MARCH 15, 2023: How family offices are responding to SVB and Signature Bank collapses
It’s hard to believe that it’s only been a few days since the banking world was upended by the collapse of Silicon Valley Bank. In the wake of the biggest bank failure since the 2008 financial crisis, family offices are deciding what to do amid larger concerns about the stability of regional and midsize banks in general, Steven Weiss reports this week.
Also in this issue, we talked with Richard Wilson, the founder and CEO of the Family Office Club, about how he defines success as a family and a family office. He discusses his concerns and why it’s important to focus your investments on just a few industry niches and also explains his method of acquiring “strategic chokepoints.”
As we near the end of winter, if you have any insights into what family offices can expect in the months ahead, please pass them along. We’d love to use them to guide our reporting and are open to running op-eds or commentaries from readers.
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HANDPICKED: How family offices are responding to SVB and Signature Bank collapses
By STEVEN I. WEISS
It was a family office that rang the alarm bell two months ago about Silicon Valley Bank, which had worked hard in recent years add more family offices to its client roster.
SVB had gone “hog wild” with its securities portfolio, wrote short seller William Martin in a January Twitter thread. Martin left the hedge fund world to launch his family office, Raging Capital Ventures, in 2021. Today, he is seen as the prophet who foresaw the banking-sector volatility of the past week.
Now, with SVB out of business, family offices are deciding what to do amid larger concerns about the stability of regional and midsize banks generally — and reassessing best practices in light of the turmoil.
SVB was unusual in having more than 90% of its accounts above the $250,0000 FDIC insurance limit and had a substantial client base in the ultra-high-net-worth world. The bank’s SVB Wealth division managed more than $14.4 billion for more than 3,000 clients, according to regulatory filings. Its SVB Investment Services division managed $1.3 billion for high-net-worth individuals.
The contagion from SVB hit Signature Bank over the weekend, as it, too, was taken over by regulators. While the federal government stepped in to guarantee deposits and offer an emergency lending facility to stop the contagion from spreading further, that bank’s collapse only fueled more concern about the sector.
Seth Weissman, managing partner at the real estate firm Urban Standard Capital, said that as the SVB and Signature news broke, he received a number of inquiries from worried families. "They want to know where we keep our deposits and our exposure," he said.
Weissman's firm made an effort to be "proactive about communicating" and sent messages explaining how Urban Standard "purposely manages our accounts across multiple banks" to avoid ever having liquidity issues, he said. The real estate industry has generally been less concerned than the tech space about whether their funds are secure, Weissman said.
That’s a lesson that the multifamily office Running Point Capital is sharing with its clients. “You want, if possible, more than one key banking relationship so that you have more than one source for lines of credit,” said Michael Ashley Schulman, Running Point’s chief investment officer. “I don’t see this current malaise as teaching new lessons so much as it reiterates lessons learned from the past.”
Schulman also said that over the past year, he has been advising clients to move out of cash and into short-term Treasuries, with rates generating returns in excess of 4%.
Family-office heir John Catsimatidis Jr. said he knows “quite a few” families that bank with Signature, and he doesn’t see signs of panic “because of government action.” In his conversations with families, Catsimatidis said, “Most are staying put for now.”
But separate from the issue of the security of deposits, Weissman said, real estate investors have been alarmed about their scheduled deals. "I've had tons of calls from borrowers set to close in the next 30 to 60 days," he said, "and their lender is a regional bank, and they're not sure that the loan is going to show up at the table."
That led Weissman to launch a product in just the past few days. Urban Standard Capital is offering to do due diligence on deals and be ready to be the lender in case the bank loan an investor lined up falls through — as a sort of backstop or insurance.
He gave the example of one investor who's set to close on a $12 million deal and has already put down a $2 million deposit. Weissman is offering that investor a fee of 1% of the loan to be available as the lender "if the bank doesn't show up to the closing table." For that new product, Weissman said, "We've got about seven or eight takers" who see the fee as "better than losing a seven-figure deposit."
Catsimatidis said he has been making a similar offer in venture capital, providing “access to working capital” to companies affected by the SVB collapse. Although conversations are ongoing with multiple companies, he hasn’t had any takers yet.
