top firm I've ever met that does this called HUR. And basically what they've done is they've created a way where you could basically put your money in an index fund. But while you're doing that, they're doing long and short, you're actually getting

tax loss harvesting at the same time. So what they've been able to do is they've invented something brilliant. And I went went up to their office a couple days ago to check it out. Because a lot of the family offices that I'm talking to are utilizing are using them currently. And basically, what they've done is, let's say you want to match the S&P. S&P is up 15%. Well, their thought process is, well, they're good stock pickers, maybe they'll be up 50, 75 basis points higher than the market. So in some years, they'll be a little down, but a little up. But the main thing is that while they're matching the market, they can kick off millions of dollars in losses because of how there's long short. And they're basically almost identical to what the index is.

And it could be the Russell 1000. It could be the S and P. It doesn't matter what it is. It's structural alpha and structural alpha, how things are structured is going to be a phrase that's going to be used more and more going forward. That's interesting about AQR, the top banks, the Goldman Sachs, the JP Morgan's that's been their pitch for many decades, which is bring your money over to us, We'll get you another a hundred basis points with tax loss harvesting, and you'll be break even on your fee.

So tax, again, the reason they're so important credit has been like a huge area for family offices to go into. And it's a great market. You could get 10%, 8%, 12% let's say fairly consistently without taking a huge amount of risk. And everybody's getting into the credit game. The problem is, and the credit was a huge market, right? It's a multi-trillion dollar- Hottest market right now. It is the hottest market right now. But here's the problem.

What the credit was previously was pension funds and pension funds don't pay taxes. Well family offices do. So there's a concept called PPLI, which is private placement life insurance, which basically puts a tax wrapper around it. So now a credit fund, you might earn 10%, but you're in California. So after taxes and after everything, your net return might be six and a half, 7%. By putting a private placement life insurance product around it, and I call again, this is another example of structural alpha. You basically eliminated income taxes entirely and your drag is about 50 bits. So the value play is very simple. 50 basis points, elimination of taxes. And again, more and more people

are learning about this because again, it's structural alpha and it's the taxes that people really need to understand that people have really not paid attention to. There's a guy, Michael Leapskin, who created the industry. He was the founder of one of that people really need to understand that people have really not paid attention to. There's a guy, Michael Leapskin, who created the industry. He was the founder of one of the top firms and he's the top guy in the industry. It's very simple. And a lot of the family offices that I work with

have spoken to him. They basically say, here's the thing, you're gonna pay 50 bits, that's your drag. You're gonna eliminate taxes. Does it make sense? Now there's certain things you can do and certain things you can't do with it, but credit is not a great investment for a family

office unless they have this tax wrapper. If you're a pension fund or the state of California, it doesn't matter. They don't pay taxes. How would you explain private placement life insurance to a third grader? All of these assets like active management and hedge funds, those are, you know, sit it up. It's great what the return is, but really what you want to know is what's your after-tax return. So what private placement life insurance does, people get spooked because they hear the word life insurance. It is, but you basically,

you're buying as little life insurance as you can in order to be taxed as life insurance, because life insurance, they're not taxed. So the tax treatment for life insurance is great. So basically what you're trying to do is create a product right now that is taxed as a life insurance product, but is an investment. And more and more companies, be it Gallup, be it Aries, be it Blackstone, all the top firms are getting into the space right now. And the reason is because private credit is such an attractive market right now.

It is great for the pension funds. It's not great for the individual investors. And they haven't thought this through. Once you explain this, once people explain it, there's almost no reason not to do it. What happens is most people haven't heard of this. And the reason is pretty simple. The fees, the compensation for the agents, and it's mostly life insurance agents who sell it, are very low for this. And typically, it's very complicated also. So if you take a life insurance person who's typically maybe not as educated as some of the financial analysts you're working with, and maybe they're looking to get compensated more right away, why would they want to do something that the compensation is so low and the brand damages so much?

Now, what Michael Lifton has done and what other, a couple other places have done is they basically realize this in the large family offices, when they come to them, this is like a new thing that they didn't understand. And the reason they didn't understand it before is never brought to their attention. So it's, again, it comes back to structural alpha and more and more of the sophisticated family offices understand the importance of structural alpha. It's not just how much, how good your return was. It's how good your return was after taxes. And where do you have your private placement life insurance?

