dr maurenbrecher

Dr. Patrick Maurenbrecher- Protecting Generational Wealth

Dr. Patrick Maurenbrecher is the Managing Partner and CIO at Kontora Family Office.

Kontora Family Office is a multi-family office based in Hamburg, Germany. Established in 2006, the firm provides services to families, single-family offices, and non-profit organizations such as foundations, associations, and religious institutions, especially as an organized institution assets in Germany. Following the American Family Office business model and operating fully independently.

In this interview, Dr Maurenbrecher and Cliff discuss:

  • • What distinguishes Kontora from other advisory services in the space.
  • • Kontora’s approach to investing.
  • • What Dr Maurenbrecher means by “thinking and working in modular units”, and the benefit of that approach to his clients?
  • • How to identify the most objectively, suitable financial and service partners, for your clients.
  • • The main differences in the private equity markets in Asia, America, and Europe..
  • • Identifying risk factors that can lead to permanent impairment of capital.
  • • How to achieve transparent planning, analysis, and implementation without conflicts of interest.
  • • The key benefits of illiquid assets?
  • • The factors that determine or effect an asset’s liquidity or illiquidity.
  • • How Illiquidity Reflected in in Expected Returns.
  • • Legacy

and more.

contact Dr Marenbrecher:

email: patrick.maurenbrecher@kontora.com

website: http://kontora.com


Cliff Locks 0:00
Welcome to the private equity profits podcast. I’m Cliff Locks. your host, with me today is Dr. Patrick. He’s the managing partner and CIO of Kontora. family offices in couture family offices is a multifamily office based in Hamburg, Germany, established in 2006. The firm provides services to families, single family offices, and nonprofit organizations, such as foundations, associations, religious institutions, especially as organized institution assets in Germany. It follows the American family office business model, operating fully independently. Welcome, Patrick, thank you so much for taking the time let’s start a conversation with a personal note. How did you get started in private equity space?

Patrick Maurenbrecher 0:44
Hi, Cliff. Thanks a lot for having me on. At Kontora. We’ve been investing in private equity for 16 years now, actually, before I did my PhD on productivity aspect, while it was basically turnaround management in small and medium sized companies in Germany, so I’ve been attached to the space for many years, probably most of our families are invested in a with about 20% of their net worth in private equity. So it’s something that’s very close to us.

Cliff Locks 1:17
What distinguishes Kontora from other advisory services in the space,

Patrick Maurenbrecher 1:21
put it this way, I would say we don’t discriminate, distinguish ourselves a lot from the standard American model of the single family office or the multifamily office, it’s very different in Germany, most people get a financial advice in the banking space, they would go to Deutsche Bank, or to Goldman Sachs, or to some of these names, or a local regional bank, and just do some some bond and stock portfolio. And that’s that will be it at Kontora be very much believe in illiquid investments. So an allocation of our clients could be 60%, illiquid. So you will find a lot of real estate project development, you’ll find venture capital, you will find private equity, you will find some funny alternative stuff like, like a container portfolio based in Singapore, or we are invested in cocoa plantation in South America. So you will find a very international diversified portfolio and we we try to drive down the correlation between the assets to get robust portfolios for our clients, I suppose that’s the main difference to the other German players in the field,

Cliff Locks 2:36
you’ve carved out a very unique business model there, I want to salute you for that that’s a breath of fresh air, we take it for granted here in the US. But in Germany, it’s very, very different. It’s a privilege, and learning and listening. Can you summarize your approach to investing?

Patrick Maurenbrecher 2:52
Absolutely. Well, when it comes to investing, it’s basically two areas that we draw ideas from. The one is, when it comes to financial returns, the most important question you have to ask yourself is how do you divide your wealth between the different asset classes. So the so called strategic asset allocation is the the main driving point for robust and stable returns. So that’s the main thing and we look at the US, especially to the endowment model that has been pioneered by David Swensen at Yale, but also others, Notre Dame, MIT, and Seth Alexander’s also a big Professor hero. So we very much look at these guys, what have they done. And then we kind of adapted it a little bit for for Germany. But in the end, it’s the same ideas. That’s the strategic asset allocation. And when it comes to picking individual investments, we very much bottom up guys. Well, I would say it’s the value investing philosophy that is very at the at the heart and core of what we do. But we try not to stay at, you know, what has been Graham said, and what his numbers that he looked at, we try to like most good value guys nowadays, look at what does it mean going forward? For example, most guys look at what is the moat doing in the future. So we look at how will the competitive advantage develop over time? For example, if you look at the business model, like like Google, say, okay, is that moat growing? Or is it shrinking? Or is it staying where it is? And when it’s growing, it might, it might be a value perspective to say, Well, if this is actually a very undervalued company, versus the traditional value guy would say, Oh, that’s a very expensive company for some reason. Yeah. These are the two areas where we draw most of our ideas from Yeah, looking around Seth, Seth Klarman for example, speak here of US based in Boston very much looking at margin of safety for each and individual investment. We try to find investment with big monitor margin of safety. So mostly what we do actually, we always look at what can go wrong, and then try to get good returns from that.

Cliff Locks 5:08
So consistent solid returns. And looking at the risk profile, very good.

Patrick Maurenbrecher 5:14
Yeah, the funny thing is, when you when primarily look at the risk side, you end up with really good returns, we track it by, you know, precisely. So in the history of controller, we have advised our clients on 169 investments. So we can pretty much say what what are the returns of these four lots of the illiquid stuff that they still run. So I mean, if you do a product refund, and that runs for 10 years, and we’ve done the investment five years ago, we can’t finally say where the where the IRR will be. But for the for the investments that are finished already the IRR is at 14%, after after coffee, it seems to work

Cliff Locks 5:56
very positive. What do you mean by thinking and working in module units in what is the benefits of this approach to your clients?

Patrick Maurenbrecher 6:07
Yeah, that that might be an advantage we have here in Germany, because most competitors, they have a model where they say, well, client, I will do everything for you, please come to me, I do the number crunching for you, you can do investments with me, and you have an all in fee model, we adjust, we do all the administration and the investment, etc, etc. everything for you all model is different. And that we say it’s fine that people also single family office can come to us and say, you know, we have the administration in place already. But we really need deal flow for private equity or real estate in the US, for example. And then we could say yeah, that’s no problem. You just we show you our deal flow, and then you just pay for these services. And others might say, you know, we do all our investments ourselves, and we have 70 p phones funds, for example. And could you just do the administration for us. So we are basically there workbench, providing them with all the all the numbers and and you know, we we get the, the the quarterly results, and we do all the bookkeeping for them. So that would be a different approach, working with Kontora. And then other families come and say, you know, we have four kids, they have no idea about investing, we are all fine, you know, maybe the husband, he has built up his wealth. And he says, well, but my kids will inherit this at one day. And but they have no idea about investing, can you teach them? that’s actually quite a big thing in our whole portfolio of services that we provide an academy program where we vary individual, you know, some some say, Can you just do some education in the different asset classes? And we would say, okay, there’s one module where we explain how does listed equity actually work? And one will explain Well, how do you invest in real estate? And one would say, what about private debt, we would then go about explaining all these things, because we very much believe actually also be a German thing over here. Most asset managers, they come to the clients and say, it’s great that you’re here. It’s wonderful. Now you don’t have to worry about anything, just give me your money, and I will take care of it. And the typical entrepreneur in Germany will panic at this sentences, because, I mean, usually he did the decisions, and he was very good at deciding stuff. And now there’s somebody coming along who wants to take all this away from him, Well, we tried to do is say, look, what you’ve always done. I mean, this, this is for the kids, but also for for the for the guys, for the successful entrepreneurs, you have done your decisions very well in your space. And now suddenly, you want to invest in venture capital, for example, or real estate, which you have never done before. So we will kind of teach you all you need to take the decisions in the future on the same solid ground. Yeah, that’s pretty much our approach.

Cliff Locks 9:02
Prouty, what is your approach to identifying the most objectively suitable financial service partners for your clients?

Patrick Maurenbrecher 9:11
I think it’s a it’s a two way process. On the one hand, of course, when it comes to investments, like private equity, for example, you have your league tables you have you know, everyone, it’s very transparent. What’s the best track record? Who are the guys who want to invest in? I don’t know, for example, venture capital, well, you want to invest with Andreessen Horowitz or Sequoia or benchmark. And then your only problem is, will they give you allocation or not? Well, that’s the easy part. So you work on your network, you try to you know, get the connections to be able to invest with the best guys on the planet. But then, when it comes to stuff like listed equity, we are more contrarian in the contrarian side of of who we like to give money. So for example, most asset managers I think that’s actually globally will say Well, you know, we have a diversified portfolio of 30 to 50 companies, and that’s a very concentrated portfolio. And then that’s when I panic because a concentrated portfolio is something between 10 and 15. Companies, you don’t find that in the in the normal institutions like a bank, or a huge asset management firm, but you do find it with one Captain ships, we look for these guys who, who, you know, have a setup, where they do their investments, but basically, they concentrate on investing in a concentrated portfolio. And they have spectacular returns. This is purely basically getting to know the guys trying to find these guys at conferences value x in going to Omaha, I mean, I didn’t go the last two years. But you know, we go to Omaha, meet guys at the Berkshire AGM and and you you get your network of guys who actually do these style of investments have to do a lot of explaining when when the families come to us at first, because I mean, they have heard the whole day year all their life, that you need 30 to 50 companies in a portfolio for it to be meaning portfolio. And so that takes a lot of education, actually, but most most families end up in the style of investments.

