The family fortune may have been made by an inherently conservative investor with a flair for designing suitcases, but when it comes to investment strategy subsequent generations of the Koffler family have been determined not to carry any baggage.
Sol Koffler is a poster child for the American dream. Arriving in the US from eastern Europe in 1920 at the age of 13, he started selling $1 suitcases as the Great Depression reached its peak. Over the next 46 years he built American Tourister into the second largest luggage company in the country.
The Koffler Group family office was established in 1979 from the proceeds of the sale of American Tourister to the Hillenbrand Company and for 14 years was run on the same prudent lines by an entrepreneur who didn’t believe in taking on debt.
By the time the Koffler Group was handed to the next generation in 1996, however, there was an immediate acknowledgment that a more aggressive approach was required. Chief investment officer Terri Chernick says that without wealth creation, consumption, taxes and inflation would have quickly taken their toll on the wealth her grandfather built over almost half a century.
Her father Richard Bornstein is chairman and chief executive of the Koffler Group. He joined American Tourister in the 1970s and after the establishment of the family office set out to diversify its real estate holdings. He also recognised the importance of strengthening its investment capabilities, which is why he brought his daughter into the business in 1997.
A Harvard Business School graduate, Chernick immediately put the knowledge acquired from corporate consulting at Bain & Company, various management roles within Fortune 500 companies and co-founding several biotechnology companies, to work for the benefit of the family.
She says her approach to selecting advisers differs from some other family offices in a number of ways. “Firstly, as an ex-Bainie I like to drill down to talk about the actual assets the managers are buying and see how different assets in the system are being priced. So my goal in speaking to a broad array of managers is not to just meet them and understand how they think, but to stay informed of asset pricing in all the asset categories and see what current valuations are - we never make direct trades so there is no conflict of interest.
“Secondly, we may seek out managers in asset classes that are volatile or in crisis if we can find a manager who has an information edge. I see volatility and supply/demand imbalance as an opportunity for alpha.
“Finally, we seek only small, niche and inefficient asset classes where a manager can only grow to $400-$500 million assets under management. We find alpha only exists in obscure, niche, oddball segments, which can be quant, market makers, commodity traders, volatility, etcetera. I am learning new markets all the time and as long as I can follow the cash flow, I am game!
“Often these managers are terrible at back office operations. Sometimes they need seeding. We will seed if we like a fund and we can build a back office from scratch. I was chief operating officer of a start-up before rejoining the family office so unlike most finance types, I don’t mind getting my hands dirty. This is how we can create value.”
The Koffler Group is an opportunistic investor, adds Chernick. “Many structured funds have to sell at certain points in time due to the nature of their limited partner agreements - we will buy at those times. Many public real estate investment trusts like to have certain types of properties, so we structure sales that work for these entities. By being flexible on time lines, tax structure and yields, we make money from those who cannot be flexible.”
In the late 1990s, small cap value stocks were cheap so the group had over 30% of its portfolio invested in that asset class. Between 2004 and 2007 emerging market was inexpensive, which left it over-invested in equity in Africa and the Middle East although it managed to pull back in mid-2008 just before the markets crashed.
Over the last five years, Chernick says the real estate business has performed well. “With the recent rises in US tax rates federally and stateside, we are more focused than ever on after-tax returns,” she says.
“Our top tax rates are 55% for short term gains, but you can double your returns over time by taking advantage of opportunities to defer taxes and access long-term tax rates. As a consequence, a high-turnover hedge fund that has mostly short-term gains would have to earn 2-3 times more than a long-term tax rate player like real estate to generate the same return.”
Private equity and index funds also have an instant lead over hedge funds in this regard, she says. “This tax rate differential (which just got wider) creates a huge hurdle for these hedge funds to jump over for tax-paying family offices. This is one reason why we see private real estate as a terrific asset class for the taxable high net worth investor, especially now. And if it is good for us, we know it is good for others.”
Bornstein describes private direct real estate investment and development as the group’s most lucrative activity. “We focus on commercial real estate, which is very relationship oriented with the world’s big retailers. We can buy properties that go under the radar of the billion-dollar real estate funds/public investment trusts but are out of reach of the ‘hobby’ investor. We get our hands dirty meeting with zoning officials and neighborhood committees, actively managing our properties.”
Chernick reckons a conservative approach to real estate leverage, tactical macro allocations and a broadly diversified portfolio with a mathematical eye for cheap tail risk enabled the Koffler Group to emerge from 2008 relatively unscathed (losses totaled less than half the gains of 2007).
“We feel current market conditions represent a healthy backdrop for ‘value-added’ real estate. We know we can add alpha because we have 20 years of relationships and we know how to rehab a problem property, which gives us the ability to buy stuff cheap.”
The ability to add value is also a key consideration when it comes to employing relatives, says Bornstein. “We encourage family members to choose a career that fits what they enjoy doing, or to take the time they need to get the mentorship, training and jobs they need to figure out what they really want to do. If they want to come back to Koffler later in life, that is great. But we want them to do so based on a genuine interest in working here and the ability to bring a unique skill to the team.”
Chernick acknowledges that she had no interest in joining the family business when she left college and that as the youngest grandchild of the patriarch, no one at the family office would take her seriously. But she also accepts that this was a reasonable view and says she knew she could get better mentorship, experience and on the job training at Bain and in corporate America.
“Some family members think they deserve a top job at a family business because they are family. I believe the attitude needs to be, ‘What valuable service can I bring to my family?’ Having family members working here is a very valuable approach because when non-family members see that you are working side by side with them on projects, it makes them feel a part of the team and shows that you care about them as people.
“In addition, family members are role models. My grandfather was always known to be a man of his word and so is my dad. If he shakes hands on a deal, it is done, regardless of where the legal paperwork lies. We are loyal and ethical. This is the kind of ethics that prevails at our firm and it emanates from the founders/family members through to the employees.”
The Koffler Group has received approaches from other wealthy families to manage their assets, but Chernick says they are too busy to consider managing the assets of other families and individuals.
“We have been focused on keeping our head down and doing our own thing. Each internal Koffler team is so competitive to get the best returns that we are not really focused on anything else. However, having been an asset allocator for more than 20 years, I have seen that our real estate group is better than any of the real estate or private equity firms I have seen out there and that it has an awesome risk return.”
The Koffler Group has been undertaking real estate development, major rehabilitation, management and construction since the 1990s, says Bornstein. “We have a full range of staff, are vertically integrated to service all the functions required for commercial and residential real estate and our returns have compounded at extremely high rates for more than two decades. We have managed money for the billion dollar real estate investment firms that manage money for the Ivy League endowments and we have a partnership with one of the largest global investment banks. We have run money for the smartest institutional names out there.”
“Philanthropy is an important component of these family values,” he concludes. “Sol Koffler had a strong belief that if one is successful, there is a moral imperative to give something back. Terri’s mom, Sandra Bornstein is actively involved in charity work. Also, we have a family foundation that has been allocating financial aid to a wide range of causes (especially educational, religious, and medical) for many years in both Rhode Island and Florida.”