Preferred Return in Private Equity

Preferred Return in Private Equity

Preferred Return Private Equity Preferred return is the part of the distribution waterfall and it gets calculated on the Invested amount based on no. of days until …

What is Preferred Return?

Preferred Return, often called ‘pref’, is a minimum return that Limited Partners in a fund must receive before any carried interest can be distributed to General Partners. A preferred return is expressed as an annual rate of return and can be thought of as the minimum expected return for the investment.

Limited Partners will receive 100% of their gross distributions until they have reached a certain rate of return on their investment in the fund. Once this rate of return has been met, General Partners will start to earn carried interest.

How is Preferred Return calculated?

Each Fund’s Preferred Return calculations are defined by the Limited Partnership Agreement that governs the fund. Fund’s calculations can vary in several ways. The most common variations are in the compounding periods of the preferred return rate, and the method for calculating elapsed time between periods.

For example, Fund A might specify that preferred return on any given capital call starts accruing when the call is funded and stop accruing when the applicable distribution of preferred return is made. Fund B might specify that for preferred return calculation purposes, any capital call or distribution is said to have taken place on the last day of the calendar month in which the capital call or distribution occurred. Now imagine a scenario where both Funds call capital on January 1, 2020 and distribute proceeds on December 31, 2020. In this scenario, Fund A investors are receiving preferred return based on 365 days of accrual, while Fund B investors are only receiving 335 days of accrual since the capital call is considered on the last day of the month.


Investor A contributes $1MM into Real Estate Fund 1, LLC on December 31st, 2020. On December 31st, 2021, Real Estate Fund 1, LLC announces a distribution. Investor A’s gross share of the distributable proceeds is $2MM. Assuming the following structure, what Investor A’s preferred return, and total distributions?

Private Equity Post Covid in the US and in Brazil, Webinar

Private Equity Post Covid in the US and in Brazil, Webinar

This Private Equity talk details the view of the industry in today’s world. The event focuses on the economic recovery in the US, from a macro and Private Equity …

Martin Saenz

Martin Saenz -Managing Risk In The Secondary Mortgage Market

In this episode Cliff and Martin Saenz discuss Managing Risk In The Secondary Mortgage Market.

Martin Saenz is Managing Partner at BeQuest Funds, and a best-selling author. Martin brings, social good, into smart investing. Renowned as a thought leader, in the mortgage note investment industry, throughout an extensive and accomplished career, Martin has demonstrated a proven ability to grow asset values, income, and knowledge not just for his company, but for his investors, borrows, proteges, and readers as well.

Listen to Cliff and martin talk about:

  • Note investing,
  • The risks of note investing.
  • Martin’s process of finding or identifying investment opportunities..
  • The percentage of risk that is imposed by foreclosure.
  • What happens if, the economy turns down.
  • . Running startups in this sector.

and more.


Cliff Locks 0:02
Welcome to the private equity profits podcast. I’m Cliff locks your hosts and with me today is Martin signs, Managing Partner bequests funds and a best selling author. Martin brings social good into Smart Investing are renowned as a thought leader in the mortgage note investment industry. throughout an extensive and accomplished career, Martin has demonstrated a proven ability to grow asset values, income knowledge, and not just for his company, but for his investors, borrowers protegees and readers as well. Welcome Morton, thank you so much for taking time to talk with me. Let’s start at the beginning. Tell me how you got started and what attracted you to private equity?

Martin Saenz 0:41
Sure, it kind of all started when I got out of business school with my MBA 2001. So I landed a corporate job in consulting, I was in corporate America for a few years, until I got fired. And that was probably the best thing that ever happened to me, because it made me realize that that the corporate America was not for me, it wasn’t what I thought it was, it never resonated with me. So from there, through a series of reading business books and trying to figure out what type of business to launch, I started a small business, which is how most people come in to the to the business community, they launched a small business for my wife and myself that small business was a federal government contracting company that provided museum exhibit display displays. For the federal government nationwide, what I learned from business ownership over the years was that it’s brutal. And, you know, making payroll, the day of, you know, paying bills late, you know, just trying to survive, and while working 100 hour weeks was it’s just it weighs on you. So I didn’t find that freedom that I was looking for. So I turned to landlording. And my wife and I, we started accumulating properties in oh eight commercial and residential, what I found with landlording, and we still own the properties and manage them today. But what I found is, it’s a great annuity play, it’s great as you’re paying down the mortgages, with the rents that are being paid. And you’ll ultimately have a property you can sell with seller financing and make all these great creative moves on the back end. But in terms of cash flow, that sustainable is meet one’s financial aspirations. It wasn’t there, the connection wasn’t made. So from there in 2013, my wife and I, we sold our company kept our properties and I made a decision, I became more spiritual, I became connected with God, I went on a mission to say I need to, I need to create a business opportunity that focuses on servicing others so enough like about chasing the dollar, making x, y, z, and you know, having this material possessions, it was just about Let me serve the most amount of people and something good is gonna come out as a result of that financially and otherwise. And so that’s how I stumbled upon the mortgage note industry. I started learning about it because I did have a real estate background. So I learned about the mortgage side, which is the flip side of the real estate coin, I started acquiring distressed mortgage notes on properties whereby the borrower had not made a payment in four or five plus years. These are mortgages. And yes, these mortgages exist, more than most people know in the secondary mortgage market space. And I just started acquiring these mortgage loans and learning about how to work them out. I’d say Initially, the first lesson I learned is that is when you buy a mortgage loan that’s distressed, you know, the borrower hasn’t made the payment, you’re exiting two ways. Either you’re exiting through the property, and you are going through foreclosure taking possession of the property, or working out a deed in lieu whereby the borrower sent signs over the property ownership rights to you. Or you’re exiting through the bar in the form of a loan modification or reinstatement or pay off something to that effect. I learned early on that it was more in line with what my principles were to exit through the bar, whereby I would work with the borrower and create solutions that help keep them in their homes while making a profit for myself. And that’s really how it launched.