Cliff Locks 11:22
That leads me very nicely into what are the main differences in private equity markets in Asia, America, in Europe?

Patrick Maurenbrecher 11:29
Well, that’s a very broad question. But very good question. I mean, for me, the the best private equity managers are still found in the United States. I mean, this is where it originated, this is where the best guys are, and where the innovation Actually, I mean, the structural innovation, how to invest in the private equity space comes from, I would always tell our families, when you want to invest with the best productivity guys, you need allocation, the United States, then in Europe, you have some very able managers, probably the markets are not priced to perfection, the way it might be in the United States. But then again, I always think most of us, most families have a home bias that’s everywhere on the globe. But we have the same in Germany. So I always tell the families rather do a little concentrate your productivity portfolios, rather, in the in the United States or in Asia, because you have enough assets in Europe anyways. So So I always work against the home bias and try to I mean, that’s a very personal thing. I mean, you have people, they say, Well, the only place to invest money is in the US. And others say, Well, you know, this is this is all cowboy country, and I don’t like to invest in the United States. And well, for me, for me, personally, I would always feel very comfortable having at least 30% of my worth in North America. So I rather have an over allocation in the United States and in Asia. And then I mean, you also asked about Asia, in Asia, it’s definitely still an emerging base there. But that can give you spectacular returns, we had the experience. Also, like 678 years ago, when I talked to clients about investing in Asia, they were like, well, if I invest in Asia, it’s more risky than investing in Europe or in the US. So I want more return. I totally understand this thinking but it was not possible, you could not get a higher return in Asia. And nowadays, the discussion is totally different. It’s more risky not to invest in Asia than to be invested. We go there we we do due diligence in in Hong Kong in Beijing. And we try to get a feeling on the ground for the right teams. And yeah, we found some really good managers, large and small. So we we do quite some allocation over there.

Cliff Locks 13:58
Like I’m sure. What is your approach to identifying risk factors that can lead to permanent impairment of capital?

Patrick Maurenbrecher 14:06
Oh, that’s a very good question. Also very difficult question. Yeah, I’m sure you have. You’re familiar with the Warren Buffett quote, rule number one, never lose money. Rule number two, never forget rule number one. I mean, that’s just the art of compounding. And if you want to do compounding, he should not lose money on the way. So that’s very difficult. And that’s where the margin of safety comes comes into, into play. It’s at the heart of what we do try to identify what can go wrong. And that that doesn’t matter if we’re talking about product which he or listed equity or real estate or whatnot. It’s always the same question, we have to look at eight factors that we always apply no matter which asset class and for example, one first question that we always ask, does the manager that we give money to has skin in the game I mean, this very old, silly in a way aspect, but it’s the one that is so important. And if you get the right answer on that, and then you have alignment of interest, that’s a very, very positive. I mean, in Hamburg, you know, we are shipping city. And I mean, it’s a very good example here, because we have lots of shipping companies here. And they used to be a time when the guys who run the shipping companies, they would run, for example, 20, or 30 ships, and then they would have the equity and three of these 30 ships, and the rest would only be with other people’s money. Now, you guess, which ships never lost money, you know, and it’s, it’s so funny. I mean, even in the biggest crisis, the ships that had the money of the of the of the entrepreneur somehow came through, and the others didn’t. And it’s a simple, simple factor, but we always follow this. So we probably lose quite a lot of interesting deals, because there’s no skin in the game or too little. But we’re fine with that. Because the risk side is so important for us. Well said,

Cliff Locks 16:12
How do you achieve transparent planning, analysis and implementation without conflict of interest?

Patrick Maurenbrecher 16:19
And that’s a easy question for us. Because it’s at the heart of our business model, we are not an asset manager. I mean, that’s the problem. When you For example, it’s about listed equity portfolio, and you go to a bank and say, well, is your is your portfolio the best? Of course, it’s the best when you come to us. We are an independent advisory firm, you know, we don’t take any kickbacks, the only guy who pays us is our clients, they asked us question, we do a very neutral and independent screen of what’s available, who can kind of fulfill the the required criteria, and then we present them to our clients, whether, you know, if they get a 30 page analysis of what what are the risks, what are the chances to give this guy or that gay guy money with a strategy, and then it’s our clients who will decide there’s actually no conflict of interest involved.

Cliff Locks 17:11
So being independent is very, very positive. And that’s different than most firms sitting in Germany at this point.

Patrick Maurenbrecher 17:16
Absolutely. And, and also, also the, the structure of our company is kind of working in our favor. I mean, we are just three guys owning the company, nobody else has shares, we will try to give more people in our company, and we’re 70 people now. So we will try to give more people shares of the company, but nobody from the outside. It’s the entrepreneurial families that are our clients, they they’re very much like that, because it’s kind of from, I don’t know, they feel at arm’s length. They like to talk to other entrepreneurs in a way. And so it’s Yeah, it’s it’s, it’s an at the same level field somehow.

Cliff Locks 17:58
Sometimes, it’s also very interesting to look at deals that have not worked out the way you had hoped at the beginning. Could you tell us about the worst deal and what you’ve learned from that experience?

Patrick Maurenbrecher 18:10
That’s a great question, Cliff. And I love it. Because actually, that’s the way we think. I mean, you always have to try to learn from your mistakes. And well, there’s one example that comes to my mind, because it’s, it’s kind of the, I mean, it’s a real estate project that we did. And it looked really nice, it was building with the hotel, and it had some apartments, and it had a cinema, and it had parking spaces. And it sounded also good. And every one of these aspects had a manager who actually knew the field, the guy who did the cinema is kind of the leading cinema guy in Germany, etc, etc. And it all made a lot of sense. And then it all fell apart at some stage. And the main failure or the or where we didn’t kind of understand enough of the project was a was too complex. And when it came, came to building this. Yeah, this project. It was too complex to handle. So the costs were running out of the budget, and at some stage, they close the they made a forward deal. And so the project, but they hadn’t closed, all the cost side, the cost side was still open, but the sold already. And that was a huge problem. And I mean, we do manage a selection. So it was it was too late. We saw too late, the complexity of the project and the calculation could not work out. I was a big problem. And we’re very, very aware of this now and I’m sure that will not happen again. But that was the was really a big learning experience and we lost money on that. And and it, it felt really bad and it was bad for our clients. And yeah, it’s always nice to talk about, you know, 1420, whatever percent are good investments. But I mean, we have actually I, you know, we have six investments of the 169, that didn’t work out. And this was the worst. And then is one is minus 2%. And one was minus 15%. And it’s, I think, overall, it’s okay, but still, those were mistakes that we made.

Cliff Locks 20:36
Let’s go back to one of the earlier conversations we had Tell me more about the controller Academy, specifically the structure of the content and who is it for because I was excited to hear this, I think it’s really advantageous when I find a leader like you and your team, putting an academy together and what they can bring forth to the client in the community. Tell me more.

Patrick Maurenbrecher 20:59
Yeah, I love I love to talk about it, because it’s basically what makes us go round. I mean, we it’s all about learning, it’s about also teaching, but also we learn a lot from our clients. They’re very driven and intelligent and great guys, investing as a difficult area. And funnily enough, at least in Germany, investing is not taught at any university. Yeah, you have finance courses, etc, etc. But, I mean, something like what Columbia school that does not exist over here. So we have modules, where you learn about what is private equity, we have modules will learn, you know, all the different asset classes. But then most important module, from my point of view is the one that the co founder, Stefan book world health, and that’s about, is there something that over centuries, the successful families all done, you know, are they are there common rules that you can follow? And yes, they are common rules. And if you look at what families who have built huge well done over centuries, you always come to the same conclusions. And that’s so funny you don’t have to you know, advantage for you, you just have to be very disciplined and look at, you know, what others have done in the past and then try to apply it with the same discipline and for example, one thing that that you you’ll find that an old Jewish families, you will find that and, and and, you know, all over the world is the same principles, for example, diversification and trying to drive down on the correlation between risks is something that has been done for centuries. It’s all I mean, they had different names, it wasn’t called alternative investments, maybe it was the land you know, you have to own land or what what now for for us for example, listed equity, private equity or direct investment in companies is basically the same risks that you buy you you buy into future cash flows of companies find that family Fugu is a is an old German family, who he they made deals with the with the pope at one point, I mean, centuries ago. But that’s the same principle. They had some of their money in land some of the money in real estate and some of the money and companies. That’s what they did. And basically, it’s the same idea that we try to tell our clients or try, our clients try to have real estate than corporate cash flows and alternative investment, which is basically the bucket of everything else. It’s working fine. That’s great.

