A passion for investing

By Deanne Stone

American Tourister founder Sol Koffler managed his family office conservatively. His granddaughter, the Koffler Group's current chief investment officer, prefers a forward-looking approach.

Sol Koffler set up the Koffler Group family office in 1979 with assets from the sale of the company he founded, American Tourister. At the time it was the second-largest luggage company in the U.S, and he built it without ever borrowing a dime. Carrying debt violated his old-school principles of doing business and, it turned out, of investing as well. For the 17 years he ran the family office, he was content with modest growth—the best strategy, he believed, for preserving his family’s wealth.

A thoughtful and generous man, Koffler was loved and respected by his family. No one questioned his right to invest his money as he chose, but after his death at 86 in 1996, the second and third generations steered the family office on a more adventurous investment path. To their minds, seeking high returns was the best bet for securing the family’s financial future.

Their more aggressive approach has paid off. Over the past decade, the Koffler Group’s real estate division has generated an annualized average return of more than 24%, and its investment division has earned more than 2.5 times its original investment between 1998 and 2008. This past June Koffler Group was named Family Office of the Year at the annual Hedge Fund Industry Awards dinner hosted by Institutional Investor magazine.

“Our passion is investing and maximizing returns for our family,” says Sol Koffler’s granddaughter Terri Chernick, the Koffler Group’s chief investment officer. “My grandfather was a phenomenal businessman but a very conservative investor. His philosophy was ‘nothing risked, nothing lost,’ so it was hard for him to invest in new businesses. But to stay in business as a family office today, you have to be able to adapt quickly to an ever-changing environment.”

Sol Koffler belongs to the pantheon of impoverished Eastern European immigrants of the last century who went on to create great enterprises. In 1920, the 13-year-old Koffler arrived in America with no money and big dreams. Twelve years later, at the height of the Depression, he started selling $1 suitcases under the name American Tourister in Providence, R.I. A hands-on manufacturer and relentless innovator, he personally developed many of the special features that made his suitcases so popular with consumers.

For the 46 years that Koffler ran American Tourister, he held to his policy of reinvesting most of the profits in the business. After selling his business to the Hillenbrand Company for an undisclosed sum in 1978, Koffler had abundant liquid wealth, and he wanted to share it with his family. He invited them to be his partners in the family office.

Koffler and his wife, Lillian, had three daughters: Paula, Sandra and Phyllis. The original Koffler Group was composed of Sol and Lillian, their three daughters, two sons-in-law and five grandchildren. Phyllis never married and had no children.

After Koffler’s death, discord among the partners led to the breakup of the family office in 1996. The real estate was divided among the three daughters. Lillian and Sandra bought out Paula’s and Phyllis’s shares of the remaining assets and retained the Koffler name. The new Koffler Group was made up of Lillian; Sandra; Sandra’s husband, Richard Bornstein; and her three children, Jo-An Kaplan, 47, Scott Chernick, 46, and Terri Chernick, 44.

John Benevides, president of family office services for Harris myCFO and the former president of the Family Office Exchange, refers to family offices as the second family business. “Family offices are true operating companies that have everything a business would have, but their primary charge is to look after the financial affairs of the family. Like the new Koffler Group, the front-and-center question families have to ask is what they want the office to do for the family, and how active family members want to be.”

Bornstein, 60, Koffler’s chairman and CEO, took the lead in mapping out a strategy for the family office, which included making substantial investments in real estate. After marrying Sandra in 1975, Bornstein left his family’s business to work for American Tourister. He began educating himself about real estate after American Tourister was sold. In 1979, he formed a partnership with a management group in Rhode Island that owned apartment buildings, and he worked in the company to learn the business firsthand.

When Bornstein assumed leadership of the Koffler Group, its real estate holdings were all located in Rhode Island, and 80% of the properties were apartment buildings that brought in a steady monthly income. “We had all of our eggs in one basket,” says Bornstein, who set out to diversify the Koffler Group’s real estate holdings. Simultaneously, he wanted to strengthen the investment side of the business, and in 1997, he invited his stepdaughter, Terri Chernick, then 31, to run Koffler’s global investment division.

Chernick, a graduate of Harvard Business School, had already established a successful career. She had worked as a corporate consultant at Bain & Company and had co-founded several biotechnology companies. “I hesitated in accepting the offer because I wasn’t sure that Koffler was up to the task of becoming a top-class investor,” she says. “But Richard assured me that I could be entrepreneurial in developing the investment division.”

“Under Sol’s leadership, we sat back and waited for others to bring investment ideas to us,” Bornstein says. “Terri’s a go-getter. By putting her in charge of investments, I knew she’d take the division to a higher level, and she has. I never say no to any investments ideas she proposes because I know she does her homework.”

Chernick opened the investment office in Santa Barbara, Calif., with a small staff, allowing her to focus solely on investments. As chief investment officer, she oversees the firm’s investments in equities, fixed income, venture capital and other partnerships.

Chernick is a contrarian in--vestor. Her strategy is to look for macroeconomic “hot spots,” imbalances between supply and demand and, most critical, managers who have an information edge over other investors. “We don’t follow the herd,” she says. “In 2008, a lot of investors moved to bigger funds for safety. I went in the opposite direction. I thought I could better evaluate how things were going when fewer people were involved, and I could follow what was happening in the back office.”

