Families with both an operating company and outside investments often prefer to invest in industries they know well — but that can lead to too much concentration on one industry, since they are likely to know the operating company’s industry best.
That was the challenge for Tony Tagliapietra when he joined Michels Corporation, an energy and infrastructure construction company based in Brownsville, Wisc., in 2019 as chief investment officer and vice president of shareholder services.
“Our job was just to diversify,” says Tagliapietra, who leads the family office’s investment operations. “Find great apartment deals. Find great private equity funds, VC funds, and direct investments. That has been my main goal.”
Still, the very trends that led to the company’s growth and its need for outside investment expertise have also meant that some of the most attractive investments risk duplicating the family’s investment in its operating company.
“Investment strategy always pivots on what the hot sector is,” Tagliapietra says. “Today, families are putting a lot of money into infrastructure. It started with President Biden passing the infrastructure bill, and it’s only accelerated through the new administration and especially these hyperscalers with their data centers.”
Data center opportunity
Michels contracts with developers to do all the initial work on data centers or other large construction projects, from excavation and grading to connecting fiber optic cable and utilities to pouring the foundation.
“Then we hand the keys over for the construction process,” Tagliapietra says. “Developers love using us because we’re one contractor that can handle the entire early scope of a data center.”
The fortunes of the company have long followed the drivers of growth in the construction sector, from fiber optic in the 2000s to pipelines and energy infrastructure today.
“Data center construction and energy distribution are our biggest divisions right now,” Tagliapietra says.
Data center construction is similar to Michels’ other projects but on a larger scale, Tagliapietra says.
“These projects are hundreds of acres. We have some of the biggest earth-moving projects that we have had on record,” Tagliapietra says.
Although large construction projects, such as data centers or pipelines, can be controversial, arguments about specific projects are usually over by the time Michels begins work. Tagliapietra says the family understands that data centers, for example, are critical to the United States’ growth and national security.
And work in the industry has given Michels’ owners a nuanced view of environmental challenges — both those posed by some construction projects and those solved by them.
Michels installs battery systems for renewable energy storage, for example.
“There will be a menu of different ways to power these infrastructure projects,” Tagliapietra says.
And recent advances in how data centers are constructed have greatly reduced how much water they use: “A closed-loop system recycles 90 to 95% of the water,” Tagliapietra says. “Water consumption is actually down to about what a couple of high-volume coffee shops use in a year.”
As for pipelines, another growing area of Michels’ business, Tagliapietra says they are often a safer and more environmentally sound way to transport natural gas than using above-ground transportation.
Investing for diversification
With the operating company heavily invested in these specialized areas, the family office investment team’s goal is to diversify the family’s investments.
“With infrastructure construction being in vogue right now and a lot of money going toward it, distributions continue to happen outside of the CapEx side of the corporation,” Tagliapietra says.
The corporate expertise in infrastructure construction naturally leads to a lot of investment opportunities in that area — but Tagliapietra says they are approaching this carefully.
“On the family office side, we see plenty of infrastructure funds. Some — which we have invested in — are tied to either energy production or distribution. Others are focused on data center buildouts,” Tagliapietra says. “Because of our exposure on the corporate side, we have limited our family office investments in data centers. Our thought is that we should get more into energy investment.”
Therefore, the family office has focused on natural gas exploration and distribution funds.
“We feel natural gas is going to be the stopgap for multiple years, before nuclear really takes off,” Tagliapietra says. “So that’s where we’re turning our focus for investment: more on the energy side than on the actual ownership and construction side.”
The family office also makes direct investments, including one in a Wisconsin-based medical technology company. But beyond that local investment, for investments in industries that veer farther from Michels’ expertise, the family office depends on fund managers.
“We know our limits when it comes to biotech or medical, for example, so we let the professionals handle that. We’ll invest via funds,” Tagliapietra says. “We are comfortable taking minority positions in companies, as we typically do not have the resources or desire to acquire controlling stakes. However, we will make direct investments when we see a compelling opportunity backed by strong market demand.”
The “Holy Grail” of investments, Tagliapietra says, is one that helps both the corporation and the family office make money.
“We’re always looking for the type of investment where we buy a certain percentage of a company and then the corporation uses that company, which increases revenue,” Tagliapietra says.