Pritzker Brothers Move Beyond the Family Office Model
January 12, 2016
Stephen Foley | Financial Times
The Pritzkers were Warren Buffett before Buffett was Warren Buffett. The Chicago family, which boasts 11 billionaires in its ranks, has been accumulating businesses for more than six decades, across an array of industries, from manufacturing to casinos to banking to cruise ships, as well as building the Hyatt hotels chain that remains the family’s trophy asset.
As his investment vehicle, Berkshire Hathaway, has grown, Buffett has in recent years switched from buying shares to purchasing whole companies, but the Pritzkers have been in the acquiring business since the beginning.
It is a tradition that scions of the family continue today. The pitch that Tony and JB Pritzker are making sounds remarkably similar to the one Buffett makes to family-owned businesses when he offers a “permanent home” at Berkshire Hathaway: sell your company to us, the brothers are saying; an industry buyer will subsume it, private equity will strip it and flip it to the highest bidder, but sell to us and we will invest in its employees and in its future.
“I grew up watching my mom and dad selling rooms in our motels,” says JB. “We had CEOs coming to our house so that my dad could persuade them to have their executives stay in Hyatt hotels. I can relate to how Hyatt is talked about in the media. How it does as a company matters a lot to me, even if I am now doing other things. So it’s personal. And that is true for family owners that sell — even if they are selling the entire thing, their legacy is wrapped up in the name and the future of that business.”
Pritzker Group — into which the two brothers have pooled their personal fortunes, estimated at $3.4bn apiece — illustrates the rising clout of family money.
After three deals this year, the group now boasts ninewholly owned businesses, a diverse portfolio that runs the gamut from Entertainment Cruises (“North America’s largest dining cruise operator”) to Peco Pallet, a logistics company, to Clinical Innovations, which makes obstetric equipment. It also has a venture capital arm, which has taken stakes in more than 100 start-ups.
Family offices are increasingly looking for ways to circumvent the high fees of private equity and venture capital funds by making those investments directly — and sometimes bidding against private equity firms to buy whole businesses. PitchBook, which collects data on takeovers, has recorded a big increase in acquisitions by family offices: 97 deals in the US in the past five years, versus 56 in the previous five.
The brothers are itching to do more but prefer not to call Pritzker Group a family office. “We’ve been at this quite a while and we don’t operate much like a family office,” says JB. “We are much more like a professionaland world-class investment firm.”
Tony and JB are the sons of Donald Pritzker, who built Hyatt with his brother Jay; a third sibling, Penny, is commerce secretary in US president Barack Obama’s administration. Frictions and factions across the extended family necessitated a delicate restructuring of the Pritzker empire that culminated in the sale of the its industrial conglomerate Marmon Group in 2007 — to Berkshire Hathaway, no less — and the flotation of Hyatt in 2009. But while feuds between siblings and cousins bubbled for a decade, the brothers only became tighter.
Working together since 2002, JB focuses on the deal-doing side, drawing on his experience in investment banking and venture capital, while Tony — at 54, the older by four years — is the operations guy who cut his teeth at various subsidiaries of Marmon before its sale.
Their relationship is recognisably that of brothers, by turns lavishly praising and relentlessly ribbing each other, not least about the annual Pritzker Group softball tournament.
“I wake up in the morning and I have 15 emails from JB,” says Tony. “He works his butt off. I’m convinced that time moves more slowly for him. I can’t keep up. But we are both extremely competitive. Like, JB’s team beat my team in softball this year and I’m not so happy about that.”
JB: “But it’s not like I’m rubbing it in every day.”
Tony: “Well, you have put that trophy right in front of
the door to my office.”
JB: “I didn’t say I wasn’t rubbing it in every week.”
Tony: “But we won the year before. Two years ago, we won.”
JB: “What have you done for me lately?”
When FT Wealth magazine speaks to the pair, they are in Las Vegas, attending a trade show for the packaging industry called Pack Expo and showing off Pritzker Group portfolio companies that include LBP Manufacturing, which makes the cardboard sleeves that keep Starbucks’ customers from burning their hands on hot coffee cups. “We are not here pulling slots,” says JB. “We love packaging.”
Showing up to meet customers is part of the deal. By going hands-on at their various portfolio companies, the brothers are demonstrating they are engaged owners who are in it for the long haul, rather than entitled billionaires pursuing a fad for direct investing. “It is important people don’t feel like we’re going to decide not to be in this business tomorrow and go sit on the beach and eat bonbons,” says Tony.
Another part of the deal is stuffing Pritzker Group with talented investors and operational managers. This, they say, is the test for a family office considering copying the Pritzker model and plunging into the acquisition of operating businesses. It cannot be done, they say, by drafting in the family lawyer or the chief financial officer of the family business to run acquisition talks.
“The family members who are involved ought to have a background of having done it before, outside or inside the family business,” says JB. “Just because one happens to be wealthy, it doesn’t mean you are naturally any good at building an investment operation that is world-class or successful.”
Pritzker Group’s private capital team is led by Paul Carbone, formerly of Robert W Baird’s private equity arm, and there are veterans from Blackstone and Sam Zell’s Equity Group Investments, as well as executive talent from companies as diverse as Redbox, the movie rental kiosks business, and medical equipment supplier Cardinal Health.
The hunt for acquisitions is focused on mid-market companies valued at $100m-$500m. The appeal continues to be to family-run or entrepreneur-owned businesses looking for capital that can take a “40 years, not four years” perspective, the brothers say.
As well as the emotional appeal to family business owners, there are practical attractions, too, and several reasons why the Pritzkers believe family capital has an advantage over private equity in some deals. Chief among these is the ability to offer greater flexibility in deal structure than a private equity firm can; the latter has a short time horizon for buying and selling assets for its funds.
Family acquirers can shape a deal to fit around a seller’s tax plans or trust arrangements, for example, much as Pritzker Group allowed the Duchossois family to keep a minority holding in Milestone AV Technologies, which makes wall mountings for flat-screen televisions, in their deal in 2013, or as Buffett acquired the Pritzker family’s own Marmon Group in chunks over a six-year period.
“We don’t lay all of our family baggage, and they don’t lay all their family baggage, on the table always,” says JB, “but we certainly empathise with all the challenges of multi-generational wealth. We understand that families often need diversity in their holdings, and sometimes there are complexities in the way that those assets are held that we can manage through.”
It is a pitch the brothers are making as vociferously as ever, as more family offices are attracted to direct investing and set themselves up to compete for deals, along with a private equity industry pumped up on cheap borrowing. The Pritzker name may be famous, but getting sight of the best acquisition opportunities involves telegraphing the group’s availability to invest for the long term and highlighting what makes family money different.
They would never do anything as gauche as posing for photos with an open cheque book but, as JB says: “We have to try harder than Warren Buffett.”
