The family office path to private assets

Michael Dell’s $16 billion family office, MSD Capital, is steadily increasing its allocation to private assets, as part of a shift away from stock picking. 

Many of the eight private equity deals completed since 2016 comprise partnerships, including an investment in UFC, the world’s biggest martial arts promoter. MSD also forges joint-ventures in real estate, including the development of a skyscraper next to New York’s Grand Central station. 

MSD’s glossiest deal worth $4 billion involves the purchase of the Ultimate Fighting Championship, billed as the largest martial arts promoter in the world

Michael Dell started his business, now Dell Technologies in 1984, after realising he could market computers direct to the public at a bargain price by cutting out retailers. He took his business private for $25 billion in 2013 taking advantage of backing from private equity firm, Silver Lake Partners. 

Dell used privacy to tighten control of his company and engineer a series of audacious acquisitions. He returned to the stock market in 2018. Moving on from cheap computers, Michael Dell now talks of creating the “cloud in a box” by giving his customers the chance to stream big data, machine learning and AI on a ‘pay-as-you-go’ basis. 

MSD began in 1998 over a dinner in Manhattan with Glenn Fuhrman and John Phelan, who agreed to head up the operation.  Early on, it was involved with hedge funds following its 2006 decision to back SkyBridge Capital, co-led by Anthony Scaramucci who briefly served as communications chief for US President Donald Trump, prior to their spectacular falling out, weeks later.

As well as backing new hedge fund managers through SkyBridge, MSD developed its own expertise in hedge funds, credit and value investing. Stock market strategies more than delivered for MSD at the outset. But active funds, struggled to beat the indices, whose performance is driven by a small number of big growth stocks. 

Passive inflows and cheap money have pushed up shares across the market leaving many of them moored at a high rating compared to credit which is unattractive, according to private equity firm Verdad.  

When companies seriously disappoint investors their shares decline sharply and there few value managers around to pick them up for the rebound. 

Consultant Bain & Co reviewed MSD in 2017, according to the Wall Street Journal. It argued private markets should be a big focus for MSD, which declined to comment.  In fact, MSD has been travelling down this road for some years, as its returns from stock-picking have declined.

Its conversion to private assets grew in 2008 when MSD enjoyed a windfall from the rescue of IndyMac Bank, now OneWest, during the credit crisis. Michael Dell has often expressed satisfaction at the way the privatisation of his technology group allowed him to revive its prospects with the help of acquisitions that would have unnerved stock market investors.  

Dell’s expertise in big data, machine learning and AI is in a position to empower MSD’s private asset deals, which tend to be hungry for data in the absence of stock market disclosures. And big data requires analytics. As Dell recently said: “If you’re not using your data with AI, you’re doing it wrong.”

MSD shares Dell’s ferocious interest in the new. According to a mission statement: “We are motivated by an intense curiosity to grasp the underlying truths that govern financial markets.”

MSD’s real estate business started in 2004, forging its partnership to develop offices next to New York’s Grand Central station with TF Cornerstone, run by two brothers, Tom and Frederick Elghanayan. 

Corporate deals are led by Douglas Londal, head of MSD’s Private Capital Group. His early career at Goldman Sachs was followed by an eleven-year stint as chief operating officer at New Mountain Capital, founded by Steven Klinsky (ex-Goldman) for whom he helped build assets worth $15 billion.

Investments achieved by Londal’s team since 2016 include a deal with George Soros to back Owl Rock Capital Corporation, which lends money to mid-sized corporations. MSD has also backed industrial group Ring Container Technologies and Wirb Copernicus Group which reviews the quality of clinical research. 

It backs Endries International, a global distributor of fasteners, Hayward Industries, a maker of swimming pool equipment, Transaction Network Services, a data solution provider, and Prophet Capital, a residential mortgage specialist.  

Many of the businesses appear humdrum, but technology is dramatically revolutionising industrial and financial processes, where MSD can draw on the expertise of Dell Technologies, where it retains a significant stake.

MSD’s glossiest deal worth $4 billion involves the purchase of the Ultimate Fighting Championship, billed as the largest martial arts promoter in the world, with Silver Lake.  This August, MSD considered investing in Sunderland Football Club of the UK. Silver Lake negotiated its $500 million purchase of a 10% stake in Manchester City FC in November.

Sports franchises are not cheap to access but they are increasingly seen as a sound source of revenue for families prepared to manage their stars and their fans. Like industrial and financial processes, their output can be enhanced with technology. Streaming, for example, can deliver news, views, advertising and analysis directly to its fans.