Cliff Locks 23:42
What are the key benefits of illiquid assets?

Patrick Maurenbrecher 23:46
I think it’s a bit counterintuitive, because most people think it’s great to have liquidity. But when it comes to successful investing, the biggest problem is not the market and it’s not intelligence or something. It’s having your own behavior in check. So illiquid investment help you because you’re stuck. For example, how many people have sold stock in in spring 2020 when the Coronavirus said a lot, a lot and then it took them and then they sold and then it took them a lot of long time before they re entered into the stock market. Well, that that there? Yeah, they messed it up. Because I mean, nobody could have foreseen that we get such a quick rebound, we see the illiquidity premium as something really valuable and it’s it’s helping everyone to have their own feelings and check in a way. So that’s what we try to, to to teach in a way most entrepreneurs that they they grasp this immediately. And I mean in their companies they’ve they’ve done it for years, because It’s, it’s what they do they always think long term and suddenly only because it’s possible to trade every day. People think that the stocks, it’s just a financial product, but it’s basically having a share in a business. I mean, you wouldn’t have the idea of because the prices of your apartment went up to sell your apartment The next day, you wouldn’t do it. But we’re starting to do it. It’s It’s funny, but that’s how human nature is. And I mean, Daniel Kahneman and others have shown as all that’s it’s all the problems are always. So yeah.

Cliff Locks 25:36
What are the factors that determine or effect the assets, liquidity or illiquidity? Okay, could you elaborate? When you look at an asset or an asset class, we look at liquidity, and then the illiquidity so you know, you look at it some private equity and venture capital. Some of the capital, it’s at points for the high net worth or ultra high net worth individual has a timeline the way they want to put those assets to work. So liquidity and illiquidity at this point does come into rolls. When do they need those proceeds returned to them? Where do they? So when you Yeah, okay, balance that takes place?

Patrick Maurenbrecher 26:18
Yeah, it’s all it’s always important. I mean, we advise our families to generally have at least 10% of a net worth and cash, no matter where rates are. That’s very important. And then, of course, you have to manage your liquidity. I would say most of our families, they, they they have about 50 to 60% of their investments in illiquid investments and the rest and liquid investments. And that kind of I mean, I’m well, but I must say, I’m talking about families with net worth north of 50 million euro, you know, so I mean, that’s a different kind of

Cliff Locks 27:01
problem. Burberry good. How is illiquidity reflected in the expected returns?

Patrick Maurenbrecher 27:08
Yeah, I’d say the I mean, we talked about it’s a it’s a illiquid premium. And and, I mean, I wouldn’t say it now is 1%, or it’s 2%, or how much it is. But it’s important, very much believe in the illiquidity premium. And that’s what our results for last 16 years have shown. I love investing in the stock market. So I I’m not a purely liquid guy, but you know, but I treat it pretty much like an illiquid investment.

Cliff Locks 27:38
Very good. What are the personal rewards for you in doing what you do? And what do you love about your career choice.

Patrick Maurenbrecher 27:48
It’s basically working with these hot driving entrepreneurs. And and that was makes me get up in the morning. And if I know I ever have a call, I have a strategic meeting with, with, you know, one of my clients, it just, it just makes my day because I always learn a lot from them, they make me think and you ways, I figured out a great investment, and I presented to them, and they they really get get to the heart of the investment and the risk reward profile within minutes. And then kind of getting them to, I don’t know, agree with me or disagree with me as something that that is very fulfilling for me.

Cliff Locks 28:31
So it’s a friendship, and a business relationship. It’s together.

Patrick Maurenbrecher 28:36
Yeah, I would say so. I mean, some of our clients are definitely in the in the top five. table for me, of people from whom I’ve learned the most definitely

Cliff Locks 28:47
very positive. Tell me about your legacy you’ve built?

Patrick Maurenbrecher 28:52
Well, I’m at the beginning of our conversation, I told you about the financial situation of financial market in Germany and the situation we have here, where I always feel very, very much behind what’s just the normal stuff in the US and and just, we’re just not a leading nation when it comes to investing. And if, if I were controller can help kind of do a bit of education that people over here also invest their money. Yeah, with the ideas that have worked for centuries. That will be great. If we could have, you know, that level of impact and help on that front.

Transcribed by https://otter.ai

John Jennings

John Jennings – Balancing Customization and Scalability

John M. Jennings is President and Chief Strategist of The St. Louis Trust Company. In these roles, he leads the client service practice and is responsible for developing and implementing strategic initiatives.  John is a member of the firm’s Management Committee, on its Board of Directors, and also serves on the Investment, Risk Management and Trust Committees.  

John works closely with client families, advising them in all areas of wealth management. Prior to joining The St. Louis Trust Company as a founding principal, John gained varied professional experience in investments, tax, estate planning and trusts in the Private Client Service group at Arthur Andersen LLP and in the Estate Planning and Tax practices at the St. Louis-based law firm, Armstrong Teasdale LLP.  John earned both his Bachelor of Science in Finance and Banking (cum laude) and JD degrees from the University of Missouri.  

A past St. Louis Business Journal “40 under 40” honoree, John is a frequent speaker on investment, trust and various other family office topics. Personally, John is married, the father of two teenage daughters and an avid reader, skier, music lover and is vegan.  He serves on the Boards of Logos School and the St. Louis Community Foundation, where he chairs its investment committee. He is also a trustee of The Saint Louis Symphony Orchestra Endowment Trust. He is an instructor at the Olin Business School at Washington University in St. Louis. Daily he produces an “interesting fact of the day” which can be found at http://www.theifod.com. 

Additionally, John is a Forbes contributor writing about wealth management topics. https://www.stlouistrust.com/author/jjennings/


Seth Greene 0:00
Welcome to the podcast. This is your co host, Seth Green. Today I have the good fortune to be joined by john Jennings president and chief strategist of the St. Louis Trust Company. JOHN, thanks so much for joining us. I’m super happy to be here. So, all right, so for our folks watching and listening and tell us about the St. Louis company, St. Louis Trust Company, what do you guys do and who do you serve?

Unknown Speaker 0:21
Yeah, so we our multifamily office started about 19 years ago out of the ashes of Arthur Andersen. So, you know, I worked at Arthur Andersen for about four years. And when it was imploding in the wake of the Enron scandal, I was like, Oh, this is horrible. But looking back, selfishly, you know, personally for us, and I think other people that were there, it worked out really well. So. So being a multifamily office, we work with 60 client families, and we have 55 employees, so nearly a one to one ratio.

Seth Greene 0:51
That is awesome. That’s it? Yeah, that’s a great ratio. And so what is it that you think makes the St. Louis Trust Company other than the ratio obviously, stand out? And how do you differentiate yourself?

Unknown Speaker 1:04
Yeah, so I’m kind of to borrow from Peter Thiel, the venture capitalist, you know, he had this great book, zero to one and other venture capitals have talked about this, like, truly successful companies need to have a secret. And the definition of a secret in their parlance is what do you believe that most other people or businesses don’t believe? And if you told them that, you’d think that a sort of crazy so and pretty much every business, but especially financial services, there’s a trade off between customization and scalability. And the goal for most businesses, almost all of in the financial services industry is to increase scale. So for instance, we work with 60 client families and oversee and advise on about $13 billion of assets with 55 employees. So imagine just the profits, if we double that to 120 and 26 billion with the same 55 employees, we’d be like, where do we stack all our Benjamins? Right? What our secret is, is, we believe that if you are as customized as possible, and you don’t scale, that that’s a great business. And you can be profitable, and you can really be among the best in the entire country, or entire world, which would mean the entire solar system. And I don’t go further than that, because who knows what else is out there? Right. So

Seth Greene 2:35
that is an excellent point.

Unknown Speaker 2:37
So we want to be as close as possible for our client families to a single family office. And we’re able to do that, because we’re 60% owned by clients. So the main, you know, our main ownership group, you know what, it’s kind of nice when you know, they get a nice dividend. The number one thing is they want us to be customized and serve their families well.

Seth Greene 3:01
Alright, so that could that that’s very interesting, talked a little bit more about the and that’s probably another thing that differentiates you talk a little bit about the ownership structure.

Unknown Speaker 3:11
Yeah. So when we started, we decided to be a Trust Company, and we needed working capital, but we also needed capital to be a Trust Company. And so we turned to, you know, we turned our initial set of clients. So they were, they were early investors in the company. And as we’ve grown, we’ve had some other clients that have bought in and we are overseen by a board that is all, you know, all but two of us are, you know, clients on our board. And so, you know, clients that are on our board, buy in, and and it’s really, it’s really great. The other 40% is owned by, you know, our primary founder owns a chuck chunk, who’s now retired, and the rest is principals of our firm. So

Seth Greene 4:02
and, obviously, we’re not asking you to break confidentiality to, quote, disclose any names, but what types of families do you work with? Yeah, so who is an ideal client for you?

