It's a Family (Office) Thing

October 19, 2016 | Bloomberg Markets

Not so long ago, T.F. Meagher worked at a hedge fund. It was a successful hedge fund, too—the $6 billion UBS O’Connor, which was actually gaining assets instead of losing them, unlike so many other hedge funds of late.

The big leagues always had a certain appeal for the former University of Illinois shortstop. Yet after six years of working his way up to executive director, Meagher, 36, found himself mulling a new job in the spring at a boutique investment firm a fraction of UBS O’Connor’s size: the family office of Peter Huizenga, who helped build the Waste Management trash-collection empire. When Huizenga Capital Manage¬ment offered him a job as an executive director, Meagher opted to play small ball for a change.

No longer does he spend his time persuading investors to put money in hedge funds as people are pulling out of them. Instead, he’s helping deploy the firm’s assets—$601 million, according to a filing—in a role the 18-person operation created specifically for him. “That’s one of the nice things about family offices,” says Meagher, who sold himself as someone who could expand the Huizenga network and develop more partnerships for the company. “They can be really selective.”

A decade or two ago, working at a hedge fund was the hottest career in finance. People flocked to the companies in New York, London, and Hong Kong. Their leaders made billions. Employees made millions. Then came the financial crisis, low-interest rates, passive investing, smart-beta ETFs, and computer-generated portfolios. Everything got a lot harder.

Hedge funds, especially, are reeling. Globally, investors pulled an estimated $25.2 billion from the industry in July, the highest monthly redemption since February 2009, according to an EVestment report. Pension plans and other large investors have redeemed from some of the industry’s best-known names, including Tudor Investment and Paulson & Co., after years of lackluster returns and high fees.

This means people in Meagher’s former role at hedge funds are often devoting much of their efforts toward retaining assets in funds that are under performance pressure rather than spending time raising additional capital, he says. And the retrenchment is fueling layoffs and closures. “There’s overcapacity in the hedge fund space,” says Brendan MacMillan, New York-based chief investment officer of Akkad Capital Partners, a family office. “The problem is that a lot of the launches have gone nowhere, and you’re left with a group of talented people without a home.”

“The magnitude of wealth that these family offices control ... has helped establish an industry that’s really coming into its own.”

For financial professionals navigating these turbulent employment seas, a family office looks a lot like a white-sand island with a patch of coconut-laden palm trees. For more than a century they’ve existed to manage the financial and/or personal affairs of the wealthy, from John D. Rockefeller to Bill Gates. The financial figures are vague on how much they hold (most families tightly guard the extent of their wealth), but estimates have put the figure at $3 trillion to $4 trillion globally. By comparison, the hedge fund industry manages about $2.9 trillion, some of which it happens to invest for family offices. “The magnitude of wealth that these family offices control, and the number that have been created recently, has helped establish an industry that’s really coming into its own,” says Bill Woodson, who runs the group at Citi Private Bank that advises family offices in North America.

Traditionally, family offices handled duties such as accounting and tax planning, as well as arranging travel and paying chefs, nannies, and yachting crews. Such operations typically wouldn’t have more than a handful of employees, let alone a team dedicated to investing. But industry consultants say that’s quickly changing. More family offices have multiperson staffs to pick securities and strike deals in-house, in a shift that makes them more like professional investment firms. Top B-schools in the U.S., including theUniversity of Pennsylvania, Northwestern University, and the University of Chicago, have recently introduced courses tailored specifically for working at family offices. “The caliber of the executives who are interested in working at family offices is really increasing relative to 10 or 20 years ago,” Woodson says. “It’s becoming a more sought-after career path for senior executives. That raises the bar for everyone at the family office and helps to professionalize them.”

And with the number of megamillionaires and billionaires skyrocketing around the world, the trend toward family offices appears to be accelerating, says recruiter Jeanne Branthover, a partner at DHR International in New York. That’s in part because, once you’ve accumulated that much wealth, it can be cheaper to manage the money yourself.

A family usually needs assets of at least $500 million to set up a full-service family office that oversees investments, consultants say. Those with more than $100 million may also be able to afford their own offices if they outsource some services. Around the world, there are at least 3,000 outfits managing the money of a single clan, and about half were set up in the past 15 years, according to Ernst & Young. By comparison, Prequin tracks more than 8,000 hedge fund companies.