With Michael Liebman. Hey, we'll be right back after word from our sponsor. Our sponsor for today's episode is Carta, the end to end accounting platform purposely built for fund CFOs. For the first time ever, private fund operators can leverage their very own bespoke software that's designed from the ground up to bring their whole portfolio together. This enables formations, transactions and distributions to flow

seamlessly and accurately to limited partners. The end result is a remarkably fast and precise platform that empowers better strategic decision making and delivers transformational insights on demand. Come see the new standard and private fund management at z.cardo.com talked about 1031 exchange, which is you take a property, it appreciates that you sell it and you replace it with another property and therefore don't pay the capital gains. Another strategy that's very popular and very practical, qualified small business stock. This is from the venture and startup world, the venture and startup world.

And it's called the venture and startup world. And it's called the venture and startup world. And it's called the venture and startup world. you replace it with another property and therefore don't pay the capital gains. Another strategy that's very popular and very practical, qualified small business stock, this is from the venture and startup world, where you buy a stock, you hold it, you buy a startup, you hold it for five years. And all the capital gains are federal income tax free and in most states outside of California is also state tax free. So you could have, and that's up to $10 million

inclusion per investment. So you invest in $250,000 in Uber, you return 40X, you get 10 million, all of that gain is tax free. Yeah, and we're doing that. I'm on the board of Fin Capital and Stole, Kalei and a couple of FinTech companies, and that's exactly what they're doing. But again, this is something that it's harder and harder

to create alpha in different products. Structure alpha is real, and it's something that more's harder and harder to create alpha in different products. Structure alpha is real and is something that more and more people are going to be focused on. And I think if you work in conjunction with the estate planning attorneys and understand the after-tax ramifications, the goal is not to make 20%. The goal is to make 20% after taxes and people are focused on the pre-tax and not focused on the after-tax.

The pensions doesn't matter. At family offices, it matters a lot. You also mentioned incentives. So life insurance agents don't make enough money to deal with the hassle. Managers aren't really ranked on their after-tax. They're kind of ranked based on AUM. There's a lot of misincentives in the space in general. That's a great point because even with AQR, basically the CIO is not necessarily an ally

because the CIO of the family office typically gets paid on pre-tax, right? So that's how they're compensated. If somebody has a mousetrap that they can create something better and then after tax is better, but that's not how they're compensated. It's subtle inherent conflict of interest between the CIO of the family office and the actual matriarch or patriarch. So if you bring this strategy to a CIO, they will like it, but they might not necessarily do it. If you bring it to a matriarch or patriarch, and they're not saying this is how I'm compensated, they're looking at it from their bottom line. They're the ones that have to do it. And when they understand it, I think more and more of

products like this of structural alpha are going to come to fruition in the next five to 10 years. And family offices are certainly taking advantage of this. To quote the late Charlie Munger, Warren Buffett's partner, show me the incentive and I'll show you the outcome. It is so, so, so very true. So you spend a lot of time around dozens and dozens of billionaires and their kids and you get the sense of their family. What's the best ways to raise good kids as it relates to children who come from the ultra wealthy families?

I remember when we took our daughter home from the hospital, we have two beautiful daughters now 21 and 24. We took them home and they're like in the bassinet and like they didn't give us a playbook, right? Like what do you do? I mean, there's no playbook for this. I think with wealthy families, it's a particular challenge for various reasons. I think children are like sponges and they are, they learn and listen and absorb so much more than we realize. So I can tell my kids, look, you know, you have to treat people with respect to the waiter and the dishwasher and the car wash person is just as important. If I say that to them, but then they see me saying, you know, treating them like, hey, you know,

just throwing them a couple of dollars and not even making eye contact with them and not even thanking them. They see that. So basically to answer your question, I think it's how you act kids react to how, what you do, not what you say. So you could say, yeah, treat everybody nicely, but if you don't, they won't. If they see you go out of your way and I certainly do it. And then a lot of families that are families that, you know, I think are very thoughtful and very well thought out. There's no difference between a CEO, multi-billion dollar company

in your busboy. I mean, we're all people and they make a concerted effort to treat it like that. They also, I think one of the things is they live in a life of privilege, which is wonderful. But to keep it grounded, you take your kids to soup kitchens. So people understand, the children understand, the worst thing you could do with a family office or any wealthy family is to raise an entitled child. And that's the absolute worst thing you could do as a parent. The opposite of entitled is gratitude. You want to make people realize, yes, mom and dad or grandma and grandpa made a lot of money, but I'm grateful for that, but I'm not entitled to it. So it's nuanced.