Unknown Speaker 4:14
So it’s interesting. So if you look at the size of our clients, you know, I don’t believe we have anyone that just made a lot of income, like we don’t have any wealth generators that are doctors or lawyers. And we don’t really have anybody that just saved money and invested in the stock market really, really to create great wealth. You have to have equity in a single company usually. So you put together your you know, you’ve taken a big risk, you’ve been concentrated, you put your own sweat equity into it, and you get lucky. So our client families, somebody did that. Whether we’re working with a first generation or you know, we’ve worked with we have sixth and seventh generation. We will So they, they either started a company, and then over time it was was sold, and sometimes they start multiple, or they were an executive at a public company and and was able to buy in or be granted a lot of equity. So that’s who our clients are, or their descendants.

Seth Greene 5:17
What are you finding some of the biggest mistakes they’re making are that they’re coming to you to help fix, or that they want to help your help to avoid?

Unknown Speaker 5:28
Yeah, you know, we get, we get a quite a few client families interested in us that realize that they need a higher level of customization and service. And really, at this sort of wealth, the wealthy families that kind of the waters we’re swimming in, kind of use a shark reference. So yeah, it’s, there’s a lot of, there’s a lot of sharks out there. But the level of wealth we’re dealing with, there’s no real just platform they can be on. So if you go to a lot of investment firms, they’re like, okay, here’s the way we do things. And the family needs to fit into how we do things. And we flip that on its head, we say, you know, we’re going to help you invest and do everything else in your lives, the way that fits your values and your goals. Right. So that’s, that’s number one. And number two, we see a lot of client families have just really been burned in the financial industry, even if they’re working with, you know, some of the really big name, you know, kind of gold standard firms, they just feel like, you know, the desire is the firm, the investment firm, just throwing things at them, just trying to sell them. And it’s all about their profitability, the investment firm, rather than what the family needs. And so we were having come in, they may still work with that firm, but they’re like, okay, we need somebody to help us to look at all this stuff and say, Okay, this makes sense that doesn’t, and we really start focusing on fees and taxes and things that the investment industry really doesn’t like to talk about.

Seth Greene 6:53
Okay, so you say you segued into the next question perfectly. So what are the services that you offer beyond the traditional investment management that they’re attracted to? They go beyond that Main Street offering, right.

Unknown Speaker 7:09
So you know, one of the we have three main lines, one of the three is, you know, investment management. And, you know, we do a nice job of investment management, but you can find good investment managers all over the place. The second thing we do is family office, and I think a great thing. And we sort of, you know, we started in 2002, we rode this wave, where, you know, people didn’t know what a family office or multifamily office was, you know, nearly 20 years ago. And so we really wrote this way we were, we were sort of early. And I think what’s great for investors is pretty much every, you know, financial advisory firm or investment firm out there says, Okay, we’re going to provide some family officers, I think that’s great. But it’s hard to do, if you have 100, you know, every advisor works on 100, or 250 200 200. accounts. So the way we do family office, is each of our professionals only works with, you know, five to seven families. So it really allows you to dig in and do bill pay and cash flow and help with charitable planning and educate kids, you know, the next generations about wealth and put together a strategy, and on and on and on and on. I mean, there’s just all these these ones off, you know, private jet charter, and, you know, should I lease or buy my car, or, you know, the next generation, I’m starting a business, can you help me on that, and we do all that. The third line of business is we can either be trustee, which is a really a convenience for our clients, there’s different reasons, they may need a trustee, or they had it, have a corporate trustee, that’s, you know, some big institution that they don’t feel like they’re a fit with anymore, and they can move to us. But probably a bigger thing is a lot of family members serve as trustee for trusts, and, you know, partnerships and things like that. And we help them be good trustees or, you know, managers of their LLC and do all the legwork behind the scenes. And, and there’s liability, you know, I, you know, there’s, there’s all these cases you hear, you know, both around where I live and nationwide about, you know, families Sue each other, and there’s, there’s real liability when you’re trustee of a family, family trust, so we help them with with that. And by the way, real quick, you know, even though our name is St. Louis trust, and we’re actually in the middle of rebranding to St. Louis trust and family office. So it hasn’t really been released yet. But we have clients in 33 states and some some, you know, family members live out of out of the US and, you know, our biggest growth areas have actually been on the coast. So, notwithstanding our name, we are not a local organization. We are nationwide.

Seth Greene 9:38
Understood. Now, you talked about a lot of the majority of the families be having a at some point in their history. There was a business that was started perhaps there’s some liquidity event or something that qualifies them to have the cash to work with a fat multifamily office like yours. How are you helping them because I mean, there’s a stereotypes and cliches of shirt sleeves to shirt sleeves in three generations, and how many businesses don’t make it past generation three? How are you helping them bridge that gap?

Unknown Speaker 10:09
Yeah, that is that is a real issue. And really what drives shirt sleeves to shirt sleeves, and you know, three, or four or five up here, stated different ways, is is a big part of that as math. So I’ll give you an example. So there’s a CLI family we’re with its, I think the main, the main ones we work with are depending on how you count fifth or sixth generation. And if you look at their, you know, this, this generations grandmother, so the grandmother and the grandfather, so they had a big chunk of wealth. And then they had six kids, and they paid a state tax. So the six kids then had one six of the wealth, less tax. And so the grant, the grandparents lived amazingly well, like they had just money just flowing it, the six kids, also very wealthy lived well, but it was a step down, right. And then those six kids, it varies between having two to six kids for each of those six kids. And then that drops down and there was a state tax. So a lot of it is math, that you know, even even if you invest well, and you control your spending, you know, some of it’s just math, and where we see some families not go shirt sleeve shirt sleeve, some of it is just because they don’t have as many descendants. So if the grandparents had one child who turned out had two children, you know, you can out earn that math, so part of it is just looking at the math and setting expectations, and just telling a lower generation, by the way, you know, even when all the money flows down to you, just because of the math, you probably can’t live as your parents did. And you definitely can’t live as your grandparents did. So that’s the first thing. So some of us just, it is what it is. The second thing is, is fees, and taxes are huge. So limiting fees, and taxes is is is really important. Investing well. And investing well isn’t just always, okay, I’m going to go out and you know, I’m going to find the next Facebook while it’s private or beyond meat or whatever, you know, Tesla and SpaceX is gonna be all this, this growth. I mean, that’s great. But that’s really hard to do. Part of it is just not making big investment mistakes. That’s, that’s, that’s a big deal. And then a state planning. So the way the estate tax laws are in wealth transfer tax laws are now you know, paying a state tax is largely optional, if you plan it early, and often, and you’re willing to do what it takes. And we’ve seen this time and time again, people that have 10s of millions of projected estate tax liability, and 10 or 20, late years later, it’s it’s zero. So, you know, we’ll see what the future tax laws hold. But it it really is optional. And all the time we see people that wait till they’re their 60s or 70s, or have a family owned business, and they’ve done little estate planning, and it can just be devastating, again, in terms of the math, and how that that passes down. So that was a long answer. I could talk more on it. But I think that’s it’s probably pretty good.

Seth Greene 13:16
How has the COVID pandemic affected your business and your clients?

Unknown Speaker 13:25
If you would have told me 18 months ago that this was gonna happen, you’re gonna have this pandemic, and we’re going to work virtually and we couldn’t visit, even our clients live locally because of, of health concerns, I would have been like, Okay, this is good, it’s gonna be devastating. And what has been surprising is how well it’s gone. So we’ve been able to, we transition remotely, you know, over a three day period last March. And our people just done a great job. You know, meeting with our clients virtually, and staying in contact with them, you know, we call them a lot. They didn’t call, it’s gone really well. Now, I will tell you that my analogy I use is both in terms of our company culture and working together and client relationships. I felt like we were running on battery power. So it was working. But I felt like the battery was degrading and training over time, right? And I wouldn’t want to do this for you know, two years or five years. And we are, you know, with the vaccines and almost everybody in our company is vaccinated, more people are coming back to the office. We’re bringing them, you know, everybody’s gonna start coming back to the office more The day after summer solstice. So he didn’t want to interfere with summer solstice celebrations, but it’s going to be the day after the summer solstice. We’re traveling to meet clients, we’re meeting him in person. It’s really fantastic to see everybody again, but again, I was just stunned that there wasn’t more of a disruption and how well it went. And I just think about him. What if this was, you know, even 10 or 15 years ago? And we didn’t have all the technology we do, it would just be a far different situation.

Seth Greene 15:06
Absolutely. How has it changed the investment advice you’re giving your clients?

