When a family invests its time and resources into building a successful company, then launches a family office with the proceeds of the sale of that company, it can be tempting for the family to keep its investments in company stock. But avoiding concentration risk is also important for families as they shift from running an operating company to investing.
Jamie Biddle, an eighth-generation family member and CEO of Still Pond Capital, the family office of one branch of the duPont family, helped guide his family away from this type of concentration risk.
Historically, the duPont family held ownership stakes in the DuPont Co. and in General Motors. By Gen 6, the investments of Biddle’s branch of the family were still almost exclusively in those two stocks.
There were some good reasons for this, Biddle says. The stocks had done very well for the family over the years. High taxes on capital gains were also a disincentive to selling.
So the family lived on the dividends from those two stocks. The family office at that time was more focused on services than on investments, since they weren’t actively managing the investments. When Generation 6 passed leadership to Generation 7, the family hired a bank to manage their investments, who made the decision to stay principally in those two stocks.
Biddle took over the family’s investments around the time capital gains tax rates were reduced to 15%.
“I made the argument to the family that now was a unique time to diversify our risk,” Biddle says. “Holding just two stocks — even though they were both in the S&P 500 — was a risky solution.”
Biddle proposed that the family “tear off the Band-Aid,” sell the stock, and diversify. They did so, paying the one-time capital gains tax. At the time, of course, they could not know how the stocks would do in the future.
“It turned out it was a good idea that we were able to compound the capital more efficiently,” Biddle says.
Still, selling the stock of two companies so integral to the family’s history was not an easy decision. It may have made financial sense, but there was also an emotional component.
“Just two stocks have treated us very well. DuPont has been one of the great long-term compounders in U.S. market history, while General Motors was a successful investment for many years,” Biddle says. “We had pretty much zero basis stock, so we paid capital gains on all of it. And looking ahead, we realized we’d likely diversify into something that’s going to compound into a lower rate.”
Biddle understood the fear — but he presented the counterargument to his family.
“You’re riding the idiosyncratic risk of two stocks, and we don’t know what’s going to happen in the future,” Biddle says. “How much collective risk do we want to take with the family capital? Keeping it in two stocks has worked but it is very risky. Do we want to continue to keep that level of concentration and that level of risk?”
When the argument was presented that way, it became clear that for his family, the downside risk was too great to keep the concentration, Biddle says. He knows not every family will reach the same conclusion: “I know some families who are in equally old companies who still hold super concentrated positions and very, very old stock at zero basis, and they’re comfortable with that risk.”
Biddle says one difference may be a different mindset in earlier generations.
“Often, the closer you are to the money maker, the more comfortable you are with risk,” Biddle says. “When you’re the first generation, you made the money. The risk was enormous. You were highly concentrated into one company — and 99% of people like you failed. You were in the 1% that actually pulled it off: Your idea worked, and you executed brilliantly, and you made a huge amount of money. Entrepreneurs beat the odds once, and they often think they can do it again.”
They may also feel that they understand the company’s industry so well that they will foresee any risks to the company stock.
“When you get to Generation 8, the money was made a long, long time ago,” Biddle says. “I didn’t make this money, and nobody I know made this money. We’re just incredibly fortunate stewards of that capital.”
It was this viewpoint that led Biddle’s family to decide to sell their stock and diversify.
“Concentrating your wealth and increasing your volatility when you have responsibility for lots of family members and their income — it’s just something you get a lot less comfortable with the further away you get from the original entrepreneur,” Biddle says. “I think of this as perpetual capital, and I’m a steward of it. I have to figure out how to keep it going for as long as we can, to benefit as many generations as possible.”
Still Pond Capital, LLC (“Still Pond”) is a Registered Investment Adviser (“RIA”) under the Investment Advisers Act of 1940. Registration as an RIA does not imply any particular level of skill or training. All information contained herein reflects the opinions of Still Pond, is subject to change without notice, and is provided for informational purposes only. Nothing contained herein should be construed as legal, tax, or investment advice, or as a solicitation or offer to buy or sell any security or investment advisory service. Investment advisory services are available only to clients pursuant to a written investment advisory agreement and after receiving Still Pond’s Form ADV Parts 2A, 2B, and 3. Still Pond manages portfolios for individuals and institutions. All investments involve risk, including the possible loss of principal. Past performance does not guarantee future results. While Still Pond believes the information contained herein is from reliable sources, it does not warrant its accuracy or completeness and assumes no responsibility for any errors or omissions.