Family Business Audiocast | Episode 6 | Richard J. Wolkowitz | Xylogenesis

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About Our Guest:

Richard J. Wolkowitz is the founder of Xylogenesis, a family advisory company designed to support families in critical areas such as succession planning, strategy, governance, and wealth management while fostering a positive family culture and philanthropic efforts. With a diverse background spanning business, law, and leadership, Rich has accumulated extensive experience working with various family offices. Over the years, he has served as a non-family member on several single-family office boards and has built a reputation for developing leadership within family enterprises. Rich's work emphasizes the importance of multigenerational thinking as families navigate challenges and opportunities together.

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[Transcript]

R. Adam Smith: Welcome to the Family Business Audio Cast on LinkedIn. I'm R. Adam Smith, creator of this audiocast series. I've been an entrepreneur, banker, and board leader for over 25 years. Today we have about 50 registrants for this event. Thank you very much for joining today. Family business is a passion of mine, having grown up in a family of entrepreneurs and engaged in a wide range of dialogues and businesses with fascinating enterprises around the globe for two decades. I founded the Family Business AudioCast to provide a valuable platform for listeners to hear from veterans, academics, and leaders in family-owned enterprises and family offices. Whether you're a seasoned family business leader or building a family office, these conversations hopefully will be enlightening for you. Today we have a special episode focused on the intersections of family legacies, wealth, succession, and business operations as well. Family business is a subject close to my heart and all of yours and I'm excited to delve into these topics with our esteemed guest today. We welcome Richard Wolkowitz on the audiocast today. Richard, nice to have you here.

Richard J. Wolkowitz: Thanks, Adam. Appreciate it.

R. Adam Smith: Yeah, it's great to talk to you again. A bit on Rich: he's a founder of Xylogenesis, which is a family advisory company that he's building after decades in the space, after working closely with a range of different types of family offices. Rich has a background not just in business but also in law, multiple boards, financial services, and leadership and governance and succession planning, focusing specifically on multigenerational families and the issues and the continuum of their lives as well. Rich actually began his career in the White House and then he went into the legal profession and moving further into private equity venture capital, when we met many years ago. He has joined several single family offices as non-family members in governance and recently formed his own company after building other leaders in the space and also consults families in the U.S. in different areas of their development. So, thank you very much for joining. Let's dive in today. Richard, tell us what you're up to with your new company.

Richard J. Wolkowitz: It's been great. You know, I saw a couple years ago a gap in the marketplace when it came to the words family office or family office offering. There's so many great firms out there today that provide the integrated services of wealth management, investment management, accounting, legal, insurance, banking, etc. And what I saw as missing gap was the exact role that I played for three different single family offices, which is how do you integrate the entire system, not only those integrated services but the family office itself combined with the family to create an outstanding, high-performing family office that also has the family component built into it and creating durable family harmony. So seeing that gap I decided to test the market and got a few clients here and there who needed that sort of outsourced CEO perspective from a family office to provide them with strategic counseling and operational advice on how to effectively manage their family office. So that's what I've been doing for the last almost year or so.

R. Adam Smith: Right, that's great. We see a lot of evolution in the family office space. Of course everyone here knows it's a very large space, five, six, seven trillion in total. We have experts on the call and on these other audiocasts from our friends Ron Diamond and Martin Roll and the Neiman Group and other friends, thank you for joining and also sharing your views around family businesses. I'd like to draw a distinction between the family office term and the evolution of that as the du jour discussion with family business. So if you could share a bit of your thoughts on, at least in the U.S., the intersection between family businesses and family offices and how you interact with them differently.

Richard J. Wolkowitz: Sure. So family office is really the way I approach it, the holding company or the governance arm to coordinate all the activities of the family, both the family business, the operating company or companies, along with all the family issues as well. So it becomes sort of the center point and coordination point for the families.

R. Adam Smith: So family businesses often go through multiple generations. We've seen statistics how they drop off in terms of the ability and or the interest rate capability to maintain continuity and hold on to those family businesses. And we just spoke about this in the last audio cast with Christina Wing and Wingspan partners, that the new generation, the next gen, is certainly a different animal than G1 or G2 and our generation. So what are you seeing in terms of the transition with the new generation in terms of the governance and then also the M&A and the monetization of those companies?