Unknown Speaker 15:11
I don’t, it really hasn’t really hasn’t, you know, going in even going into the pandemic, you know, we’re big on on the belief that, you know, the financial industry, models risk and returns using the standard bell curve, or the normal distribution, the Gaussian distribution, that doesn’t work, that math does not work, you cannot take projections and and say, Oh, well, this is your downside risk, or this is what’s going to happen. So we’re very big on investing. Acknowledging the uncertainty of the future, part of that means having an adequate margin of safety. And so when we hit the nearly 35% doubt, and just over 30 days, so, you know, the the, the 30% down that occurred in it was the fastest drop in the stock market ever, even faster than some of the times in 1929 1930. So, really, No, none of our clients panicked. And some of them rebalanced and really rode the, you know, sold high and our, you know, take to liquidity and bought low thing. So, you know, they really did quite well, or did fine through it. Now, if it had gone instead of 34% down, if it had gone 70% down. Yeah, that would have been, you know, it would have been, it would have been more difficult, but it just really reminds you just the folly of trying to forecast when investment returns are. And a lot of the industry says okay, well, you know, and I did it. I am also a contributor for Forbes, I wrote an article wrote a few hours, I’ve written a few articles kind of lambasted this idea that you can predict and a common excuse that people give when they predict is, well, I couldn’t have foreseen that, I could, I didn’t know that there was gonna be a pandemic, or that, you know, going back that you know, 4% of the mortgage market of some Prime’s would be one of the main things that led to, you know, unraveled the, you know, the entire financial system, almost or, you know, who had on their, their, their scorecard for 2021, that a boat, we get stuck in the Suez Canal and further disrupt global supply chains, or that a tsunami would take down the, the reactor in Japan, you know, and these things happen. And it just reminds again, with a pandemic, you, you should invest in a way that’s robust to the unexpected. So it’s just, it’s really been a great lesson. And if you don’t mind me saying another lesson that just says home again. So the stock market and economy are not correlated, you can’t look at what’s going on in the world or the economy or even geopolitically and say, now I’m going to make investment decisions. And three days after, in retrospect, what was the bottom, I wrote an article in Forbes, and it was advice we were giving their clients and reiterate with the clients, that they’re just not correlated. And the point of the article was, we’re heading into a really bad recession, unemployment was spiking. The stock market was dropping, everything just seemed horrible. But the point was, is you shouldn’t sell out of your portfolio, just because the news is bad is going to get worse. Because they’re not correlated. And then what happened is, you know, turned around and had a, you know, 70 some odd percent gain from about the time that I wrote that article, and what people have said to me is, Jennings, how did you know, we had bottom? And I said, No, you don’t understand the point of the article is, I didn’t know and that nobody knows. And you should invest, like you don’t know. And a challenge we have sometimes is talking to prospective client families that want us to give them the certainty of, we know what’s gonna happen. Instead, we say, we don’t know what’s going to happen. And we’re going to invest that way. And we find that our clients that are very sophisticated investment wise, love that. And some investors that are less sophisticated, you know, don’t choose us, they want to go to the big bank or investment firm that says, you know, here’s our chief strategist, and you know, the s&p is going to be up 14% this year, and blah, blah, blah, blah. And they like that certainty. Because as humans, we don’t like uncertainty. If somebody says, I know what the future is going to be, we get this dopamine rush or like, we feel good. So, again, I’m just like, sorry,

Seth Greene 19:30
that’s quite a fascinating answer. When you are not serving as president, what do you I know that you are an avid reader? What are a couple of the best books you’ve ever read that had the biggest impact on your career?

Unknown Speaker 19:44
So, you know, the Black Swan by Nassim Taleb had a huge effect. I read that shortly after it came out in in 2007. I’d like to say that I read it was like, Oh my gosh, I see you know, 2008 coming, but let’s, let’s at least open my eyes to it. And it really last few years, one of the books that has, you know, just, I was just like, wow, just really, you know, knocked me as like I’ve learned so much and really caused me to see the world a bit differently. There’s a book called scale, by Geoffrey West, who was a physicist at Los Alamos, and then went over to the Santa Fe Institute, and was the head of the Santa Fe Institute, if you don’t want the Santa Fe Institute is it’s a academic think tank and their, their main area of research is complex adaptive systems. It’s how things interact, when you have intelligent agents and feedback loops and everything, which is really how the stock market works, by the way, why we that’s why we can’t predict it. But this book is all about scale, like power laws, it’s on about organisms and businesses and things and what a power law really is, is, I’ll use an example of let’s let’s use the example of book sales, you can look and say the, you know, that there’s, you know, how many ever books published in the USA, every year, it’s, you know, hundreds of 1000s. And you can say, the average book, you know, sales 10,000 copies. And if you think in terms of a bell curve, you’re thinking, Oh, you know, there’s, you know, kind of, if you’re listening, I’m sorry, I’m like drawing a bell curve with my hands, high in some low, but a lot around the $10. That’s not how it works. You have people like Stephen King, and JK Rowling, you know, you have this very small percentage of authors that sell a ton of books, and then drops off immensely, we have this very long tail of most books selling, you know, less than 2000 copies, less than 1000 copies. So that’s a that’s a power law distribution, or think about wealth. So, you know, if you take a, you know, you go to a concert venue that has like, 2000 people, and you go, okay, the average income of these are that, let’s say, the average wealth of these people is, you know, $250,000, if you average it, right body, and if you think bell curve, you’re like, oh, okay, but imagine if, you know, Bill Gates walks into the room, okay, the average just skyrocketed. And it doesn’t tell you anything about what everybody else has. And, and that’s the way wealth works in America, too, is at every stage, you know, you look at the top 50 versus the low 50. And then the top 10%, the top 1%. At every stage, there’s a few number of people that are massively out of range that that affect everything else. So this book is all about that is a little technical. Like I’ve, I’ve talked before about how much I liked this book, I’ve had people that have like I couldn’t get through it. So if you want to just really expand your mind, but it’s work scale by Geoffrey West.

Seth Greene 22:40
Great recommended patients fascinating interview, and anything else want to share that we didn’t think to ask you yet.

Unknown Speaker 22:46
Well, I would just like to, if I could plug my blog, of course, please. So I write a blog a few days a week, it’s called the interesting fact of the day, it really should be called what Jenny’s thinks is interesting, but I get a you know, it’s very well received. And it’s just all sorts of different things. Some some times as things on leadership, sometimes it’s as simple as its national Grilled Cheese Day, you should go eat grilled cheese, and, you know, today’s sent out as a rerun because my daughter guys, graduates from college tomorrow, and it’s on the five best commencement speeches. So it’s just a lot of different eclectic thing you can think you can find it

Seth Greene 23:22
at V th e.

Unknown Speaker 23:25
iPod, which stands for interesting fact of the day. So th e, i fo D calm, feel free to subscribe, feel free to unsubscribe. But just me, I find that people say that it kind of kind of tickles their interest in things. So.

Seth Greene 23:39
All right, well, this has been Seth Green with john Jennings of the St. Louis Trust Company. JOHN, thanks so much for joining us. Thank you so much. Thanks, everybody for watching or listening. We’ll see you next time.

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Three Investment Lessons To Learn From Warren Buffet

If there ever turned into any investor that one must pay attention to that would be the notorious Warren Buffet a stock dealer who began operating his father’s brokerage at a young age of eleven whilst he made his first stock buy. That’s why these three funding training to research from Warren Buffet that are so precious.

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Copyright © 2007 Joel Teo. All rights reserved. (You may additionally publish this newsletter in its entirety with the following writer’s records with stay hyperlinks most effective.)

michael livian

Michael Livian – Combining Investing with Purpose and Fulfillment

The Private Equity Profits podcast with Cliff Locks Episode 001 Michael Livian The guest is Michael Livian, founder and CEO of LivianCo. an Investment and Wealth Management Company. Michael has over 20 years of experience in the financial services industry. He was the Chairman of the Executive Committee and Head of Asset Management at Safdie Investment Services Corp. (subsidiary of the Swiss private bank, Banque Safdie). Prior to this position he was a Managing Director at Speed Ventures, a primary pan-European private equity/VC firm. He also worked as an Associate Director for Bear Stearns & Co. in New York and in Italy with a special focus on fixed income and credit derivatives. He holds a summa cum-laude MSc degree in Economics from the University of Milan. Michael published several academic articles and books on quantitative finance, fixed income and equity valuation. He is a CFA charter holder, a member of the New York Society of Security Analysts (NYSSA) and the co-chairperson of the Private Wealth Management Committee at NYSSA. He lives in New York with his wife and three children.

Listen to this informative Private Equity Profits episode with Michael Livian about the growth of the alternative investments industry.

Here are some of the beneficial topics covered on this week’s show:

• How he helps clients achieve combining investing with purpose and fulfillment.

• The best percentage for time split between portfolio company analysis/operations and evaluation of new investment opportunities.

• Attributes that make a business a good candidate for a leveraged buyout.

• The typical capital structure prevalent in LBO transactions.

• Red flags you would look out for when assessing a potential investment opportunity.