But I think a lot of the families take a lot of time and a lot of thought. How they act is how their kids are going to act to people and how they if they're philanthropic, if you say I'm philanthropic, but they never see you writing a check, that's another thing. If they see you writing checks or they never see you writing a check, that's another thing. If they see you writing checks, or if they see you doing some stuff at soup kitchens, or doing some projects with other places, that's what sinks in. Children understand things a lot more than we give them credit for.

And I think that's really the key. Just to double click on that, there's two main issues that happen in wealthy families. One is if they grow up, you would call it entitled, but really a higher standard of living. So you're on private jets. You're always staying at five-star hotels. That's all fine. There's nothing inherently wrong with that, except when they want to continue that standard when they get older.

And in order to maintain that standard, you have to have millions of dollars every year, which brings you to the next dilemma, which is if a child is used to that standard of living, you essentially have to give that child capital, which takes away their kind of passion life and takes away one of the greatest joys in life, which is your career and what you work on. So I think that's kind of the dilemma and that's a hard needle to thread as a parent in a wealthy family. It is very hard.

But I think if kids see you working very hard, not to say daddy works hard, but if they see you working from 7 in the morning to 11 at night and they see you, they'll model that. And they're going to try to do that as well. So again, they observe. Children are sponges. Whether they're three years old, all the way up to early 20s,

they look at what their parents do, not what they say. And that's truly the key, early 20s, they look at what their parents do, now what they say. And that's truly the key, in my opinion, to raising kids that are grateful and not entitled. Chris Bounds The best example that I've seen of this working out well is when the kids happen to have the interest of working in the family office and continuing working with their family. On top of that, what I've seen work really well is when their parents send them to investment banking for a couple of years, they send them to this bootcamp, have, you know, their entitlement beaten out of them, for lack of a better word, they come back very grateful for the opportunity and very kind of wired to work hard for their career.

Right. So I'm on the board of Crescent, which is a $60 billion multifamily office, and they've got a bootcamp. They do exactly that for next gen. And they take these high school kids to camp and basically teach them these things. And then there are other kids who are very similar things. So I think educating the kids is a really, really key thing. And I think that there are more and more firms are realizing the importance of not just giving, but just educating them, explaining to them how it works. And the earlier they understand it, the more likely they are to be effective when they're older. So you co-founded the Family Office Initiative

at University of Chicago Booth. Tell me about the initiative. We were working on it for a long time. So I started, I launched the Family Office Initiative at Stanford University about five years ago. And basically what the reason that we created it, you've been to a lot of family office conferences. Many of these conferences are simply pay to play.

I have a hundred families that invest alongside of me from 250 million to 30 billion, and they always ask me, oh, you're keynoting this, should I go? I'm like, no, not worth going to the conference. So I wanted to put together a conference there that I would tell you or the families that invest with me to go to. So what we did is I went to Kirkland Ellis and EY, I said, you guys put it on. And then what I'll do is two things. I'm going to get you world-class speakers and I'm going to pick the content. Because I wanted to create a conference that I would go to. So three examples, we had Paul

Carbone speak, Paul ran the family office for Tony and JB Pritzker. He wasn't pitching a fund. He was just saying, this is how we do due diligence. We had Tim Callahan, and this was during COVID, talking about he was opining, he was Sam Zell's partner, opining on office. He wasn't selling, raising money for Fun 5. He was just opining on what he thought was going to happen to offices because remember, during COVID, people would go back to offices or what's going to happen. And then lastly, Denise Illich, who's from Little Caesars, she helped to rebuild Detroit.