Figures on how many people have joined family offices from hedge funds in the past year are difficult to obtain, because family offices are extremely private. They usually don’t even have a website, nor do they advertise jobs or publicize hires. Many of the firms’ names are even veiled to protect the source of the fortune behind them. Branthover says she’s received as many as 30 inquiries this year from hedge fund employees looking for jobs at family offices. That compares with about five in previous years, she says. Competition for openings has intensified even as more family offices have been created, says Michael Castine of recruiting company Ridgeway Partners, who places executives at family offices, asset managers, and wealth managers. Hedge fund candidates won’t have an easy time jumping to family shops as their industry contracts, because so few seats are available, he says.

Family offices that operate like boutique investment companies should feel familiar to hedge fund expats. Many families want to take long-term bets and protect against losses, for instance. They’re also increasingly seeking ways to team up on deals with endowments, foundations, and other institutional investors. “That’s really morphing the industry and blurring the lines between hedge funds, private equity, and family offices,” says Huizenga’s Meagher.

Family offices are less constrained when it comes to focus and liquidity, as their aim is long-term wealth production, according to Robert Discolo, a chartered financial adviser who recently joined the $1 billion multifamily office River Partners Capital Management as CEO and CIO. “As hedge funds got larger and more institutionalized, it was much more difficult to find opportunities, because they had to operate within narrow investment and liquidity parameters to satisfy their client base,” says Discolo, who previously invested in hedge funds and private equity for bank Julius Baer, AIG, and Permal. “Family offices, for the most part, are opportunity-agnostic and will seek alpha anywhere and everywhere.”

An appealing aspect of family offices, according to consultants, is that they look a lot like hedge funds in the glory days of the 1980s and ’90s: secretive and lightly regulated. Family offices in the U.S. typically don’t even have to register with the Securities and Exchange Commission, let alone disclose the amount they hold as required for other money managers with outside investors.

Meagher’s daily routine is similar to his previous one at UBS O’Connor. His mornings at Huizenga Capital Management, in an office building near leafy cul-de-sacs and an outdoor shopping mall in Oak Brook, Ill., begin at the on-site gym, where he hits the treadmill and lifts weights. Before the markets open in New York, Meagher meets with his six investment team colleagues for an outlook on the day’s activities. Lunch is catered. Most days he works until late in the evening, when he heads home to his family.

One big difference from his hedge fund days is the firm’s small size, which means everyone is in constant contact with each other—and with the owner of the firm, Peter, 77, who’s a regular presence in the office. Huizenga started the family office in 1990 after decades of helping his cousin, Wayne, build Waste Management into one of the biggest companies in the U.S. through a series of acquisitions. The family was also an early and significant investor in the video-rental company Blockbuster and other ventures. “They’re investors at heart,” Meagher says.

Meagher wasn’t shopping for a job at other family offices when the Huizenga opportunity presented itself, he says. Since his hire, he’s helped pool money from other families with Huizenga to create a fund-of-funds-type vehicle to invest with five to eight money managers focusing on stressed and distressed opportunities.

That’s exactly what Huizenga Capital Management says it wants Meagher to be doing. “One of the things that family offices have that’s very valuable is a network,” says President David Bradley, 48, who’s also Peter’s son-in-law. “We created the position because we literally have hundreds of relationships, and we wanted somebody that would help us better manage them.” He says the direct investment activity has delivered higher returns and greater tax efficiency because the family has been able to hold on to stakes for longer than they might have in some funds. “We have lots of experience that often can add value to companies in which we can invest or manage,” says Bradley, having made “significant” investments in health care, finance, technology, and consumer-focused businesses.

Meagher says that when pitching his company as a partner to other investors, he emphasizes that it can make decisions on deals quickly because it’s an 18-person operation. It’s also not constrained in the types of opportunities it can invest in, unlike some hedge funds that must stick to a mandate such as event-driven plays or macrostrategies.

That’s not to say family offices are without pressure. After all, business is far more, well, personal. The family doesn’t want to lose its hard-earned capital, and when mistakes are made, relatives can be just a few feet away. Another downside is the whim of owners, says Castine of Ridgeway Partners. “The person who controls the money,” he says, “could walk into the office one day and say, ‘I don’t like the way the markets look, and we’re going all to cash.’ And no matter how hard you work, your name isn’t going to change to become the same as the family’s. You’re always going to be a staff person.”

To that end, most family offices typically don’t offer executives carried interest, although more than half let them co-invest in deals, according to a September report by UBS and Campden Wealth. A few may even offer an ownership stake in the family business or office.

Meagher says the hedge fund industry remains one of the best career launch pads, because you get to work with some of the smartest investors in the world. Although the Huizenga family office still puts its money in hedge funds, Meagher is happy to be the allocator of one clan’s capital rather than fundraising in his old role at UBS O’Connor. “They are truly long-term investors seeking the best investments,” he says.

Which is why he opted to play small ball in the first place.