Hedge funds make up about 30% to 40% of Koffler’s investment portfolio. Chernick targeted what she calls “sweet spot” niches for investing—hedge funds that have $400 million to $600 million under management. Most are established funds, but in 2008 Chernick began seeding startup hedge funds that have exceptional managers. The prospective fund managers are put through a rigorous selection process, including a 30-page questionnaire Chernick developed. “The best managers don’t come to you; you have to search obsessively for them,” she says, “and that takes a wide web of contacts and a willingness to travel and move cash fast. We seed only one manager or so every year, so they have to meet our criteria.”

Besides seeding the startup funds, Chernick offers Koffler’s expertise in setting up back-office procedures, a skill she honed when she worked for Bain & Company in her twenties. “We constantly update our knowledge of operational best practices from the back offices of hedge funds we invest in,” she says. “Then we re-create those practices in the back offices of the investment managers we seed. Offering this valued-added service allows us to cherry-pick the best seed managers as our partners.”

Currently, Chernick invests in and manages the global portfolios of 30 hedge fund managers. Her diligence, knack for spotting opportunities and skill in managing risk has landed the Koffler Group’s global investment division in the top percentile of family offices.

Back in Providence, Bornstein was busy expanding and diversifying Koffler’s core business, the real estate division. Now a full-service real estate company, it has a staff of 45, including a management team that oversees all of its properties plus some for third parties, engineers, property developers, construction workers, and two CPAs and a tax lawyer who work on strategic planning.

Under Bornstein’s leadership, Koffler revamped its real estate holdings. Now it owns properties all over New England; 95% are shopping centers and office buildings, and only 5% are apartment buildings. Despite the difficult real estate market of the past few years, the occupancy rate of Koffler’s properties is an impressive 95%.

Koffler does a lot of ground-up development of big-box stores, scouting locations and either building the stores or leaving the construction to its clients. It also rehabilitates older malls and stocks them with better tenants before flipping them and moving on to the next project. “We’re value investors,” says Bornstein. “We can’t compete with the really big real estate investors with big malls. We found our niche in investments ranging between $1 [million] and $40 million, and we don’t want to go any bigger. We’ve got a great team in place that understands the marketplace and does a great job of acquiring real estate.”

Like his father-in-law, Bornstein believes in generously rewarding employees for excellent work. “Sol’s philosophy was to pay salespeople well. Even back in the ’50s, ’60s and ’70s, he was paying them six-figure salaries,” Bornstein says. “I have the same philosophy: Our employees’ success is our family’s success. The more they earn, the happier and more productive they are. We treat everyone in the office like family; that’s why people like working here.”

“Richard is a natural leader,” says Chernick. “He creates a vision of what he wants for the company, and then collects smart people around him who want to help him and the family realize it. For Richard, the integrity of our family name comes first. His handshake means something, and people know it.”

The Koffler Group intends to remain a single family office, but for the first time it has put together a real estate fund to acquire properties with money raised from individual investors and other family offices. The fund will probably be capped at $50 million. So far, it has made a few presentations to family offices that share Koffler’s contrarian philosophy. “We think the real estate market will be inundated with more properties in the next two years than we could buy on our own,” says Bornstein, “so we want to keep a large cash position to take advantage of opportunities as they arise.”

Chernick, too, started speaking publicly last year to attract more seed money to invest in hedge funds and to expand her network of family offices. When the Koffler Group undertook an evaluation of its performance reporting and, more recently, looked at upgrading its security protocols, it turned to other family offices to find out how they managed these practices. “I’ve been building a network of smart, educated people who handle information as we do,” says Chernick. “When I need to do research I can go to my Rolodex and get more timely information and get it quickly.”

“The key to the success of family offices today is the strength of their personal and private networks,” says Harris myCFO’s Benevides. “Given the ever-changing landscape, having a solid network is critical for testing ideas, finding solutions and locating trusted partners.”

For several years, Bornstein and Chernick had been the only two family members actively working in the Koffler Group. Then, this past May, Terri’s brother, Scott Chernick—who had taken time out to work in a real estate firm—returned to the family office to work in property management.

The active members take responsibility for ensuring that the non-active family members understand the office’s goals and receive timely financial reports. Koffler holds an annual, all-day board meeting at which Bornstein and Chernick make presentations and encourage the non-active members to ask questions. Until her death in June at age 99, Lillian followed the financial news.

“Family members not active in the business are our clients,” says Chernick, “and they have to come first. They get monthly statements, but they don’t see the numbers day-to-day, so it’s easy for them to feel alienated. We have a strict policy of no secrets and 100% transparency.”

When Sol Koffler ran the family office, family members were not allowed to withdraw money from the firm. Bornstein reversed that policy, believing that family members had the right to pull out at any time if they weren’t satisfied or thought they could do better elsewhere.

All of the family members have wealth outside the family office and can choose whether or not to have it managed by the Koffler Group. “My brother and sister opted to stay with us,” says Chernick. “That’s a real source of pride for us because it says that we’ve earned their trust.”

Deanne Stone is a business writer based in Berkeley, Calif.

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