Connect with Michael

Email: mlivian@livianco.com

Website: http://livianco.com

Phone: (212) 319 8900

Connect with Cliff Locks: https://www.investmentcapitalgrowth.com/

Michael is the founder and CEO of Livian & Co. He has over 20 years of experience in the financial services industry. He was the Chairman of the Executive Committee and Head of Asset Management at Safdie Investment Services Corp. (subsidiary of the Swiss private bank, Banque Safdie). Prior to this position he was a Managing Director at Speed Ventures, a primary pan-European private equity/VC firm. He also worked as an Associate Director for Bear Stearns & Co. in New York and in Italy with a special focus on fixed income and credit derivatives. He holds a summa cum-laude MSc degree in Economics from the University of Milan. HeI published several academic articles and books on quantitative finance, fixed income and equity valuation.He is a CFA : charterholder, a member of the New York Society of Security Analysts (NYSSA) and the co-chairperson of the Private Wealth Management Committee at NYSSA.

Listen and subscribe:

Interview Transcript:

Cliff Locks 1:05
Welcome to the private equity profit podcast. I’m Cliff Locks your host and with me today is Michael Livian, the founder and CEO of a lending company, an investment in wealth management company. Michael, tell us a bit about your background and how you got started.

Michael Livian 1:20
Hi Cliff, thank you for having me on your show. Very excited to be here today started, actually in a different country. I was born in the US but raised in Europe. That’s where I started my career. And I moved to the US about 20 years ago, I started working for a big Wall Street firm, and I was more of an academic. I published a book with Italian Publishing Company of Bloomberg. And I was working with universities, I was very involved in the fixed income space. And then I transitioned more to the venture capital and private equity space. And in 2004, I was hired to run the asset management of a Swiss private bank here in the United States. And after several years of being involved with wealth individuals in the asset management industry, I decided to start my own firm with some partners, but large caliber large family offices. And that’s how I got started. The idea was to create an innovative business that caters to the needs or modern needs of wealthy families and business owners. And since then it’s been a phenomenal journey journey.

Cliff Locks 2:34
Fantastic. I’m glad you’re helping a lot of family offices to be able to help their high net worth individuals that are part of their team. So I’m assuming you’re also doing multifamily offices, and then single family offices.

Michael Livian 2:48
Among others. Yes, so multifamily offices, single family offices, that large wealth individuals, that that’s my basic client,

Cliff Locks 2:59
How do you help your clients achieve combining investing with purpose and fulfillment?

Michael Livian 3:05
It’s I think, understanding what wealth is for for a wealthy individual or for wealthy family is it’s a multi pronged exercise. It’s it’s not only about the money and your returns, think the wealthier people get, and the more complex needs become. And the larger the families, the discourse is elevated more to what the values are, what the purpose of that family or that individual is in life, what the legacy that they want to leave behind them is. So we work through several assessments, and help our clients, not every client is a good candidate, but many clients, they really want to address those type of issues. And more and more what we are seeing is there is an alignment between the value values and purpose in life and also the way they want to invest their funds. And the So in other words, ESG is playing a role now.

Yeah, yes, g i think ESG is, it’s definitely I think it’s an acronym that has a big appeal on people, I think that it’s aligning the value. So ESG, it may be everything and nothing. It depends what you include and how you define history. But it’s really determining defining what the purpose is, you know, for that family or that individual and investing in a way that is consistent with that. So it’s different families have different views and different interests. And it’s a transition not everybody is like that some people are still really looking just at at rates of return. They’re not making an impact. But I think that the way I will look at this when we’ve been doing a lot of work and Following the research of fidelity and Beynon company, and having been discussing this for many years with a lot of professionals, what we see changing is it’s for those people that actually started the business in school. And if you think of the Mazda three, turn, you know that there’s a pyramid and the base of the pyramid are really basic needs, you know, shelter food, as you get more comfortable, and you fulfill and meet those needs, your your needs evolve, and there are different things that you’re looking for in life. And the same applies to wealth. And I think that the as we change what we do, as generations changing, what we’ve seen is that that if you survey, a baby boomer, or for those participants, so that the podcast that did not know that those individuals that were born right after World War Two, their needs are very different their views their values than the Gen Xers and Gen Y, or millennials, you know, or generations that were born after 1960, they, they have a different view of the world, they are more or less worried about their their basic needs.

They’re specially among wealthy people, that our clients, they’re more interested about finding purpose, having more balance in their life and worker and retiring and having plans in place and, and doing things that are meaningful in their life. So I think, as we evolve, you know, as a society, as an affluent society, these topics are going to become more and more relevant.

Cliff Locks 6:50
That’s very interesting. In other words, when you look at the, we have parents, they’ve been successful at this point, they have the next generations, which is their children. So if you look at the time and the quality that can be put together, where they’re spinning knowledge and education together between the parents and the children at this point, to understand their responsibilities, and the wealth that’s within the family that will continue as a legacy to go forward to be able to do good, and also to support, you know, the next generations at this point. So us actually spend time with the other generations, I mean, the children have that wealthy family at this point to help them carve a plan together and be part of the fabric of what makes the family. Yes,

Michael Livian 7:36
yes, yes, yes. Yes, a lot of the research that that that we have been reading is that that there is a positive correlation between happiness of individuals and the next generation, and having a sense of the history of the family and the heritage and the legacy and creating that bridge. It’s also a way to make everybody happier, you know, it’s like,

Cliff Locks 8:03
so the family dynamics, when they work together with one of your team members is actually addressed at that point, it actually becomes a healthier and happier ecosystem, let’s say within the family at that point. Quick question, what are some of the biggest challenges your clients are facing now?

Michael Livian 8:20
I mean, I think that at this specific point in time, obviously COVID as the gigantic challenge, I would say, for some people financially, I think even very wealthy individuals that are heavily exposed to certain areas of the real estate market, I think they are a little challenge. But for most people, I think it’s not even financial, it’s really the level of anxiety and fear, fear of the future and the, you know, questioning, you know, their their lifestyles, and where they’re gonna live, if they want to stay. I mean, we’ve seen a lot of people move around in the last year or so it’s like, people that were very deeply rooted in in a location, and they just overnight are uprooted. And they move to different states or, and so there is a lot of anxiety yet not. And, and I think that that’s probably today that the biggest issue, but I do anticipate that with the rollout of the vaccines, these will actually pass and I think we’ll hopefully we’re closer to the end than the beginning of this problem. And so that is kind of one of the main issue specific to the current circumstances. And then you have general issues, I think, our clientele there prime, they’re mostly professional business owners and entrepreneurs. And I think that the speed of the change that technology is bringing About his displacing a lot of people, a lot of it’s, it’s it has become increasingly more challenging whatever industry you’re in, to deal with the disruption that technology is bringing about. So that is also a big area of concern for our clients, the lifecycle of products, the life cycle of their specific industry is changing. And, and they need to adapt. And it’s, I don’t think that previous generations were faced with this issue. And then that’s another area where we actually converse with the, with our clients, very smart people, business owners, but that they’d like to hear from us what what we see in the marketplace, you know, we were deeply involved with the companies of all kinds and all sides, and we listen to their management calls and participate, you know, to a lot of conferences and get to know really what is happening in a lot of like, the most successful firms and we share some of the findings with our business and our owner clients

Cliff Locks 11:08
are very good. I sit on the board of directors of five companies on finding the same type of disruption that takes place at this point. Most of the companies are more entrepreneurial in their understanding is we have to disrupt ourselves at this point, before you get disrupted. What we’re finding some of the technology that’s out there in hydrogen, some medical appliances, like some of its, you know, many decades old, the technology, it’s had incremental increases, but not exponential type of increase in renewing what that engineering looks like inside those products. And we’re finding it’s the entrepreneurs that are disrupting these these organizations. But you brought up something very, very important, the conferences, maybe the zoom calls that are out there at this point in time is a way to get educated. And I think, to be proactive at this point.

Michael Livian 12:00
Yeah, I’m very optimistic about the future, I think, I do think that whatever is going on today, in the world, and with technology and digitization of almost every process offers an opportunity for people to improve and not to be displaced by technology, because I think that that, as humans, we’re always going to be superior and, and

Cliff Locks 12:29
so it’s just about educating ourselves and upgrading our knowledge and our skills. I think you’re brilliant, I think you laid that out very, very nicely the idea of the individual, and those that own the companies need to take the initiative to understand we’re going to need to re educate the workforce. Some of the manufacturing may have something called a kobach, meaning there’s a robot but the individuals working next to it, the robots doing a lot of the menial, repeatable tasks, but they can coexist together and someone’s going to have to program and keep an eye on in run those robots at that point, it’s probably a technician at that point, which will get paid more than somebody, you know, running on the line. So let me ask you, what does the growth of the alternative investment industry look like from your perspective?