Cliff Locks 4:39
I’m proud of you know, non performing assets are a challenge, you know, Ario the banks. At this point you’re stepping in as a benevolent, but business person to help that individual borrower at that point to find a solution, a long t erm solution for them and their family at this point. Tell me about bequest funds.

Martin Saenz 4:59

bequest funds is a 506 c reg D Income Fund that houses a portfolio of seasoned performing mortgages through that we receive borrower payments in on a monthly basis. And we in turn pay our investors on a monthly basis. So it’s an income fun. But prior to explaining bequest, or even just touching on it, it’s really important, I believe, for the audience to understand the roots like how I worked up to taking on requests and launching that in March of last year, through the course of the years I had acquired and personally worked out whereby I talked to the bars I created loan agreements, you know, I worked out short sales and or discounted pay offs and everything else with over 1000 loans. So for myself, it’s on the fix and flip side someone said Well, I I fixed and flipped 1000 homes. So it’s really through the course of of that growth, and really kind of going through and really ironing out my due diligence process. I got to a point and I’m still a large buyer of distress paper. Don’t Don’t get me like we purchased 25 million in distress paper in the past 18 months, so we’re still a large buyer of it. With that said, my roots come from helping people that need to be helped stay in their homes, while making a profit for myself. Now, bequest funds is on the other side of the fence, we have a portfolio of bars that are making their payments on a monthly basis. We only purchase performing mortgages that go into the Income Fund. So it’s more of a management and daily monitoring process. So that we can be reactive if we have to do any outreach and connect with with folks and help them if there have any special occurrences that’s that’s really what bequests funds is about. So it really touches on the risk side, my background touch touches on how we mitigate risk on the bequest fund side because I’m used to the rough side of the fence so to speak.

Cliff Locks 7:20
Note investing can mean different things. Tell me what it means to you.

Martin Saenz 7:25
Sure, what’s important is to talk about the secondary mortgage market space when you’re talking about note investing, someone just pictures, a person that wants to go buy a home, become a homeowner go into a bank or some lending institution, and they apply for a mortgage. And that mortgage application goes through an underwriting process. And from that a promissory note and a deed of trust or mortgage is drafted upon approval, of course. And so the promissory note says ay ay ay so and so Joe Smith promised to borrow this money and pay it back given this certain set of terms. And the deed of trust or mortgage is the document that ties that promise to the property in the form of collateral collateralizing that that promise and so what happens is, after that mortgages originated,

there’s a pool of them that will sit with that originator or will sit with some company they sell it to and a portion of those those loans in the pool will become defaulted. Something happens in a borrower’s life.

That is typically deals with love a divorce happens, loss of job underemployment or health. Those are really what we hear a lot what we hear most often. So something happens in someone’s life a hiccup and they stop paying their mortgage. And so what the bank does, or lending institution, they will bundle those defaulted mortgage loans into a tranche and they’ll sell it into the secondary mortgage market space, which is similar to a flea market, whereby you have hedge funds and lenders in that are buying and selling these distressed mortgage loans. Now there’s also performing mortgage loans that the same things occurring but in this case, we’re just focusing on the distress distress mortgage when you take a hedge fund that will buy a pool of these defaulted mortgage loans, they will make contact with the bar. Now mind you, it may be a few years later, the person got remarried, the health got better, they got their job back and something happened on the positive side. And they they got reestablished the bar got reestablished. So if the hedge fund has a good operation, then they will work out payment terms with the bar because they bought it at a discount, mind you they may have paid 20 cents 40 cents on the dollar.

For this paper, so there’s room to be creative and to be compassionate. If a hedge fund operates as such, then they can create a payment plan that works with the disposable income at the bar. And borrowers will actually be appreciative based on the relationship and based on the understanding that they’ll make their payments on time. Once those payments become seasoned over time, a company like mine, which is bequest funds, will go out and buy those performing mortgages in a performing state and place them in our fund. Which, which is why we consider bequest funds, a low risk, high yield fund.

Cliff Locks 10:43
That leads me to my next question is how risky is note investing?

Martin Saenz 10:49
it? Gosh, I mean, I could answer that a few ways. But I’ll say it is as risky as someone’s knowledge level. what’s what’s fascinating, and I’ll clarify that in just a second. But what’s fascinating is that the mortgage note industry

deals with money. I deal with money all day long, 10, big calculator, you know, calculator here, Excel spreadsheet, there is numbers all day long. However, that’s actually probably, if there’s if there’s a list of 10, things that are critical and the mortgage note space for success. That’s probably number eight. There’s so many other factors. The first and this was in my, in my book that I wrote two years ago, note investing fundamentals, where I where I stated deal flow is king. in this industry, I can’t speak for other industries, I can only speak for the industry that kind of bleed for and that is deal flow is critical. So relationships with sellers and having a thorough underwriting process by which you vet assets, having a professionalized acquisition process where, where you’re taking down deals, and you’re doing what you say 100% of the time, and then having a compassionate, yet very thorough Asset Management Division, where they’re making contact, and they’re making, you know, striking deals and arrangements with the bars, so that cash flows created. So the more someone has a business setup, the more they mitigate risk. And the less they have it set up to that extent, the more that there’s risky scenarios that will take place.