She wasn't basically going to them and saying, donate to my charity to help me. She was just saying, if you're going to be philanthropic, go ahead and do it more strategically and run it more like a business. So that was scaling. But then about three years have got very political. So I met with, I was having lunch with Michael Milken and with Steve Kaplan, who runs one of the top professors at Booth. And I said, I want to move this over to Booth. And that was sort of like the start of it. And what we've done is Paul Carbone and myself and a few other people are basically putting together an initiative at the University of Chicago booth. And what we're trying to do is we've got Steve Kaplan as sort of the

inside person who's helping spearhead it. We put together an advisory board of a council of 40 of the wealthiest families in the country. These are average AUM of $5 billion. And the goal is several fold. And I think what we're creating at Booth is going to be the most important thing that we're doing, that I'm doing in the family office world. Because family offices are inefficient and fragmented and siloed, how do you change that? How do you get them where if they go to a conference and people realize multi-billionaires there, everyone's not pitching them. The only way to do it, in my opinion, is through a university.

Now, what we're doing with Booth is, first we're gonna have a course coming out in December, taught by Professor Eaton, it's called the Family Office. We're gonna teach these kids at Booth about family offices, about permanent capital. We're gonna have a conference in May, very limited, maybe 200, 250 people, exclusively family offices. So think about this. You typically go to a family office

conference. It's 95% service providers, maybe 3 to 5% family offices. Here, it's 100% family offices, zero service providers. So the goal of what we're trying to create at Booth is to educate these kids because my belief is that today the top kids out of Booth or Harvard or Stanford or different Northwestern, they want to get into private equity or venture capital or real estate. Nobody wants to go into a family office. Nobody knows what a family office is. But with 84.4 trillion coming downstream and having permanent capital, it's my belief that in five to seven years, the first choice of these kids out of school is going to be to work for a family office. I could be wrong, it might be 10 years, but that's going to happen because of the wealth transfer. So

we're trying to create an ecosystem where we can have a network of family offices with other family offices without an agenda under the auspices of a research institution, which is one of the best in the world at University of Chicago Booth, where they're going to educate. And again, they don't have to make a profit. Their goal is not to profit. Their goal is to educate and to do research. In order to take this level, in order for family offices to truly disrupt private equity and venture capital, which I think they will, you have to start somewhere.

And I think what's going to happen is Booth is the first, but it's not going to be the last. You're going to see more and more of these schools, top schools, create these family office initiatives. And then it'll be called a family office center, because that's what the kids are doing based on the fact that there's 84 trillion coming downstream. We chatted about this. You mentioned that my alma mater, Harvard, and also MIT and Princeton reached out to you wanting to do similar initiatives. Why are universities so interested in the space? Because it makes sense. And that's really what they're trying to do similar initiatives. Why are universities so interested in the space?

Because it makes sense. And that's really what they're trying to do. It's really the next thing. So when I graduated Northwestern in 1987, they didn't call it private equity, they call it leveraged buyouts. And it was a new industry. And then Steve Kaplan, who's at Booth was very, very early on in basically realizing that private markets are going to disrupt the public markets. Because the public markets, if you have a publicly traded company and I used to run a hedge fund and you've got to report to me every 90 days, we're now an analyst on Wall Street, there's no way you could run your company efficiently. So private equity and venture capital in the late 80s kind of took off and Steve Kaplan

at Booth realized, was a visionary and realized this. And knowing that the alignment of interest is much better. 2% covers the overhead, 20% I make money if you make money. So that industry exploded and Steve Kaplan at Booth was one of the earlier guys doing it. Now, fast forward 30 years, we're at the next iteration. We believe that family offices are not going to replace, but are going to disrupt private equity and venture capital. And the reason is they've got something called patient capital.