Richard J. Wolkowitz: Sure. So from the clients I've served, I really see that COVID has really changed a lot of perspectives for the next gen and for the leading gen. So the leading gen now realizes life is short. There's more to life than managing this. And their struggle has often been trying to find family members who want to grab on and start to lead themselves. Prior to COVID, there was a lot more of the family members and next gen wanting to pursue their own careers. The trend I've seen since COVID is that those next gen are really looking for something more connective and wanting to be part of the family enterprise system. So I've seen many young adults leaving their careers, leaving maybe the big cities, returning home to wherever that home may be and wanting to be engaged. And they're coming home to an environment where the leading gen really wants to hand off the baton to them. So there is great engagement, there is great alignment. One wanting to grab on, one wanting to let it go. The question is how do you do it? And making sure that those family members come in having that right alignment. And that's a lot of the work I do is really understanding what's the goal of the family office because the founder or leading gen may have set up the family office for one purpose, right? To maybe organize and manage their wealth. But there's much more to a family office than just the wealth management and investment management component.

R. Adam Smith: Okay, let's come back to governance. So, you've been on boards, you've been in private equity and venture capital and been an investor, so a lot of different hats. Talk about governance, which is an area that I think is very important to be able to understand how governance works business and be sensitive to the real control levers of governance. But also, share some thoughts on how you think best practices can affect and build a family business governance for longer term sustainability and the legacy of that company.

Richard J. Wolkowitz: Sure. Governance to me is really the heartbeat of the family office. Everything kind of centers towards the governance and governance is really how do you what are the process procedures, cadence, timing, different structures that can be in place for people coming together to meet and discuss various topics. In the role of using governance, especially on that earlier topic you mentioned, which is how do you integrate the next gen in? Governance is actually the key to doing that. Families I work with often set up, obviously, a board for their family office where there's opportunities and roles to be played for all family members, whether or not it's the true fiduciary role, whether it's a non-fiduciary role, whether it's an advisor role, whether it's an observer role, and just to come in and listen and participate. The same thing can be true for all the different kind of subcommittees that the advisor, that the board may form such as investment committee, next gen committee, audit committee, finance committee, family committee. Right. So, all those different sectors allow the family to begin to integrate and engage with each other.

R. Adam Smith: The universal banks do a good job and have the range at Goldman or Morgan or JP Morgan. Of course, they have significant resources, but if you go down to the entities that advise the families and the family businesses, even if the wealth is not significant, let's say $100 million, not a billion, talk more about the layers of governance and do you think that there's a big difference between the smaller size family businesses and the larger size businesses with their ability to form their own layers of governance and how do they get that counsel in the market?

Richard J. Wolkowitz: Sure. So the governance is required for all family systems. The question is the wealth of the family may guide them the opportunity to have advisors that they can afford in different capacities. So I represent, for examples, on the small end of family that's worth 20 million dollars all the way to the large end, my largest family is worth over 12 billion dollars. So does that 20 million dollar family and all those ranging up until the billions want the same kind of things? Yes. Do they need that same kind of support structure? Yes. So it's really, you begin to talk to families about what are their needs, what are their purpose, what's the goals they're trying to accomplish, who are the different family members involved, and hey, are there third-party outside resources, such as those that you've mentioned and others, that can play a role to help support the family system? So bringing together all those outside sources really helped create the whole governance mechanical system.

R. Adam Smith: So let's move into best practices as a company. You've seen probably, how many family businesses have you worked with over the years would you say?

Richard J. Wolkowitz: Hundreds and hundreds and hundreds.

R. Adam Smith: Yeah, that's a lot. Okay, so that's a lot.

Richard J. Wolkowitz: I've been doing this work since the early 1990s.

R. Adam Smith: I'm not going to go over all those, but it would be interesting to discuss the ways that the families can work together, let's say Tiger 21, let's say some of the stealth family office groups, Ross Perot has had a group over the years, there's many more probably in Europe and Asia that don't get talked about. I'd like to hear your thoughts on how they can collaborate together generally and what type of ways that can lead into a multifamily office environment.

Richard J. Wolkowitz: There's so many resources, as you mentioned, out there today and so many good ones in the evolution of this whole space to create advisors and advisory systems that appreciate and understand and can advise are there. You know, the longer that family offices are around, the more former family office executives and former family members of family offices now have that tangible experience to bring out. So groups like Tiger 21, as you mentioned, all the different organizations provide a great peer-to-peer learning session, not only for the families but also the non-family executives and not only for the non-family executives of family offices, but all the advisors. And so there's so much to learn and share and begin to see these patterns that are developing. And sure, family offices have been around for hundreds of years, but the great proliferation of them over the last two decades or so, have really created a different perspective. And so what are the needs today of all the advisors, of the family office staff, of the family, in order to make a healthy system? Those resources are available, and I can't speak highly enough about the benefits of Tiger 21 and seeing the work they've done for a number of my clients.

