World’s Wealthiest Gather in Beverly Hills for Group Therapy, Investment Advice

Michael Sonnenfeldt
Michael Sonnenfeldt
Courtesy of Tiger21

So you finally sold the business you have been building for the last 20 or 30 years for a big chunk of change. Now what?

While the thought of starting a new venture sounds interesting, you don’t want to spend the second half of your life like you did the first—working all the time. But you can’t just take cruises and sit around watching the time run out on the clock. You need to do something.

And then there’s all that cash. What to do there? Invest it, right? But how should you do it and what should you invest in?

If this sounds like you, then you’re probably in the top 1% of the 1%—you’re not just rich, you’re wealthy. But you didn’t get your money from mommy and daddy or from winning the Powerball jackpot. You worked for it and now you want to preserve it. Unfortunately, it’ll be tough to find anyone who has sympathy for you and your first-world problems. So where can you turn?

Tiger21 is an elite, tight-knit group of high net-worth individuals from across the country who, as former Fortune managing editor Andy Serwer wrote back in 2004, “aim to enrich themselves by disclosing their portfolios and their personal lives, everything, to one another.”

Tiger21 is part investment club and part group therapy for the ultrahigh net worth set. It aims to help its members, who must have at least $10 million in liquid investable assets, to identify the strengths and weaknesses in their portfolios and, most importantly, learn about new investment ideas. There is just so much a plutocrat can learn reading Fortune and listening in on conversations at the country club.

This week, Tiger21 members from all over North America will gather in Beverly Hills for a few days of tough financial love from their comrades. They will spend their time listening to lectures from investment experts and discuss their financial hopes and fears for the coming year. Fortune sat down with Michael Sonnenfeldt, the founder of Tiger21, to learn more about this elite conference and what will be discussed. The following interview has been edited for publication.

Fortune: Why have this annual conference? What can members expect?

Michael Sonnenfeldt: We will be talking about the world of finance, the world of family, and the world of legacy and philanthropy, with a little bit of behavioral finance thrown in. We will have world-class health experts, leading experts in finance, such as Tom Barrack from Colony, one of the top guys in real estate, and people in philanthropy, like Richard Dreyfuss who has extensive experience in that arena, as well.

It is also a chance for our members from North America to meet one another in person. We bring together all these top entrepreneurs and investors into the same room. They then tend to build relationships together, discuss deals with one another, and explore issues.

Your latest member survey found that around “80% of the investments made by TIGER 21 members in the private equity space have been direct investments.” Does this mean that they are avoiding big private equity firms like Carlyle and Blackstone and going rogue?

We have great relationships with the firms you mentioned, what would be called the largest or “mega equity” funds. But our members made their money building small companies into very significant successes. And so they have a bit of an edge when thinking about investing and tend to go to the middle market. There is some evidence showing that middle and small market private equity investments tend to outperform the big deals, albeit with more risk. But our members are uniquely able to shoulder that risk.

So what are some examples of these direct investments?

What’s interesting is that 60% of that 80% of direct private equity investments are in companies owned by our members. The remaining 20% is where a member takes a small piece of another company and either becomes a board member or rolls up their shirt sleeves and becomes an adviser.

There are passive investors, those that just throw their money into a managed fund or buy an ETF, and then there are active investors, those who follow financial news and buy and sell equities and the like. But it sounds like your members are more intense than that.

Well, they really have no choice but to get involved. We are living in a negative real interest rate world where you really can’t just be passive anymore. Japan just went into negative interest rates and eight out of 10 of the big European economies are also in negative territory. Our members are deeply concerned about deflation or dramatically slowing growth, so they are being forced to take risk just to stand still. This is a conference where people explore what I call “prudent risk,” which plays on the skills they have honed over a lifetime as really successful entrepreneurs.

That makes sense looking at your recent survey, which shows your members’ personal allocations to “safe” investments, such as fixed income and cash, are at the lowest level since before the 2008 financial crisis. Does that mean your members are very bullish headed into 2016?

I don’t think they are very bullish, actually. They are just being forced to take risk and so they are looking to take prudent risk. Some of our members would say they are investing to protect against a downturn in the economy because they are investing in income producing activities, which will be far more valuable than cash if the economy stalls.

With the Fed raising interest rates, I thought that investors would be dialing down the risk, not increasing it even more.

For entrepreneurs who sold their business, they really have no choice. If you do the typical math, in order to generate a particular sales price, they probably got a multiple of six or seven times Ebitda in the sale of their business. That translates to a 16% or a 14% return. Today, they can only get a 2% or a 3% return in the market. It’s not much. If you spend 40 years building a business that generated, say, $3 million of Ebitda and sold it for $20 million, after you pay the taxes you are left with $16 million of which you can only generate 2%, or $300,000, a year. That means your income has fallen by 80% or 90% because the money that comes out of the sale can only be reinvested at dramatically lower rates. That’s what we call “sticker shock.”

I guess you can always eat into the principle, but that doesn’t sound like something your investors want to do.

Exactly. It’s the dilemma so many entrepreneurs have. Before, they were business builders, but now they consider themselves “wealth preservers.” They know that if they stand still they are going to go backwards. So they are frankly desperate to find ways to generate prudent income that meets their risk profile. This conference is where they explore this dilemma with fellow members who are on the exact same unique journey.

Speaking about risk, the February cover of Fortune deals with the “reckoning” that is coming for investors who have plowed an unprecedented $362 billion into startups over the last five years. Are your members concerned about exiting some of the private investments they have made?

They are dramatically concerned. The value many ascribe to their membership is meeting people and learning about new investments they wouldn’t have learned about on their own. But just [as] importantly, not investing in opportunities that their fellow members dissuade them from going into, because they didn’t understand the risks. Most entrepreneurs understand risk in the business they have been building for the last 40 years, but few have the ability to see risk outside that narrow scope.

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