Cliff Locks 12:35
What is your process of finding and identifying inves tment opportunities,

Martin Saenz 12:39
I say with humility today, I’m going to speak to how it was a few years ago. But how it is today is that we have relationships that are so close to hedge funds that are so close to major lending institutions that were fed on a regular basis. So we receive in distressed debt on a regular basis on that side of the fence we receive in opportunities for performing assets. Now, that may change, nobody’s taking it for granted. We’re very respectful and thankful for that relationship, however, all speak for for individuals that may not be at that point, because that’s kind of best foot put in and

I wrote about this. And note investing made easier, which was my first book, and I’m not trying to plug my books, I’m just, it’s just what’s coming to mind. But I wrote about a sourcing lifecycle that needs to occur within the node space. First part of that source lifecycle phase deals with identity creation. When people come in our space, and I see it quite often, they go right to, Hey, I got a million dollars in the bank, you know, I’m a big real estate buying whole guy, I’m just going to go delve into notes, because I just probably have to shift a few gears and then I’ll be rocking and rolling. No identity is so critically important. Yet, it’s so often overlooked, you need to be seen in the space, as someone who is low risk, so meone who’s very competent, and someone who’s going to perform because if you don’t, then you’re risky to me, I’m not going to do business with you, if you’re going to go out and do something foolish or do something, you know, because you don’t know. And then you’re going to go catch me up in a bad way, some way down the road. So I have to know that you have a good process in place that you are fully focused on this industry and you know what you’re doing. So identity is about how you come off to other people how that’s perceived. And from that point, it goes into a whole marketing and branding effort. Because you have the identity now you have to go and portray that amplify that that message to the world to the note world. And from there. There’s a daily outreach, outreach math method that that I that we employ here, deals with CRM system, we have an outreach matrix.

W hich gives us metrics around our outreach approach. So there’s a daily sourcing effort that needs to occur when you first come in this space, and probably just needs to occur in general throughout your longevity in the space. The ultimate result is you’ll see deal flow, you have to transact on the deal flow, because none of it matters if you’re not transacting, because the industry is so small and tight knit, that if you’re not transacting, then you’re dead in the water. So from from a from a business perspective, there’s someone that comes to mind came in the business. He had $10 million liquid, he thought, you know, hey, I’m a big gorilla. I got money in the bank, I had the successful business, sent the message to the world, show me your deals, number of players showed them deals, he started nitpicking because he didn’t really know he didn’t have a good process set up. So he just turned people off. Nobody cares that you have $10 million in the bank money is so abundant in our into so much about your identity and so much about how professional you are from from a sourcing perspective. I like the word professionalism as what you bring into the industry. What percentage of risk is imposed by foreclosure foreclosure, it’s really on a state by state basis at this point. So COVID hit and moratoriums got issued around the country, and then the cares act got put in put into effect by the Senate. So if you just take the cares act, you know, from from a high level perspective, it sets measures in place for borrowers being able to obtain forbearance agreements with the lenders, however, what’s not was not stated is that the cares act is specific to government backed mortgages. So when you buy mortgages in the secondary space, they’re privately owned. So they’re not government backed. So actually, the care were exempt, as in it as a industry as a sector from the cares act. Now, with that said, We’re extremely conscious of what you know, what the cares act mandating expectations, you know, the whole PR end of it. So with that said, when a borrower calls in to us, and they say, Hey, we need we need based on COVID, we’re going to ask them a series of questions, ask them to provide documentation, because we can we found through COVID was that our our collectability percentage with our performing assets all over all our entities, was has been about a steady 92%. So 92% and $92 of every $100 is collected on a monthly basis. Now mind you, you know, we purchase these at a discount our collective portfolio and request sits at a 61% investment to value we have coverage, what when COVID hit, we anticipated that 92% to go down to 75%. We were like, you know, let’s plan for it. We went went from like a daily monitoring of our assets to like, hourly, we were like on everything Code Red. We were like, okay, we’re gonna get to 75. But how do we minimize how do we make it 80% which would be a victory, what we found is we were having communications with bars, and we were asking for documentation, we found that a majority of the bars didn’t have a COVID related need for forbearance. So it was just they heard it in the news.

You know, cousin told them Whatever the case, and so they just continued pain based on that. We maintained, you know, where the 96% collected today, we were about 93% all of last year. So we were above our 92% 90% the industry average industry standard rather, we’re we’ve been fine from a collectability standpoint. Now with that said there’s certain states that there are still foreclosure moratoriums in place. We have to be mindful of that. However, I’m going to say this and because if you’re going to if you would ask me Hey, what do you what are you most proud of this would probably be that nugget. We foreclose on our distressed debt side, less than 2% of our portfolio. I’m talking mortgages that have not paid in four or five years.

We foreclose so we’d go through the foreclosure take the take the property to auction, sell it to a third party or take it back Oreo less than 2% of the time. That is insane.

That is insane. It and that speaks to how conscious we are in diligent we are with our team members to go and work out arrangements with the bars to keep in line with our mission of keeping them in their homes. That is how significant it is to us as a company.

And I’l l tell you this too. I know I’m like soapbox, right? I’m gonna say this because this is like very passionate about this, it is sometimes more profitable to take back the property.