R. Adam Smith: Right. Yeah, it's the first mover. There are some other ones that are boutique-y that are memberships and there's a lot of private and supportive dialogue within those environments as well. What's the difference from your perspective between Europe and the U.S. or U.S. and the rest of the world in terms of how family businesses operate?

Richard J. Wolkowitz: Sure. I'm going back to my days of practice in international law in the early 1990s to doing family business consulting work and family office work now over the last 30 years. The trends are still about the same to me what I see. There's, of course, from a government perspective, there's more regulation in Europe and there's about to be regulation, more regulation in the United States. So that's going to impact how different structures such as family offices can operate. From a taking chance point of view, from a legacy point of view, from an innovation point of view, the Americans seem to jump first. And the Europeans, in my perspective, are a little bit more cautious and wait for the development. And perhaps because many of those may be more generations ahead of the U.S., but the U.S. families seem to be constantly innovating, constantly taking chances, and the leading gen is certainly allowing the next gen to, with guardrails in place, to take more chances and let them develop. So I'd say in terms of regulation and next-gen, I think the technology has also been a leader here in the U.S., but I've also begun to see some other European-based technology platforms to begin to develop. And then, you know, women in leadership roles, I think, are occurring much more quickly in the U.S. than other parts of the world.

R. Adam Smith: Right. On a previous audio cast, we talked about the passion investing in the rest of the world, of course, in the U.S. in art, in cars, in real estate. But, for example, Ruby Hugueny, we spoke about in European, especially in their context, they hold on to real estate assets and passion investments even more than the US, perhaps more longer, and that those homes or those chateaus or those castles or those assets can be held on in an attractive fashion outside of the US. I don't see that happening so much in the US. I see real estate as more of a transaction. What do you think?

Richard J. Wolkowitz: The more families I'm working with really divide their real estate portfolio into two sections. One is the commercial side that they're open to marketing and handling in a totally commercial effort. They also have a bifurcated portfolio of what I call legacy real estate. Real estate assets that they want handed down to the generations that are family assets and only to be used for the family and generally never to be sold. So maybe that's a more recent event, but that's when I see how the families are really dividing up their real estate portfolios.

R. Adam Smith: And what are the most tax-efficient areas for long-term capital gains, would you say in the U.S. across the G1, G2, G3, if you look at liquid portfolios, where are you seeing that activity?

Richard J. Wolkowitz: Well, I'm not really a tax expert, so the last thing I want to do is start talking about taxes. So, I would bring in our family's tax experts to talk about what particular areas that they find to be a tax advantage for them. But clearly, real estate is a big driver towards that.

R. Adam Smith: Right. I've been reading a lot about the direct investing. Again, we have some people on the call, and we see this in the reporting from McKenzie, Harvard Business Review, from the Family Firm Institute, UBS, Camden. There's been an explosion of direct investing into operating companies directly. You and I have talked about that, doubling or tripling. The average family holds at least two and a half operating companies, but the larger ones can own 10, 20, 30 companies. What are your thoughts on how they hold those businesses longer term in terms of buy and hold or cash cow or recapping them and not perhaps are they looking to sell them as rapidly as non-family hold?

Richard J. Wolkowitz: Sure, so that's one of the biggest portions of the work I do is most of these great prolific families were in business, right? And that's their DNA is operating a business, going into a business, a facility, seeing people and having that shared experience actually with their employees. In many cases, their employees are multi-generational family employees working on a multi-generationally family-owned business. And so there is that ethos, there is that culture within the family. And so whether or not, as you call it, they've got that golden goose still, it's providing great cash, it's something in the family's DNA to want to continue to do that. And certainly buying businesses that strategically enhance the primary operating company or companies is a strategic approach. Sometimes the younger generation has their own ideas and the family sets up sort of a family bank to help capitalize and support and give them resources to manage those other operating companies. You know, the families that have gone liquid, as many do, they start out with an embedded family office. They grow the business. They may take out the family, embedded family office, into a standalone, but they may sell that family business at some point, there may be a liquidity event. When that happens and they're sitting on liquidity, it's almost certain that those family members are gonna take a portion of that liquidity and somehow exercise their entrepreneurial spirit and go back into business. So whether or not there's this rotation between a family business, then formation of an embedded family office, to perhaps a standalone family office that's outside of the operating company. There could be a liquidity event that then causes them to have their family office then support and become sort of an embedded family office back in future operating companies. So I see this pattern that exists between the family office being a dynamic entity at times, especially for those that aren't able to fully have a total single family office that provides all the services and they outsource some of the work.