Michael Livian 13:20
It’s a very, very, very good, an interesting question. First of all, I think that it is important to define the alternative investment space. I think that that. Again, I think it’s easy to put like a label on something. But what is an alternative? Is it real estate, venture capital, private equity, hedge funds, commodities? cryptocurrency, what what is it? That is included in in the definition? And I think that each subcategory of what you may define alternative investments, they have, certainly different paths in their evolution. I think that first of all, the fact that you’re in an environment where structurally interest rates are low, despite the short term gyrations that you may have had recently with the 10 year Treasury, you are still in a low interest rate environment and you are in an environment where valuations in the public markets are pretty high. So there is a very large demand for alternative assets in general. And I think that’s going to continue and I think it is going to evolve Having said that, I do believe that within the asset, alternative asset space, there are a lot of players that don’t really deserve to be there. In the end there are there’s going to be a pretty stronger so say Natural selection and evolution. And I think that that, specifically, let’s say, any person can start a hedge fund, you know, it’s like, but there’s not that many great hedge fund managers. I mean, it’s really very few are very large. So I do think that that the the compensation structure in some of the hedge funds is going to change. Okay, it has started to change, I think there’s gonna be more consolidation. And, and I think that there’s always going to be a big appeal. But I think it’s gonna look very hedge fund industry is gonna look very different in the future. I do think in the private capital markets, both private equity and private credit, you still have tremendous opportunities, in a way becoming also more liquid. You know, there are marketplaces where you can exchange physicians and loans and you have a lot of participants. And you may get higher rates still very highly of sub sectors of the alternative space. And then I can go on, but I think probably these are the broadest categories are solid ation in the hedge fund world. Still expansion in private equity, VC, private credit, as long as credit remains cheap and available, you’re not gonna have a lot of hiccups there. But again, private markets are heavily dependent on credit. And we are, I would say, in the expansionary phase for credit, but this is not going to last forever. So I think it’s important to be very wise, as an investor, where you’re when you’re approached the space,

Cliff Locks 16:36
recognizing there’s a pressure to put money to work in the five year private equity cycle, what industries or strategies do you think make the most sense right now,

Michael Livian 16:46
clearly, I think what we have seen in the last year is a strong demonstration healthcare, biotech and Life Sciences space. There are phenomenal opportunities, it’s, it’s an industry that still offers a lot of opportunities for extra returns or additional returns, because it’s a little bit behind the other industries, when it comes to de innovation other than the pharmaceutical sector in particular, or the life science or the biotech, but the healthcare sector as a whole, because it is heavily regulated. So it has not evolved as fast as a lot of other areas. So the technology there can really create a lot of incremental returns. And there’s a lot of opportunities there. I think that’s certainly a very important area. So if you think of the two areas that you have a lot of regulation that kind of slows down the evolution of an industry, there’s these two giant areas of healthcare and the financial sector. So I think they both are probably in the early cycles of a massive evolution. And in that offers, obviously opportunities for returns for investors. So it’s, it’s, I would say probably a little bit more between the VC and the private equity, not your classic private equity, leveraged buyout, I do think also, when it comes to the private equity, space, logistic and infrastructure space offers incredible opportunities. I think, again, in the US, the percentage of ecommerce in retail sales is still pretty small, compared to the entire pool of retail sales that are happening. And in I do think that the backbone of e commerce is really the logistic that’s so you know, storage facilities, and transportation. So those are kind of assets generally offer good cash flows, and they’re pretty stable, and they have potential good growth rates. And I think those are private equity investors, the ideal candidates, you know, you can level them up and increase your rates of return. So those are the main things that come to mind. But there’s obviously a lot of other areas of interest. I think it depends also on the on the style and appetite of the private equity operator.

Cliff Locks 19:09
Tell me a little bit, what credit ratios do you look at when assessing the financial health of a borrower.

Michael Livian 19:17
This plays an area of great interest for us, we look combination of purely quantitative metrics that we can pull from the balance sheets. And I think we have a very close relationship with the NYU professor or former professor at Altman, that is a dear personal friend of mine and developed the z score model. So we use his model with many other evolutions. There’s another academic by the name of Campbell, that has developed other tools. So they they give us a little bit a more holistic sense of the health of firm then obviously alongside those, those are, I think they give you a much better probability of default. But alongside those, what we use are more traditional metrics. So we use will be data ratios, that to EBIT ratios, debt to assets, debts to capital, obviously we normalize the cash flows, we look at the kind of averages over time we look at peers. So there’s a number of things that go into that. And most recently, we have not employed utilize this tools, yet, but we are working closely with some FinTech companies, they are doing a lot of interesting work, I think that they are providing their accounting solutions to companies. And they pull the data almost instantaneously from their accounting systems and from their bank accounts. And they can actually, in real time, look at the evolution and credit worthiness of the borrower. And they even lend to borrowers based on those metrics. And so there’s a lot of old school classic stuff that goes into the analysis of the credit analysis for a borrower or issuer. But there’s more and more exciting stuff that is also coming online now.

Cliff Locks 21:23
Very, very positive. And I’ve seen one of my companies is utilizing those lines of credit. In other words, we’re on walmart.com, they’re doing hundreds of 1000s of dollars a week in that line of credit was very, very important to be able to allow the continual growth in that particular market. So when Yes, they have access to our bank accounts, and they understand the cash flow that’s coming from Walmart into our accounts, and they lend against it. So it maps up very, very nicely. Michael, what are some of the red flags you would look out for when assessing a potential investment opportunity?

Michael Livian 21:56
red flags, I think that, first of all, what, what we have learned in after many years of dealing with borrowers companies and management and investments, is that probably the most important aspect that you want to look at when you evaluate a business or an opportunity is actually the industry and the industry dynamics. It’s not focusing on the specific product, or the management of the company. But the first thing that we would do to identify if there are red flags, we’re just going to look at the industry dynamic. How does this industry look like? in which direction? Is it going? Is it growing? I mean, how many participants are here? Is it prone to changes and disruptions are the companies that we’re looking at the re on top of their game, or they’re behind? So it’s not really a red flag, but that’s contextual, I mean, if an industry is going in the wrong direction, we’re not going to put money behind it. Now red flags is, first you start with the management. I mean, you want to have credible management that is honest, transparent, has the right incentives, communicates with investors, you know, sets proper goals and shows a track record of achievement when they fail to do that, or they’re not transparent, that is already too. And then you have a number of accounting metrics. You know, if you have big discrepancies between earnings and cash flows, that is typically a red flag for you. So I think it’s a, it’s not that difficult, but that, you know, there are tools that we have available at our disposal, when we look at the accounts, to see if things are off, you know, revenue recognition, discrepancy between cash flow and earnings ending on the specific industry, the working capital cycle starts to look off menu, you can start to pinpoint, but I think that that, before you look at the financials, you want to look at the business and the management. The financials are a consequence of what the management is in the business. It’s if you have poor management, low quality management. For us, it’s an awful red flag

Cliff Locks 24:10
for a very good, well seasoned team is very, very important to have consistent results and maybe serial exits, maybe they’ve built and sold a few companies. Let’s look at some of the value your fine team brings forth. In other words, we’ve got a high net worth individual, they probably have a business that they’re running at this point, you know, they are starting to get into their 50s 60s you know, they need to look at succession planning. You know, do I continue to prepare, you know, the company to be able to be sold? Am I going to turn the business over to maybe one of my children? Am I going to bring somebody from the outside to run the company. Tell me more about your process to be able to help these high net worth individuals make the strategic decisions they need to make.

Michael Livian 24:55
Look, I think this is a topic again that I have very close to my heart. Cause approached by some strategic buyers. And you know, we are in the business that generates a nice steady cash flow. And we go and ask the same questions to myself. I said, you know, what? Where do I stand? I mean, do I want to build this business for my children? Do I want to pass it on to them? I mean, what’s the endgame and it’s a in I got involved institute that is known as the exit planning Institute. And I found out there is a science behind exit planning, building value for a firm for business owners, me it is medium sized, small sized business owners. And and I came to the realization a very, very large chunk of the businesses in the United States are owned by by private individuals, and that they are in their early 60s, almost, I would say, 75 80%, I don’t remember exactly the statistics, they expressed an interest to retire within the next 10 years. But if you ask them, if they do have a plan, or a written plan, again, 80% of them, they don’t have a plan, they just have an idea and the goal. And also, what were the statistics show is, most of those businesses, they end up not consuming a real transition, you know, they actually have problems before either there’s a disability, there’s some Distress, there’s an issue with the family, they, so they never, the transition does not come to fruition, we really prepared ourselves to work with clients using the science behind the transition planning, and that the numbers and the methodology to make this successful, and to also make it an enjoyable experience for the business owner, because also i’m quoting, Price Waterhouse, they did a survey of business owners that sold their business within 12 months of the sale. And a very large number of those business owners, they say they profoundly regret selling that regret selling the business, transitioning out of the business, whether it’s an external transition, it’s a sale or pass it on passing the business on to a partner or to the children, it requires three things requires emotional preparation, right? I think people do not realize that you know, what, you spend a lifetime building a business, and you’re been running every day, and you know, getting excited dealing with problems, clients making money, and all of a sudden you sell this I mean, your purpose is gone. You are your business if you’re a business owner. So there is some preparation that goes into that, you know, the financial component. I think that that many business owners are not aware of the structure of the transactions, how much they may get out of the transaction, the tax implications, the state implications. So all of these things need to be handled and prepared before you transition not while you’re transitioning. And lastly, I think the majority of business owners don’t really know what that they have an idea of what the value of their businesses, right, but they do not know really how much they can increase the value of their business and how much they can get in a transaction. So these three prongs are the foundations of a plan.