Because you get instant cash flow instant capital gains. And there’s equity in the property and you know, equity spikes in the country. So on, we are here for the cash flow, and we’re here to the for the cash flow being paid by the bar that are helping the community. I mean, that’s really important.

Cliff Locks 20:33

What happens if the economy turns down? I mean, you COVID was definitely an example of that. How do you handle that?

Martin Saenz 20:42
So when the economy when there’s a downturn, it generally means there’s more supply of inventory, and prices go down? Now, that’s not to be say, like, Well, let me be naive. Let me you know, pray for a downturn, any of that. But the fact of the matter is, our end secondary space increases with inventory, based on a market turned down. So right now we’re seeing a shortage of product in our industry shortage of product in prices have skyrocketed, but that’s everywhere, right. That’s across all asset lines, probably. But yeah, that’s that’s the anticipation the downturn occurs, and they’ll just be more more debt to be purchased.

Cliff Locks 21:29
What’s your advice for people investing in this sector? And what do you tell them to do before they make an investment,

Martin Saenz 21:36
it depends on the investment. So if they’re going to invest in themselves, start a note business and to create a better life or to create supplemental income or something to that effect, then they need to learn the fundamentals, they need to spend more time on education, there’s heavy compliance in our industry, there is there’s a lot of nuances, a lot of pitfalls, a lot of compliance, I’ll just say it deserves saying a second time, you know, one needs to be set up as a no business. It’s, it used to be when I started, where you could be a solopreneur, and be a one person show and do it all.

But those days are no more because there’s too much complexity with it. There’s licensed services you’re using, there’s compliance, there’s licensing involved, there’s debt collection, courses, there’s just a whole plethora of activity that’s going on. And you’ll never scale. And when you don’t scale your burn up and die from a perspective of someone that wants to just invest, set it and forget it, then be quest funds. We have, we pay, we have a few classes. Actually, as of today, we are attorney blessed the new ppm with two class additional classes. So I’m really stoked before we just had an 8% return paid monthly with a one year lock in period. Now we have that plus a 9% return with a four year lock in period and a 6% return with a six month lock in period. So we have more more options for individuals, you can go park your money, and just receive monthly income or let it compound at an increased interest rate. So there’s a few different ways that one can invest. There’s also joint venturing that goes on. But you have to be very careful because with sec laws, I mean to be a passive investor investing with an active investor, you know if sec could consider that a security. So that’s being sold to that passive investor. So you just have to be mindful of that and have attorneys review all documents, especially as it relates to joint venturing. Compliance is key.

Cliff Locks 23:52
Do you have any advice for people that are running startups in the sector?

Martin Saenz 23:56
Yes, you should only invest in assets or start businesses that produce cash flow, and that you have control over and I learned it from doing the opposite control. I’ll give you an example. My wife and I, when we started our federal government contracting company, we were an ant. I mean, we probably weren’t at when we sold the company to later, bigger and however that end customer, ie the Pentagon and other places we sold to they were our customer. Now it took us years to get there and we bled out to get the customers. They were our customers. We had control over the customer request funds. We get asked every week to be on someone’s platform. Oh let me get you set up on fidelity’s platform, let me get you set up on this platform. No thank you. We will build our own sales team and we will get to where we need to go that customer is going to be our customer. And that’s very important to us. Because once you just start playing with the margins and paying fees here and there that thatcreates risk within our fund. And we’re operating on a nice margin, where we’re very comfortable. And we’re able to recapitalize and purchase assets upon payoffs and whatnot. And so we don’t want to jeopardize the safety of our fund. The other thing is that it’s got to produce cash flow. So many people invest in assets, for appreciation, and that’s nice. But appreciation doesn’t pay for groceries, it doesn’t pay the m ortgage.

Cliff Locks 25:27
Well, so I appreciate where you’re coming from them. For your fund, what’s your investment thesis? what exactly you’re looking for?

Martin Saenz 25:36
I wrote another shameless plug, I My apologies, Cliff, I wrote a book last year during the pandemic called cash flow dojo, build your home on multiple streams of income, the whole the whole point of inspiration. And this is coming from someone you know, I have, I have several books out, I get royalties, I get I mentor, some people, I have hundreds of performing notes that pay me every month. So I’m coming from a place that receives hundreds of streams of income per month. My whole thesis was for the book is that yes, I people will say you can’t live off a single income, that’s outdated, right? That’s 1970s, the husband works and the wife stays home. I’m saying that you can’t live off dual income. Now. That’s dangerous. It’s not that it’s not a secret for the wealthy to say, hey, you need dozen streams of income, it’s mandatory for the middle class, in today’s market, today’s world that you need, if you are going to provide for your family, husband, wife, whomever, you need to ensure that multiple streams of income are coming into your household. And that’s the whole book. And that’s what I believe with request from the bottom of my heart. It is it is something I have my own money in there. I have my partner Sean has his own money. And so we launched it, we put our money, because who am I to tell you come to request when I haven’t put a penny Sean and I put a million bucks in, I mean, we to kick it off. So we have money and we have skin in the game. And so that would be the other thing. Don’t don’t invest, anybody who asks you to invest, ask them how much they’ve invested themselves, I think that’s critic, the whole idea of of one needs, one can u se a fun like bequest to bring additional streams of income to themselves.

Cliff Locks 27:27
I think you’ve got a very, very good message, you know, I’m impressed the idea of the multi streams of income, it’s something I share with my clients on a global level, I hope our youth will look at what you’re sharing at this point, because they have time value that can advance what they’re looking to do, buy your books and learn, you know, from the knowledge, you paid your dues. You’ve scaled a few companies at this point in time and you bring forth a very easy program in place, you know, through your funds, to be able to take that knowledge that’s already been perfected, and actually earn a very handsome return. So I want to compliment you on that.

