In October 2015, Sam Zell pulled off one of the biggest real estate deals since the recession of 2008. The Chicago-based business magnate sold more than 23,000 apartments controlled by his real estate company, Equity Residential, to Starwood Capital Group of Greenwich, Connecticut. While most details of the transaction made the financial pages, a sliver of the deal — approximately $30 million of the $5.4 billion sale — was offered privately on ShareNett, an online forum for wealthy families who prefer buying and selling far from the prying eyes of journalists.
Launched quietly in January, the ShareNett platform is reserved for family offices, which are companies that handle the personal and financial affairs of the fabulously rich. In the U.S., family offices date back to the Gilded Age of the 19th century, when titans of industry (or robber barons, depending on your politics) such as John D. Rockefeller saw the need for trusted professionals to manage their enormous wealth. Family offices in the U.S. number about 6,000, according to an estimate from the Family Office Exchange (FOX), which manages an online network of 350 families with a median wealth of $500 million.
This new twist on old-money networks — the members-only, no-plebs-allowed online platform — offers a convenient, decentralized way to source and coinvest in specially curated deals. For sellers, the discrete (and discreet) digital conclaves are like a pick ’n’ mix of wealthy families increasingly drawn to private equity. As for the Zell transaction, it is not clear which ShareNett family office participated in the $30 million real estate deal, or whether there was a consortium of buyers. Representatives for ShareNett, Starwood and Equity Residential declined to comment.
ShareNett is the brainchild of Jim Pallotta, an investor and hedge fund manager whose family office, the Raptor Group, also owns the Italian soccer club A.S. Roma. Surprise, surprise — access to ShareNett’s select Rolodex of contacts does not come cheap. According to a person familiar with the organization, the annual fee for using the platform is $15,000 once a family takes part in a deal by investing in another family office’s deal or by offering a deal that successfully raises capital. ShareNett and Pallotta declined to comment.
The growth of these networks represent a paradigm shift a decade in the making. Burned by the opacity of the 2008 financial downturn, family offices are wary of allowing big institutions to manage their money, preferring to invest their own wealth. A FOX survey found that 69 percent of its responding members engaged in direct investing in 2015, with 46 percent stating they intend to increase their allocation to the sector this year. “This is part of families becoming more professional and having a stronger preference to share with each other rather than other firms,” says Jeremy Bronfman, chief investment officer of BHB Holdings, his father Matthew’s family holding company. A fourth-generation member of the Canadian dynasty that founded Seagram, Bronfman notes that family offices traditionally have relied on dated connections built generations earlier. “They were way, way behind,” Bronfman says.
The last 12 to 18 months have seen “a strong and growing trend for families to band together under one roof or [through] an independent service provider that creates a secure online network,” adds Marc Halsema, managing director of global family office services at Fieldpoint Private in New York. Direct private equity deals offer financial transparency, Halsema says, as well as the opportunity to manage or supervise a company in which a family office takes a stake.
In Los Angeles, Tami Kautzman is the chief executive and founding member of Family Chateaux, which she describes as a “bespoke service” for approximately 50 family offices. She does not publicly market the organization, which was founded in 2014. Kautzman usually has around 25 active deals that reflect the typical mix of family office investments: real estate (the most deals), consumer products, technology and health care, as well as clean/alternative energy and financial tech (the fewest deals). “I’m just creating access,” Kautzman tells OZY. “I’m there to increase their network.”
Kautzman notes another perk offered by online groups: the end of the family office tradition of trudging to annual networking conferences and conventions in stuffy hotels to meet, greet and (occasionally) squabble with family members and other ultrarich clans. “Many [families] don’t want to go out and meet people,” says Kautzman, who sees online forums as offering connections minus the drama.
Who you meet virtually, however, is still as important. Psychographics — the study of people according to their attitudes and aspirations — is essential to the success of the family office version of Facebook. “People who think they know it all make very poor members,” says FOX president Alexandre Monnier. “The last thing you want is someone in the room or someone online telling someone else they are doing this or that wrong.” Monnier says he cherry-picks candidates, and if he has any doubt whether they would fit in, he discourages them from joining.
Family Chateaux shares deals on its private platform sourced from within the private family office community. Kautzman notes, however, that due diligence remains the responsibility of the family office. Michael Zeuner, managing partner at WE Family Offices, which represents nearly 75 families with approximately $6 billion in assets under advisement, says that’s where the problem lies. “They are platforms that are funded by the firms [or] individuals representing the sellers,” Zeuner says, “and they have no fiduciary responsibility to the investors. Just because something is offered on a digital platform doesn’t mean it’s a sound investment.”
It turns out that even for superwealthy families wheeling and dealing in private digital clubs, the old adage still applies: Caveat emptor — let the buyer beware.
Source: OZY, Farah Halime
Photo: Getty Images