“Thankfully, for most of the ones I spoke to, either their lead VC stood up, or they think they’ll have adequate access to their cash,” Catsimatidis said.
Even with the federal government's lending to backstop deposits, many companies and ultra-high-net-worth individuals and families are moving to larger banks. As one family-office member put it, "I think J.P. Morgan, Bank of America and various trust companies with very conservative balance sheets is where many trust their capital will be safe, from what I'm hearing."
But for as many challenges as regional banks face, their core customers aren't eager to abandon them anytime soon.
"We've had a great relationship with a lot of regional banks, including Signature," Weissman said, though "there's a credibility challenge that they need to address in order to have depositors keep deposits there."
Weissman sees regional banks as the only institutions able and willing to work with small businesses on their needs and providing critical lending facilities to those businesses.
"A collapse of the regional banking market," he said, "would be terrible for the economy."
— With reporting by Marcus Baram
PEER-TO-PEER INSIGHTS: Richard Wilson
Richard Wilson is the founder and CEO of the Family Office Club, a club with over 4,000 registered ultra-high-net-worth investors and family offices.
How do you define success as a family and as a family office?
For many of our clients, they are living a kind of success that goes way beyond financial success. Some interpret this as a chance to finally fulfill their vision, and they work harder than ever. Many keep working long hours but add in constant heavy travel as well. Many times, they don’t just take it easy after having an exit; they look for another project or company to scale.
And what concerns do you have?
Interestingly, many of them do not focus on their health as a top-three investment of energy, despite the fact that they already are way ahead on the wealth game. They spend $100K-plus a year on airplane tickets, wealth advisory and dozens of other things; but they often do not spend even $20K a year on their health. We often point this out. And even if you are the most money-focused person on planet Earth, ignoring your health means you are more easily hospitalized and taken offline, or you may die early. And that creates a taxable event and means you will not reach your potential in business.
What do you know now that you wish you had known 10 years ago?
I now know how critical it is to focus on just one to three niches and to go very deep in those niches — knowing them cold, having superior distribution, a good reputation, an understanding and the ability to navigate those niches fluidly and assess opportunities and seize them as they come up. The wealthiest families I know who do this grow and keep their wealth. For Family Office Club, we have decided on multi-location medical practices which are profitable and want to grow further before selling to private equity and short-term rental properties, as that niche is less than 1% owned by institutions. The more that families can play a strong offense in one to three niches and let others passively play defense for them, the faster they become specialized.
What’s the biggest advantage you have in making investment decisions for the long term?
We look to acquire strategic chokepoints, think very long term and have a thought leadership/add-value approach to business. Combined with seeing deals first, exclusively and on better terms, that is our largest advantage.
The most powerful thing for an investor is to be seeing deals first, exclusively and at a better valuation. For example, I invested to acquire 2.5% of a company last year, but they gave me 5% equity. And another group is giving us a 16.5%-a-year preferred return plus 50-50 profit split after that on a real estate portfolio deal. This year I was gifted 33% of a company without having to pay for the equity, and we also are being shown a portfolio of 40 assets in a very valuable location off-market from another group.
Interview conducted by Marcus Baram
To the moon … but not quite yet! Elon Musk’s plans to build a town in a rural county just east of Austin, Texas — complete with new streets, recreational facilities and subsidized housing for SpaceX and Tesla employees — is just the latest chapter in a long tradition of wealthy tycoons building communities “molded around their personal philosophies,” Bloomberg News reports.
The Big Apple still is a lure for the wealthy: New York remains the most popular home for the super-rich, with over 21,000 ultra-high-net-worth individuals owning a primary or secondary residence in the city, according to a new report by the data firm Altrata. Next on the list: London, Hong Kong and Los Angeles.
Fake Brueghel turns out to be real: For generations, a French family assumed that an old painting of a lawyer’s office that hung behind a door in their home was a cheap reproduction, Artnet.com reports. Until an art appraiser spotted it and confirmed that it’s the real thing, completed by Brueghel between 1615 and 1617 — and set to go on the auction block soon for an expected $800,000.
HELP US WITH A STORY
We’re working on a story about how to build a family office that lasts — one with a shared mission and succession plan to endure for generations. If you have any comments on the topic, reach out to [email protected].