Martin Saenz 28:04
Thank you.

Cliff Locks 28:05
What are some of the challenges you face

Martin Saenz 28:09
noise the noise out there it’s it’s brutal. I mean, I’m here in Sarasota, Florida, I’m in a in a skies building right across street from the Marina, it’s, it’s the most beautiful, it’s probably the most beautiful place you could ever see. I mean, I’ve water in every direction, in this buildings full with financial planners in financial firms. And, and I’m not knocking anyone, everyone has their own angle and their own their own thing going on. However, I’m competing against so much noise in this industry. And I believe in the heart, my heart of hearts that you know, we have a good product that can help deliver cash flow to to anybody who’s willing to invest with us. And so I have to fight through the Apple stock. Is that this the bitcoins at that? Yeah, it’s tough.

Cliff Locks 29:04
When you bring something that’s unique, it’s consistent cash flow on a month to month basis, backed by real assets.

Martin Saenz 29:11
Someone told me this week, someone told me this week, it’s boring, and I wanted to kiss them on the cheek.That’s, I’m like I am that’s us, we are boring.

Cliff Locks 29:24
How or why is keeping homeowners in their home the most profitable scenario?

Martin Saenz 29:30
Well, for one, it’ll, we never modify alone. And we never purchase a loan that’s not fully amortized. So that goes to the core of my belief that the homeowner should always have an opportunity to fully pay off their home and have it owned free and clear for themselves so they could have better retirement for themselves down the road. So for one, it’s just the right thing to do. I mean, we saw that oh, you know, mid 2000s. All the nonsense. The Ninja loans and you know, arms adjust after a one year and all this nonsense in which is what created a lot of you know where we are today financially from the borrower’s perspective. So the more that we are concerned or we are more, we are more considerate to what what our borrowers up against, We treat our borrower as a customer. That’s, that’s our mantra here. So so they’re treated like gold, because they’re paying us cash flow, they’re letting us ring the register. So we need to treat them with the utmost respect. So having that focus in what is in their best interest paying off that mortgage. Now, what happens as a result of helping them pay off their home and having a free and clear monthly streams of income for decades, perfect.I get this no other way to put it.

Cliff Locks 30:53
What are the benefits of individual notes versus a pooled note investments.

Martin Saenz 30:59
So it’s a portfolio game, you know, you’re gonna buy, it’s kind of different. When when you’re talking about performing mortgages, you’re talking about request funds, you know, we can we can do a one off, it uses our whole acquisition process and team to buy one loan. So we’re having you know, economies of scale when we buy pools. So from that perspective, we always want to buy pools, we could use our system to buy one note. But it’s more advantageous to focus on buying 15 notes at a time, which is, which is normal for us is like 30 to 70 loans performing mortgages at a time now from a distressed debt standpoint, you never know how the end results gonna play out. So you buy that you haven’t spoken to the homeowner for five years, you don’t know what it is they you know, are they going to drag you down a long road that’s going to be costly? Or are they going to go and refi you out in your cash out at par? You know, you just don’t know till it plays out. So buying and pools is almost mandatory from a non performing purchase perspective.

Cliff Locks 32:09
The COVID cause the note buying industry to contract.

Martin Saenz 32:17
No, no, it’s um, I mean, when you’re when you reference the mortgage note industry, my thought goes to supply and profitability. So from a supply standpoint, supply has been dwindling consistently over the past five years. So we’re still good we have access to deal flow. But on the retail side, they they have they have bear the brunt of all this the most there’s a shortage from retail buyers that buy the one offs, the mom and pop investors, that kind of thing. So So from a supply standpoint, COVID probably accelerated it, because you probably had more hedge funds that said, Well, let me sit on the paper and not sell it as a fire sale. And just see how it plays out plus equity spikes. payoffs are more prevalent in today’s world. Now from a profitability standpoint, you’re paying more for the asset. However, it’s you have more equity coverage back in the asset. So risk is minimized. So you’re paying, you’re paying more, but you’re also getting more value. So I’d say that profitability still there. However, what COVID has done, if any, has just allowed for hedge funds to maintain deal flow upstream, and not let it trickle down at the rates they did in the past. What are you most proud of what will be your legacy? To have, you know, bequest funds is a legacy play. We launched this as an evergreen fund. So to have something I can pass down to my children.

Cliff Locks 33:54
I think that’s important. Are you mentoring anyone in the office at this point? young people?

Martin Saenz 34:00
Yes, we have a marketing assistant and investor relations person. Connor who’s Investor Relations, he’s 21. And, and Sophie who works marketing is 22. So I’m mentoring both and actually just had a our weekly meeting this morning, we roleplay for our meetings. And And so yeah, we do role playing exercises and on top of a lot of other different training exercises,

Cliff Locks 34:28
That’s nice to get back and look after our youth and I look at it where we have a fiduciary responsibilities as our leaders to come in and put time and effort and look for opportunities to hire either new graduates, interns, and share with them, you know, our values and what our business does and hopefully hire you know, some brilliant young people to join the team and flourish right along with us, Martin, can I share your contact information with our listeners?

Martin Saenz 34:56
Absolutely. Martin’s email is at Martin

Cliff Locks 35:00
Add BBQ which is spelled ma AR ti and their website is at B q I want to thank our listeners. I look forward to being back with you shortly for another episode of the private equities profits podcast The show has been produced by Market Domination, LLC.