R. Adam Smith: Right. Yeah, we've talked in the past about the multifamily office structure and how they operate very differently and the embedded element. There's been some interesting structures and progress there, I think, going back to see right with their embedded platform and Rock & Co now, Crescent, really fascinating organizations. Talk a bit about those more advanced multifamily office organizations. They're getting quite large and quite sophisticated and having talked to the founders and owners, they're really enjoying themselves. They're scaling quickly. There seems to be a flight to quality in a sense, or even with or without acquisitions. And also, for some of those on the call and myself, I think that art is a huge business and is really picking up as well as an asset class.

Richard J. Wolkowitz: Sure, the emergence of sophisticated multifamily offices are some of the greatest tools and services for families. I mean, where else can you get an advisor that has the resources of a substantial multi-family office but also has the experience of looking at so many other families and seeing what they're doing right and wrong to help develop best practices for them. So the multi-family offices are scaling as well. In large part because of what you've mentioned before, they're coming from maybe PEVC world where the deals aren't as prolific because many family offices are getting involved in those spaces and so they're looking for career opportunities and very skilled people are coming in to the multifamily offices there. There's also former family office executives and staff who have worked in a family office and the grass isn't always greener working in a single family office. And so they become great skilled professionals that can come and support and enhance the multifamily offices. So I'm a huge proponent of that. Even single family offices need outside experts. And so who should they go to? They should go to the ones that really have buttoned up practices with the best people. And some of the best in the world.

R. Adam Smith: It seems like some of them, when they get to a scale, let's say over 10 billion, and some of them are 50 billion or even 100 billion, out of 5 trillion, it seems like small numbers, but in terms of scale within the U.S., within a country, and I think Europe is more fragmented, perhaps, because they don't consolidate or they don't want to consolidate as quickly as the US, or perhaps they don't have the pressure or the desire to do so. But some of these groups are getting big at $1,500 billion and becoming really modern forces in the financial world, with internal trust in the states, private banking, alternate investments. They can work with certainly a case or an iCapital or they can do it themselves. And then there's all of this area of passion investing as well. I see a significant amount of money going into modern art in particular. And I think vintage cars has been a big business as well. It's smaller on a nominal basis, but it's an important market. So, interested, your thoughts, what are the passion areas for the G2 and G3? Where are they going to put their time and money?

Richard J. Wolkowitz: Well, I think that's as unique as the families themselves. I mean, their advisors need to be aware of that question and be able to dive deep with their family clients on what is their passion, what do they want to move the needle on, what do they want to roll up their sleeves, and what do they want to use as a central point for the family to coalesce around and work together in. Philanthropy or social impact, two different things and sometimes people get them confused. Philanthropy is clearly for the purpose of giving and not expecting necessarily a financial return, right? You may want to see a return of your money within that organization to move the needle on something, but clearly social impact, you're expecting a return. And a lot of families still are getting those concepts confused, which can cause tension within the family if they don't talk about it first and have missed expectations later. just like you said, art, cars, guns, wine, watches, I mean, you name it. Families are into everything depending on what their interests are and exploring it.

R. Adam Smith: Yeah. Well, you've had a lot of experiences directly to ameliorate and advise around the private holdings, families, maybe of course without names, tell us a story of a transformative experience you've had with the family business in the last six, seven years.

Richard J. Wolkowitz: I think one of the most unifying experiences I've had lately with the family was really helping them design a compensation plan, a long-term compensation plan that'll brought alignment between the family and the C-suite of one of the portfolio companies. And they took that model and rolled it out to all their other portfolio companies. You know, family offices and these families have prolific expectations, right? They're dreamers, they're often running around and looking at opportunistic deals, but once they get that deal, they focus in on it and they want the best in class C-suite running them. So the question is how do you keep the alignment and the retention of those great people and to grow a team and you mentioned it, for the long term, right? Family businesses are known for that patient capital and keeping these enterprises for a long time, which means that they have a different investment approach to them and a different go-to-market approach. And so, you know, recently that I worked on this, we called it a growth incentive plan for the C-suite to really become aligned with the family. And whether that looked like in the form of synthetic equity, because the family wasn't willing to give up equity, so how did we arrange that? And so once we came together, it took about a year and a half to get that done, actually. But once it was done, it was a really fulfilling thing for me and I've gotten reports back from the family and some of the executives that it's really working well and keeping everyone moving together.