So if you look at how companies are financed today, a private equity firm will buy a company, privately owned companies that's owned by a family for three generations, they're going to hold it. And I can tell you upfront when they're going to sell it. They're going to sell it in three to five years because that's the compensation model on how the people who are the private equity firms compensate. Private equity firm one will then sell it and oftentimes they'll sell it to private equity firm two and they'll pay it and they'll do it, hold it for three to five years and

send it to perhaps another private equity firm. So over the course of 20 years, if you look at this, this could change hands four times. But if you look at the taxes and the friction and the disruption in business versus a family office, you could simply buy it, hold it, let it compound. It's not even close. The problem is that very few families can execute right now. What we're trying to do at Booth is make it where more and more families can, because as more and more families can and take advantage of what their real value is,

which is permanent capital, patient capital, this is gonna completely disrupt. Again, not gonna replace, but disrupt the private equity model. And what's happened with private equity firms is they've, in general, it's almost become an AUM game. True in venture to an extent, but much more in private equity, it's become an AUM game.

So I had a friend, I think I told you this before, who did a roll up of logistics companies and he needed 150 million, the placement agent got him 500 million and he just wanted 150 and the placement agent was dumbfounded why he wouldn't want it and wrote down on paper, 2% of 150 million equals X, 2% of 500 million equals Y, what am I missing? And my friend who has been credulous said, here's what you're missing. If I do what you want me to do, there won't be a fun too, because I can't deploy the other 350. That's a microcosm of what's wrong with the industry. And again, I'm generalized. There

are a lot. You can't create alpha. You can create alpha short term by financial engineering. I can financial engineer in any company and make money short term. But to create true alpha, you need to operate. And core operators, family offices. Family offices operated something at some point. So in order to create the alpha, and that's what we're trying to create a booth, it has to be not just financially engineering these companies, but operation, operating these companies.

Just to play devil's advocate, I hear you when you say that private equity firms are flipping these privately owned companies every three to five years, but isn't that a feature? In other words, pressure makes diamonds. They have this intense focus for three to five years. But isn't that a feature? In other words, pressure makes diamonds. They have this intense focus for three to five years. They have to return to their LPs. Isn't that a positive thing? Why is that a negative thing? So let's say you're the company, you're the, you make garage doors, right? And you sell it to, and you keep some of the money in the

deal. The reason is that if you're selling a company every three to five years, they're looking to turn it and the disruption in a lot of times if people are looking, these employees are family to a lot of these places. So if you sell to a private equity firm, not always, but many instances, the first thing they're going to do is cut costs, cut costs, cut costs, maybe add some leverage, et cetera. The family offices look at things through a different lens. If you're looking to how can this company go from year one to year 20 and be the most profitable? Objectively, that's subjectively, but objectively, the family office permanent capital is a superior model.

The problem, like I said, is very few family offices can do that. So yes, it's a better model, but most can't do it. What we're trying to create a booth is a way to educate these family offices where it's not just the Pritzker's, the Crowns, the Dells that can do that. It's more and more families that can do that. If you're successful, what's the result of your family office initiative? Several fold. One, I think it's going to fundamentally change the way companies are financed going forward and will educate the next generation of students at these schools. Right now, again, it's still a new industry. 68% of family offices that exist started since 2000 and half started since 2008. So it's a very, very new industry. And so the goal is to A,

educate, B, do research. There's no metrics. When people have a liquidity event, what do they do? We want to create something where you've got to get governance down, you've got to get estate planning down, you've got to do ABCD. And then once you start investing, which is how you're going to increase the capital, here's how you do it with permanent capital. So the goal is, I think, in an entire new industry, even though Tony Pritzker won't call himself a family office, our hope is if we get this right, and we still have to execute, that in five to seven years, he'd be happy to call his firm a family office. Our hope is if we get this right and we still have to execute that in five to

seven years, he'd be happy to call his firm a family office right now. He's not justifiably, but in five to seven years, if we get it right, he will be happy to say you have a family office because it won't be considered whimsical. It will be institutional and it will be professional. What is some advice you'd give family offices today that are looking to improve their returns from day one? One focus on what you, where you made your money and where you've got strength, and then outsource the rest.