Transcribed by

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:




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.

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Private Equity: How it really works!

Private Equity: How it really works!

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andrew busser

Andrew Busser “The Importance of Understanding Family Dynamics

The Private Equity Profits podcast with Seth Greene Episode 007 with Andrew Busser,

President of Family Office at Pitcairn For almost a century, Pitcairn has partnered with some of the world’s wealthiest families to meet their needs and drive better outcomes year to year, decade to decade generation to generation.As President of Family Office, Andy Busser leads Pitcairn’s exceptional team of relationship managers, analysts, and client communications professionals, ensuring that the Pitcairn client experience sets the standard for families of wealth. People who know Andy describe him as curious and enthusiastic, with a passion for solving complex problems.

Andy brings a commitment to objective analysis and holistic solutions to the Leadership Team, and he is known for building successful relationships with clients and employees. Throughout his Pitcairn career, Andy has spearheaded the development of the Pitcairn Experience. He continues to position Pitcairn as a leading innovator among family offices. Before joining Pitcairn in 2015, Andy was a partner at Symphony Capital, a healthcare-focused investment manager of private equity and hedge funds. Previously, he was a management consultant at The Wilkerson Group and its successor, Wilkerson Partners.

Andy holds an AB in History from Colgate University. He has served on multiple boards, including the Colgate University Alumni Corporation and Lincoln Center Education, and Andy is currently a trustee of the National Committee on American Foreign Policy. Creative by nature, Andy enjoys painting, in particular, landscapes. He is an avid reader and can usually be seen traveling with a book on history or economics.

Originally from Columbus, Ohio, suburban Philadelphia is now home for Andy, his wife, and two sons. Whenever possible, he can be found skiing in the Rockies or fishing the waters off Cape Cod.

Listen to this informative Private Equity Profits episode with Andrew Busser about maintaining and protecting generational wealth.

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

  • Providing a comprehensive service experience across all the dimensions of family wealth.
  • What it means to truly be an advocate for clients. • The one thing that can destroy generational wealth.
  • The importance of understanding family dynamics. •
  • Pitcairn’s Gen 7 research hub.
  • Communication in teaching generations what it means to be responsible with money.

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Larry Kaplan

Leveraging Employee Stock Ownership – Larry Kaplan

Larry Kaplan, Managing Director at CSG Partners, LLC.

Larry has built the nation’s leading leveraged employee stock ownership plan (ESOP) practice. His expertise in capital structure and ESOP optimization has led to hundreds of successful liquidity transactions and numerous accolades from industry organizations. He is also the owner of Synergy Capital I, LLC, a broker-dealer that provides corporate finance, liquidity and M&A solutions for private companies.

Listen to this informative Private Equity Profits episode with Larry Kaplan about identifying risk factors that can lead to permanent impairment of capital.

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

  • Does ESOP give shareholders more after tax value more than private equity?
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  • Analytics and data that drive the ESOPs recommendations.
  • Employee stock ownership plans and how they are funded.
  • Operating as industry agnostics. Firm philosophy and culture.

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Phone: 212 433 5500


Cliff Locks 0:01
Welcome to the private equity profits podcast. I’m Cliff locks your host and with me today is Lawrence Caplan Founder and Managing Partner at CSG partners LLC. Larry has built the nation’s leading leveraged employee stock ownership plan. It’s an Aesop practice and is actively involved in all aspects of csgs investment banking activities. He helps owners of private middle market companies achieve equity monetization, while addressing personal goals such as business continuity, legacy and estate planning. His expertise in capital structures and Aesop optimization has led to hundreds of successful liquidity transactions in numerous accolades, industry organizations. Tell me how you got started, Larry, and what led you to private equity?

Larry Kaplan 0:47
Sure, I was working at a middle market accounting firm in New York in their Consulting Group, doing some general consulting we also have m&a side of our business. And I was working with one young individual that started a company was 34 years old was constantly reinvesting in his business and wanting to sell the company and we had taken the company to market he’d gotten some bids from private equity, a few from strategic and they were really low three, let’s say four to four and a half times Eva Dodd is about 21 years ago. And at the same time, we were doing some work for the garment center company, Bill Blass here that he had passed away and his estate was selling their interest. And I found out they had an employee stock ownership plan, bill actually actually sold a piece of his companies earlier. And he used that money to fund which now I think the name has changed, but was then bill Blass Reading Room at the New York Public Library. And I became interested in the Aesop I knew nothing about it. And I started talking to people that were involved in that Aesop. I spoke to their attorney, and they were telling me the tax benefits that you receive when he sold to the sap. And I knew nothing about that. And I said, That’s amazing. Actually, I said, these tax benefits are really encrypted, you don’t pay capital gains taxes, the company receives tax deductions equal to the sale value. And so I started going around to the partners at this firm, which was an excellent firm, and I started asking them what they knew about Aesop’s and everything that they knew about Aesop’s was completely wrong, because they just didn’t have any of the facts. And these are very smart audit and tax people. And I said, Look, there’s this major disconnect in the marketplace between what’s reality and what this product actually is. And so we then took this company down the road of selling to an iOS app, he got as much money after tax if he would have sold the company. And it became a huge success. Because Three years later, he sold to the software initially for like, value the company was $40,000,000.03 years later, he ended up selling the company for $140 million. He walked away with a ton more money, the employees walked away, I think there are maybe 50 of them with over $40 million. It was a major success. And that’s what led me to say there is this opportunity in the market because business owners don’t understand Aesop transactions, nor do they’re professional advisors, the one that I came across, and that’s how I got started.