R. Adam Smith: Well, certainly it's tricky in terms of people's relative status and stature and feelings within any organization, particularly a closely held business, when you have the family members in leadership versus people from the outside. That must be tricky at times.

Richard J. Wolkowitz: There's a lot of dynamics at play. The key is getting everyone aligned, whether you're talking about the family, the family system, the family office, any of their portfolio companies. It's constant work. It's constant communication. It goes back to the governance is how do you keep things in process and in check so that you're getting the input in the communication at all times and that's a full-time job in and of itself.

R. Adam Smith: That's fascinating. There's so many elements to consider. Let's finish up talking about legacy. Again, they are successful families that want to sell, but they're not really in a rush to do that until they're in hundreds of millions or more. And even then, they can reach an answer, recap, they don't need to sell the company unless there's an impetus, right? So just to wrap up the call today, with all the experiences you've had, it would be great to hear your thoughts on legacy and how the families have taken that seriously to continue those businesses over, not just multiple generations, but as a brand, as a company, as a source of wealth, and something to be proud of over time.

Richard J. Wolkowitz: Sure. So the families today that I work with, again, governance helps create that legacy. And we talk so much about succession planning or continuity planning, transition planning, how do you get the next gen in. Well, if you're thinking how do you get the next gen in, in my opinion, you're almost too late. It needs to be a naturally occurring, naturally evolving process. And governance allows for these junior members of the family and junior boards, observer roles to play. And legacy just becomes a self-fulfilling prophecy many times when you work at it that intently. So we sit down with the families and really go step by step by step. Every part of ownership, every part of management, every part of the board, and where can we play it have a meaningful role and a supportive role not to distract the business but to involve the next gen. And so that is really part of legacy planning is that communication is that governance structure.

R. Adam Smith: Right. Someone was mentioning to me the other day an idea that harks back to  the turn of the century and the big families in industry in the US and previously in the rest of the world, sort of ahead of the game, and looking at the scale of the businesses that the Gettys and Rockefellers and J.P. Morgans and Harrimans built way back, which really were quite powerful, probably even larger on a relative basis than the big players today. But there was an interesting idea mentioned that there could be some families that come together to build a few huge family ecosystem holding companies as a collaboration. And maybe it's different than the big engines and patriarchs of the past, but I could see that happening. I mean, indirectly happening, but what do you think of that possibility?

Richard J. Wolkowitz: I see it happening, I think it's happening across all spectrums of wealth. Those families that have had existing single-family offices have been operating for some time, and they're trying to figure out, due to rising costs, due to difficulty in getting competent personnel, due to the difficulty of technology, due to the difficulty of more complex investment tools, how do they stay ahead, and who's going to operate this eventually. I mean, they formed a business and they didn't really realize that their family office is a business. And so, I see more and more families that I'm talking to that are saying, hey, do you know another family like us that maybe is having the same kind of stress points and would want to merge together. And so I see that happening more frequently. I think there is going to be a trend towards consolidation or mergers between family offices themselves and it probably begins at the indirect investment level where families begin to club deals together, get to know each other, have some success together, maybe have some failure together, but get to know each other better. And I'm like, well, why am I operating a single family office? And why do you have that same overhead? And we're both struggling to find the right people. Why don't we merge together? And so whether or not that's what you're talking about, if you're talking about even the Titan families merging together, those create complexities as well. for this very fragmented space, which is going to continue to be very fragmented in my opinion as more and more wealth is created. But those that have experience are going to want to begin to have conversations about what would life be like if we worked with another family more closely.

R. Adam Smith: Great, I agree. And that will create significant opportunities for a lot of the services around the industry as a majority of that more complex, advanced corporate work is not going to be able to be done completely internally.

Richard J. Wolkowitz: Well, Adam, I see you leading the charge on investment banking between family offices.

R. Adam Smith: I'm just leading the audio cast today. But we'll try to keep you through a half hour. That brings us to the end of this episode. I'd like to express my gratitude for our listeners. This will be taped and repurposed as well. Thank you for joining us and thank you Richard for your time. You're super busy building your company. It was great to have you today.

Richard J. Wolkowitz: Adam what a pleasure. It's always great talking to you and thank you to everyone else listening out there today. 

R. Adam Smith: This is R. Adam Smith signing off. Stay tuned for our next episode of the family business audio cast on LinkedIn.

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