Cliff Locks 28:23
I think that’s very, very important. I mean, I’ve had the privilege of building three companies with successful exits, and it was a plan and there were advisors involved, find folks like yourself that helped guide me through that process. And it was a privilege to work with them. It was emotional. My last transaction, I sold the company to KKR, which is a large venture company company and became part of a fortune 500 Company, which was something new to me versus being entrepreneurial. And then we had the ability to add additional assets. And when we sold the company, again for 1.2 billion in cash. So when you look at things, it’s a process for the entrepreneur, and then the opportunity to do you want to stay with the acquiring company for a period of time. In my case, I stayed for 18 months contractually, and then go on and do something different the tax implications. Those were very, very large checks that had to get written and they need to get planned for.

Michael Livian 29:10
Absolutely, you’re absolutely right. 100%. Right. I think that what typically happens is that when you come to the deal table, the seller just feels very frustrated and pulls out because they just didn’t realize that most transactions, you have an urn out, you have sellers financing, you have taxes, you have commissions, if you do acid sale, you may be penalized and they get very frustrated and they boys up to the point that they may go to the table when they need to sign and you just decide to take a walk and live the negotiation in the deal. So

Cliff Locks 29:46
very interesting. Yeah, I’m on the nother one. Now I’m working with young people and we’re doing the acquiring side and we’re finding ability to stay very friendly with the seller and understand what their needs are. You bring up Something very, very important. See this on your website, know your gaps, you know, the three numbers you should know and manage to achieve your goal that lays out a very positive scenario. And I’d like to go into depth with a little bit from yourself, where this conversation really needs to happen with the seller at this point, because you don’t want buyer, you know, remorse, let’s say, and the seller remorse you don’t want having these conversations where the funds are going to go and understanding the period of time for the transition between the seller and the buyer. And maybe the seller becomes one of the board members, maybe they leave some equity in the company, understanding each other’s needs, I think can allow that transaction to flourish. So tell me more about that. No, you get

Michael Livian 30:43
I think, as a very successful business person yourself, you know, how the mind of, of a business owner works, I think that you need to always simplify things have clear numbers, clear things in your mind, that’s really how we need to have, we cannot deal with that with uncertainty and confusion, our mind always wants to have certainty, even if it’s the wrong certainty, facilitate the process of a business owner transitioning, I think there are three fundamental gaps that they should really have straight in front of their eyes all the time than they can be numerically calculated. They’re extremely important. The first one is what we call the wealth gap. So the wealth gap is essentially what financial planners use all the time is, how much money do I need to live my life the way I want to live it pretty easy to calculate with some trial simulations.

The second component of that calculation is how much do I have today that is liquid and investable, that can get me there, the vast majority of the times there’s a giant gap between the two specially for business owners element that was going to fill in that gap is the value of the business. So essentially, if you want to get to a point where you’re comfortable, and you know that you can really go on with your life and do whatever you want in peace, you need to make sure that that gap is filled by the value of your business after tax after transaction costs, if you do an exit, and that’s really what you are working towards. Now, this leads to the second part, which is what is the value of the business? Is it sufficient? Can they grow it enough to act as a plug to kind of close that wealth gap? So there’s two components that you want to evaluate? One is a profit gap. And then if you have a value gap, so what are these gaps? Today?

Luckily, we have a lot of tools and technology in databases, also in the private markets, as opposed to the public markets, where you can benchmark your business. So the income gap, essentially, is a measure of the difference between if you take the best in class company in your specific sector, and yourself, what is your EBITDA margin, or adjusted or recast the beta, you want to make sure that in the private business world that you need to make some adjustments is not like in the public markets. So you need to add back certain numbers remove them, so you need to fix calculation for your EBITDA. But what you’re looking at is, what is my EBITDA margin on the revenues that they have? And what is the EBITDA margin of the best in class company. And then I think part of the exercise is to see what levers Do I have to increase the profitability of my business, that’s kind of part of the exercise of accelerating buildup in value in your business. But it’s, it’s a number that you should know as, as I think that that when you have numbers in front of you, it gives you a different motivation. It’s not an idea, it’s not a concept, you can compare. So you know what my EBITDA margin is, like 15% the best in class companies, their EBITDA is 25%, maybe I can increase my profitability by 5% By doing this, this this this And lastly, is your your value gap is essentially the value of the best in class company in the same sector. Same type of business, if you apply a multiple to their EBITDA. And if you apply a multiple to your EBITDA, you can calculate the difference using the same level of sales. So if you have best in class margins, and best in class multiples, and you have your multiple and your margins, that gives you an idea of how much value creation you could aspire to achieve. get to that point, ultimately, if there’s sufficient money to close your wealth gap.

So this these three elements together, they work as a foundation to make to build a plan. They give you the right motivation, but also the Right tools, then to go deeper into some assessment and analysis at the business level as a personal finance level, and see, you know how you can adjust, I think it’s very important to start with simple, clean, good numbers. I think when business owners see these things, they’re Wow. Alright, now, I know what I need to do. And let’s work on this. And let’s work and there’s a whole process behind this, build all the different plans to close those value gaps and those income gaps and those wealth gaps.

Cliff Locks 35:32
Very, very comprehensive. I mean, you bring forth a lot of wealth of knowledge for that high net worth individual to really understand a vision of what success looks like, you know, as they continue to age and they got to make some decisions with their business, it would be very, very positive for our listeners to partner with you, Michael, what do you love about what you do? And what do you find most rewarding? personally?

Michael Livian 35:54
It’s a very good question. There’s two things that they’re always loved. And they think that’s why I went into this profession, I have a deeper intellectual curiosity. I like numbers, I like concepts, ideas, businesses, I like studying and researching. If I if my, my family makes fun of me, they say should be an academic, you know, it’s I should be teaching stuff. Because I really love learning. And I think being in the finance sector, it allows me to learn everyday more. I mean, there’s so much we can learn on the quantitative side, on the analytical side, and the research side, on the tax side, there’s so much you continuously learn and learn and learn. And I really enjoyed and I can share it obviously, with with my clients. So this is one thing that I like, really makes me happy that because of person I am, I really get enormous satisfaction when I can help people and I do something meaningful for them that and we have all sorts of people, all sorts of clients, we do get the often people will make a big change in their life very happy. And they’re very grateful. The reward that they get from that is priceless. It’s not a monetary reward. It’s like, you know, I feel like I really did accomplish something, you know, somebody that had some issues, and they need to fix things. And they had that. And they’re just grateful, you know, that I help them out, or we help them out as a team. I’m

Cliff Locks 37:12
not alone. I see you and your team cares about their investor. Now with COVID-19. Some of the economic disruptions tell our listeners about the program that provides an objective second opinion, from your trusted and professional team are hurt. There’s no fees, no stress, no obligations,

Michael Livian 37:28
things now are a little bit better. And obviously, I’m very happy that got out of the stressful times that we experienced at the beginning of COVID. For many people, this was just the catastrophic event that came out of nowhere, I think it was the economy was doing perfectly fine. Everything was doing perfectly fine. All of a sudden, you are faced with issues and problems that seem insurmountable. You cannot walk out of your house, you cannot walk out of your apartment, you think you’re extremely wealthy, because you you own a nice office building downtown, and all of a sudden you don’t have tenants. You have a hotel, and you know, they forced you to shut it down. A lot of people, their life changed overnight. We offered early days, our services for free to not all our services, but at least an initial review and assessment and financial situation of some of our clients. We offer them a free consultation to see where they stood, how they were invested if they had the proper investment plans, who are benefiting from all of the things that our government has been extending to people. So we just wanted to assist people.

Cliff Locks 38:40
I truly appreciate you spending this quality educational time with our listeners today. Michael, it is my pleasure, Cliff. Michael, can I share your contact information with our listeners, please? Yeah, absolutely. You can reach Michael Levin. His email is at m Levin at Levin co.com Lubin co comm is spelled Li ve i a n co.co m that’s Li ve i a n co.com and you can also reach Michael at 212-319-8900. Again, Michael’s phone number is 212-319-8900 Thank you to our listeners. I look forward to being back with you shortly for another episode of the private equity profits podcast. The show has been produced by market domination LLC. I’ll see you next time. This is Cliff Fox