Cliff Locks 3:08
I appreciate that. Tell me about your employee stock ownership plans and how they are funded.

Larry Kaplan 3:14
Sure, we like to tell business owners that any doing an Aesop is doing a leveraged buyout of your own company, right, just like a private equity firm is gonna go in, and they’re gonna put some equity to the transaction and go to the capital markets to raise debt to finance the transaction. We’re doing the same thing, right. And initially, we had to educate the banks as to Aesop’s, we had to educate the funds to ethos, we had to educate all parts of the marketplace as to why they should be lending into an Aesop transaction at terms similar to what the private equity firms are doing. And so now we got the same access to the capital markets as a private equity firm doing up and down the markets. Last year, we closed our first high yield leverage bond offering to financing ease up which was we raised over $500 million for that transaction. So we’ve got in and said to these business owners, you could do it and we’re going to help you do it. And that’s where the money comes from. It’s a debt driven transaction. There’s no equity in the deal. But since the owners aren’t paying capital gains taxes when they receive those funds, that’s the equity piece that we’re able to fill in the gap.

Cliff Locks 4:21
Isn’t Aesop give shareholders more after tax value more than private equity?

Larry Kaplan 4:26
Well, a couple of things we’re going to talk about after tax value number one, just from a strict monetary perspective, right when you sell to an ISA, under Section 1042 of the code. When you receive those proceeds, if you reinvest into qualified replacement property similar to a 1031. In real estate, it’s much more flexible. You could defer paying capital gains taxes. As long as you hold that replacement property. There’s a whole industry that’s popped up helping business owners satisfy that qR p requirement, but number one right off the bat, you’re not paying these taxes. And that’s kind of like the great equalization factor with what you’re going to see with the private equity deal. But in addition, right, how does it give them more and this is really, sometimes we go into a transaction and the private equity offers are more than what they’re going to be able to get from selling to an ease up. Most of our deals are done directly, though, with private, family owned businesses. And they could be a business in Des Moines, Iowa, or remote portion of Iowa. And they’re the private employer in that town. So when these companies start looking for liquidity strategy, these employees have been with them. In some cases, since they’ve been in that community since the 19th century. While they want to get the value for the company, getting the absolute maximum last time off the table is not what’s driving most of the people that are doing any stuff. They want value. They want strong value, but they’re also looking at their community and what’s selling to a third party could ultimately do to their community.

Cliff Locks 5:54
Well said, What industries do you serve?

Larry Kaplan 5:56
We’re industry agnostic. So right now we’re probably working on 30 or 40 different transactions. We’re working with companies in the construction industry, manufacturing, distribution, transportation, services and consulting. We’ve got a large medical practice. Aesop transaction right now, you’ve probably done some episodes on the healthcare industry. And we’re offering Aesop’s to medical practices, the same kind of a structure that they’re getting through private equity. They could do it through an Aesop. So you name any attack, we’ve got accounting firms, we’ve been uncertain specialized law firms, you name any type of an industry. And as long as those companies are paying taxes, then Aesop could be an alternative structure for them.

Cliff Locks 6:41
Very interesting. What are you most proud of in your career to date?

Larry Kaplan 6:45
Well, I think in general, we’re both proud of we’ve probably made hundreds, if not 1000s of employees, millionaires through use of putting these up in place. And I’ll just give you one quick story. One of the earlier, Aesop’s, I did turn out extremely well. And it was limited workforce. So most of the most of the top executives at the company when the company was sold four or five years later, walked away with north of a million dollars in their retirement account. And independent of this, I was playing in a casual poker game with my brother in law and some of his friends. And there was one of the guys who I’d never met before who said, Yeah, my wife worked at that a special needs child that really needed a lot of care and it was very expensive. And he said my wife worked at me SATCOM, through the sale of her stock. When the company was sold, she was able to fund the care for the rest of his life through the proceeds that she received from the Aesop. And to me, that was amazing. And we see this time and time again, now that we’re really transforming not just the selling shareholders, right, they’re happy, and they’re getting great deal. But it’s also the people that helped build these companies that are now getting dissipate in capitalism and ultimately sell and get this money. So it’s a nice thing to do very positive.

Cliff Locks 7:59
What is your approach to identifying risk factors that can lead to permanent impairment of capital,

Larry Kaplan 8:04
just like everybody else, right? So anytime we’re going into a company, we’re going to be the liaison between the company and the credit markets. And so we try to do the same type of due diligence and stress testing as any type of private equity firms come into a company and do right, what could happen to impair this company’s future cash flow. And of course, because of the ISA up in the company not paying taxes, they’re always gonna be better off at least there’s some positive cash flow. So when you stress testing and Aesop, even if the company is performing, you know, 50% less, they’re still generating the same after tax cash flows. So you’ve got more buffer in your ability if things go wrong, but it’s the same thing, right? How How big is your order book, how sticky is your clientele, the same kind of stuff that our private equity firms gonna go when we try to analyze and the better companies could get, you know, six, seven times, even puddings that don’t have that, you know that you get two times EBIT, done alone. So it just runs the gamut. And it’s the same analysis than any private equity firm will come in and do. How

Cliff Locks 9:05
do you help clients determine whether it’s worth exploring an Aesop transaction?