So it's easy if you make your money in real estate, like you're very good in venture capital. Venture capital is the hardest asset class to do. Unless you're doing it full-time, in my opinion, you shouldn't do it. If you do it full-time, it's a phenomenal asset class. But because you've made your money in real estate, don't start investing in venture without somebody who's an expert in that. So what happens is family offices don't necessarily stay in their lane. Greg Watson has a family office. He was a CEO of Walgreens. He's fairly good at understanding the healthcare system. I would rather invest with him than Neil Bloom in real estate on a health

care deal. I'd invest with Neil Bloom for sure in a real estate deal. So I think what people have to realize is you made money in a particular vertical, focus on that, stay in that lane. The other ones either outsource to a multifamily office or if you want to keep everything internal in a single family office, find people who are smarter than you in different verticals. So all I've done in my business model, I've just found people that were smarter than me in real estate, in venture capital, in private equity, and all these different things, and let them do what they do and delegate.

And as long as you can take your ego out of the equation, it's not complicated. And it's not just ego, it's also just being penny wise, pound foolish. Another way to say that is pay your damn fees in the private markets. You mentioned you index in the public markets. I love index funds in the public markets because the returns are pretty efficient. But in the private markets, you're either paying your two and 20 to a top private equity fund, or you could lose 70% of your returns on a zero fee structure. And that's exactly what happened. So post-crash pre-COVID, when interest rates were zero, I don't care what you invested in, you probably made money. It wasn't easy, but it was certainly

easier to make money in real estate, but private equity, venture capital, stock market, everything went up. Three years ago when they started jacking up interest rates, family office said, well, wait a minute, why do I need to hire you, David? I know you're a smart guy, but you charge two and 20. If I could make money and not pay any fees, it's better. And they made money until they didn't. And three years ago, that changed. And as they started jacking up rates in a lot of private equity deals, they're not only not making money, they're losing money. In venture capital, they're losing money. In real estate, they're way over their skis. So what happened is they had a false sense of confidence, hubris, ego, whatever you want to call it, because they're like, I can do

this myself. There's a skill set to doing what you do. There's a skill set to doing what credit people do or what real estate people do or what private equity people do. And now I think how this is going to play out is a lot of these family offices who are now not making money and realize there's a skill set to doing what you do are pulling back and they're going to stay in their lane and they're going to outsource to the experts like you or like the real estate people or the private equity people. To quote the 10,000 hour rule, it takes 10,000 hours to have mastery of something. And what typically happens in any asset is you get pretty smart pretty quickly. You could get pretty smart

in a couple of years. You get smart in five years, but it takes a decade, several decades to have mastery. And that's where really the returns, that's where the alpha is. But it's also in relationships too, right? So if you've got relationships with a bunch of venture capital people and a bunch of people in different industries, if I came in and tried to compete with you and I'm not a venture capital person, it's not that I don't have the knowledge, which I don't, or the skill set.

I don't have the relationships. So the relationships are really key too. And the key with family offices, they're not just money. It's a strategic partner who can help you with vendors, with customers and things like that. They're operators, they're not financial engineers. So our goal at Booth is to create an ecosystem where we could take, I think that the private equity, the venture capital, you know, that was an entire industry which took off the

last 20 years and it was super successful for many, many people. We're at the second inning in the evolution of family offices and what we're trying to do at Booth is we're trying to say this is actually an industry. It's not a frivolous thing that you have a lot of money and you just invest where you do. There's metrics, there's analysis, there's education, there's research and that's what we're trying to do at Booth. How would people keep up with everything that you're doing that wanna follow you? We have familyofficeworldmedia.com

is kind of the media platform that we've created. So it's familyofficeworldmedia.com. And I put out a lot of content on LinkedIn as well. So, you know, I like to do that, but I do think that it's important for everybody. Giving is important. You gotta give back and you've gotta educate. And that's another reason why we're trying to do this

at Booth because education is really important. Teaching students, to me, I taught a class at Harvard, I taught a class at a couple other schools recently at Oxford. And the whole point is, I get a lot of joy out of giving back because I know I've been fortunate. And by working with these universities, a lot of people who of giving back because I know I've been fortunate. And by working with these universities, a lot of people who've had a certain degree of success

want to give back. And I think that's something that we all have to do. And I think giving back and paying it forward is something that's very important. And that's another reason why we're all doing this at Booth. Well, thank you, Ron, for jumping back on the podcast. Hope to see you soon. Great to see you. Thank you.

Thanks, Ron.