Marty Gross founded Sandalwood Securities in 1990 after a career practicing law and working at investment firms including L.F. Rothschild. Sandalwood began as a fund of hedge funds — one of the first to emerge — and has since evolved into a family office that shares its investment opportunities with clients. Gross discussed his business and the benefits of co-investing to clients and the firm.
Can you talk about how Sandalwood became what it is today?
The hedge fund space in 1990 was in its first inning. You didn’t have databases where you could compare different funds. The value proposition of Sandalwood was to find great hedge fund managers, analyze funds and help you afford them, and then monitor them. As the business grew, clients would ask us what we have invested in, and we’d show them our investment portfolio. We were able to help investors determine which funds were of high quality.
Over the last 30-some years, the profits from the hedge fund business allowed us to create our own family portfolio, which is institutionlike. Our holdings are similar to those of a major institution, foundation or endowment. We have publicly traded securities, both equity and credit, and a list of alternatives. Our family portfolio has eight “buckets”: equities, bonds, hedge funds, real estate (both funds and individual properties), private equity, venture and lending funds.
We know which clients would be interested in which types of investments, and when we decide to make an investment for ourselves, we create a feeder in one of our entities to house those investments and call those clients who might want to invest their capital alongside ours.
As such, in addition to the hedge fund business, we have a family office alternative platform that enables our clients on a deal-by-deal basis to invest alongside our family office money.
What are the benefits of co-investing?
We have a team of people who do a lot of research on funds. Once someone decides to invest in funds, they can either hire a team of people to do that research — including finding funds — or they can use us. We’re an add-on research capability to anyone who wants to work with us.
Clients know that we’re only putting them into investments that we’re putting our own money in. That differentiates us from a bank or a brokerage firm, where the people who are making the recommendations don’t always invest their own money into the funds they recommend.
What should families looking for co-investment opportunities know?
The first thing they need to know is what they want to accomplish. What is their portfolio all about? What do they want their money to do? Do they need liquidity? If they don’t want anything that’s going to be illiquid for more than a year, for example, there’s a whole set of investments they can’t make. They have to know what their goals are.
We can help families think through their investment plans, help them understand the types of opportunities that exist for what they want to accomplish, and discuss the tools that are available to them to achieve their goals.
What are some key principles for successful co-investing?
Understand the strategy that you’re using; and understand on a nonemotional, rational basis what a realistic expectation is from that strategy. That goes for all investing. With co-investing, you want to see the track record of the person you’re investing with.
What market opportunities are you watching now?
The main thing that’s been different over the last year or two from the previous couple of decades is the direction of interest rates. You’ve seen a lot of assets being marked down as interest rates have risen. At the same time, stock price-earnings ratios have come down. A lot of regional banks that would usually lend to commercial real estate investors are now out of the market.
One of the things we’re watching is lending funds. Funds are functioning as banks and generating 10% to 13% net to their partners. That’s higher than the historic return on equities. We’re seeing a lot of our clients moving into lending funds.
We’re also watching some very opportunistic real estate funds. A lot of people who bought properties with floating-rate mortgages are having a hard time. Funding, especially in real estate, is not as easy to get as it was a year or two ago.
These opportunities are driven in very large part by the substantial increase in interest rates.
What’s new in the family office space?
There’s been a significant increase in the number of family offices and a significant increase in the percentage of family offices started by people who have a background in financial markets. Many family offices are more sophisticated investmentwise than those started in the past.
We’ve also seen family offices hiring some very, very talented investment people. They’re willing to pay for talent. Family offices are creating an extensive network of advisers, high-net-worth individuals and other family offices.