Larry Kaplan 9:09
Right, so we do a lot of right. So we’re a very quantitative driven firm, right? So the first thing that we go into a business owner is that we say, look, you have all these other options, right? And which is the best option for you. We’re gonna run financial models, and we do this virtually every day, we’re gonna say, what does an Aesop look compared to private equity day one? What does it look like in years 345? What does it look like and compare it to a strategic value strategic buyer. So we’re running all these different models with different assumptions and then we come through and we work. Normally we’re introduced to these clients through a trusted advisor, whether it’s their accountant, their lawyer, or some other type of their financial wealth manager. And so we’re including them in the process and collectively, they look at it and you also need to include estate planning, all the things that you look at in any type of asset. sale gets incorporated into the analysis very, very positive.

Cliff Locks 10:03
What kind of analytics and data drive the SOPs recommendations? Number one, you

Larry Kaplan 10:09
start with the same thing. So we start with the same base financial models, they would with the private equity, you can have a low growth, moderate growth, high growth case, looking at the cash flow of the business. Is it cashflow intensive? Is it not cashflow intensive, we have to look at factors that lower taxable income such as a cubii deduction, depreciation, and then we look at the company and saying, Okay, how much the bottom line driver with does the E sub really make sense? Higher the taxes that those companies are paying? When I say to companies, they’re usually pass through entities 95% of the time, either an S or an LLC, paying taxes at the personal level? And then we say, okay, when we layer on the ISA, right, how much better off of those companies be? And then we say, how much money Can we borrow, right? What’s the value of the company for Aesop purposes, so all these when we do analysis, it’s usually a 60 page analysis that covers value, capital, raise cost of capital, the ability to pay that down based on various assumptions. So again, it’s a lot of modeling. And that’s where people appreciate the detail that goes into this analytical exercise,

Cliff Locks 11:17
very professional. Describe the culture and philosophy of the firm.

Larry Kaplan 11:22
You know, our culture philosophy is always do the right thing for the client, right. And so number one client comes first, second, and third, always, you know, tell the good news and the bad news, if it makes sense. Let’s go for it. If it doesn’t, it doesn’t, then let’s not waste everybody’s time and, and try to put a square peg in a round hole. Most people at CSG have been with us further, you know, for the last 20 years, when they start coming very few people leave most of our managing directors now they become a Managing Director Emeritus. So even though they’re not working full time anymore, what ex partner who is now in his 80s, and he’s still bringing in business. And so who worked with some of the younger people, they’ll run the deals, and he’ll do it. So we have no stop limit, you know, you could continue working. And then now what we’ve really done over the last five years is bringing a real good core group of younger people that are gonna be the future of this for I think we give the best training. I mean, we know that because a lot of times, historically, they kind of target our employees and take them over the bigger banks. And then sometimes we just hired our new head of capital markets, have worked with us 15 years ago, went to work for the major banks, and then we brought him back in, and he’s been a phenomenal help for us opening up new sources of capital that we could never have touched by ourselves. So that was great.

Cliff Locks 12:39
I’m proud of you and your team a continuity, yeah, and flourishing, and really the doing the training with internal. And then the mentor. I think it’s very, very positive. And I wanted to ask you, what do you love what you do in what do you find most rewarding personally?

Larry Kaplan 12:53
Yeah, so I’m not a normal person. Because I love I mean, I love what I do, right? I mean, we’re working with different business owners in different businesses all around the country. And one thing I really didn’t love was I was on a plane, you know, usually two or three days a week. Now I bow under COVID, I sit here, we’re doing a meeting in Los Angeles, I’m doing a meeting in Phoenix, and I don’t have to travel as much, I enjoy that. But I enjoy working with business owners, right. And I enjoy working with the companies and then seeing them transform, and then seeing the success that comes out of these businesses and how successful they could become and how value how wealth is a tremendous wealth creator, not just for the few people on top, but for all of the employees at the company. And it really is great when you start to see some of these companies in the success they’ve had. Since I’ve been doing this now it’s our 21st year, you know, we see some major, major success stories.

Cliff Locks 13:46
It’s exciting. It’s not just the top sea level, the really it’s the employees at that point. And it’s

Larry Kaplan 13:51
we’ve got, you know, hourly employee workers at companies that have got retirement accounts that are in the seven figures, tremendous, what would be your personal legacy? Well, my personal legacy, just that this see our firm and the work that we’re continuing to do, to see and continue to see that, you know, we’re out here and do more of them. Unfortunately, Aesop’s are, you know, a backwater area of finance, most people don’t know them. So when you look at the benefit they bring versus the amount of market penetration they have. We’re just scratching the surface. My what I would like to see is a company that hopefully this year we’re going to do 25 to 30 of these transactions, but in five years, we’re doing 150 to 200 of these transactions and just to continue what we’re doing but in a bigger, more broad based way. Very positive. I truly appreciate you spending the quality educational time with our listeners today, Larry. Larry, can

Cliff Locks 14:47
I share your contact information with our listeners? Absolutely. You can reach Larry by email at info at CSG partners comm which is spelled info inf o at CSGP ar T and you can reach Larry by phone at 212-433-5500. Again that’s 212-433-5500 Thank you for our listeners. I look forward to being back with you shortly for another episode of the private equity profits podcast. This show has been produced by market domination, LLC.

Transcribed by

Private Fund Edu: Fund Types

Private Fund Edu: Fund Types

Hedge Funds, Venture Capital Funds, Real Estate Funds, Private Equity Funds and Special Purpose Vehicles! This video gives a quick overview of these …

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 

Additionally, John is a Forbes contributor writing about wealth management topics.


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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