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Inside Penny Pritzker's portfolio: How a billionaire invests

FinanceOrlando Real EstatePenny PritzkerSalesReal EstateBusiness

How do the wealthy stay wealthy? The mandatory financial disclosure released last week by commerce secretary nominee Penny Pritzker provides a rare look at an American billionaire's entire investment portfolio. Pritzker inherited much of her wealth, long stashed in hundreds of domestic trusts and at least one offshore family trust. But she also has built a reputation as a savvy executive who has managed and built companies within her family's operations.

Toward the end of the breakup of her family's Chicago-based empire, which officially concluded in December 2011, Pritzker struck out on her own, forming PSP Capital Partners. The investment office has about 25 employees and includes investment experts, attorneys, accountants and administrative staff, all there to help her manage her wealth.

Her 184-page financial disclosure form displays a portfolio heavy in real estate, her specialty, but one that is well diversified. She has invested large amounts in mutual funds as well as tax-friendly municipal bonds. Smaller investments include stakes in oil and natural gas pipelines; gold bars; lumber companies; and even the royalty rights to the stage musical "Singin' in the Rain."

To see the full disclosure, click here. (Registration required.)

She has taken advantage of deals available only to the superrich. She has lent herself money and taken consulting fees and salaries from some of her businesses. Blessed with creative forebears, she has benefited from offshore family tax shelters devised before the government made the practice illegal.

Pritzker's disclosure does not tally her wealth, which Forbes has estimated at $1.85 billion. It provides an estimate of the value of each asset on a given day within 31 days of the May 9 filing and estimates income from Jan. 1, 2012, until the filing. If confirmed, Pritzker has written that she will sell many of these investments to avoid any conflicts of interest.

If confirmed, Pritzker has written that she will sell many of these investments to avoid any conflicts of interest.

Mortgage backed securities

While Americans were cowering amid the financial crisis, Penny Pritzker's investment office was doing the opposite. It went shopping in the garbage heap of residential mortgage-backed securities. You might remember them as "toxic assets," the nickname given in 2008 to bundles of mortgages so ugly they brought the largest Wall Street banks to the verge of collapse. With no one willing to touch them, values sank as low as 40 or 50 cents on the dollar.

Pritzker did what few investors dared. She bought the orphaned securities in 2008 and she continues to hold most of them, according to a source close to the family. What remains in her portfolio is worth at least $46.6 million. They have some of the ugliest names of the financial crisis attached to them, including Countrywide and Bear Stearns.

"The world was collapsing at the time, and brokers were afraid to sell them" to anyone, said Lewis Altfest, a private wealth manager, who also chose the unique path of buying the securities on his own. "It took a lot of work" to analyze them and also required having a close relationship with a broker with mortgage-backed securities to sell, he said.

Pritzker, of course, has a staff involved in making decisions. And she wasn't a newcomer to real estate, banking or credit.

In addition to the securities Pritzker bought, she supersized her exposure by investing in funds, including a bond hedge fund, the Doubleline Opportunistic Income LP, and bond mutual fund, the Doubleline Total Return Bond Fund, that stood out for their large investments in private-label mortgage-backed securities.

Besides her mortgage-security purchases, Pritzker made other investments on the back end of the financial crisis. When the U.S. Treasury bailed out banks with cash, known as TARP money, it received preferred stock in them in exchange. As the Treasury has been selling the preferred stock, Pritzker bought an amount worth at least $4.46 million. Interest rates on those shares range from 5 percent to 13.8 percent. .

Real estate

Penny Pritzker's specialty is real estate. The first business she launched for her family, in 1987 and now called Vi, runs upscale retirement communities.

According to her financial disclosure form, her stock in Vi's parent company, CC Development Group Inc., is worth $25 million to $50 million and generated more than $5 million in dividends during the reporting period.

In 1991, when Ronald Galowich retired as director of the Pritzkers' nonhotel land holdings, her uncle, Jay Pritzker, put Penny in charge. The effort became Pritzker Realty Group, and it expanded quickly. She started with apartment buildings then built entire neighborhoods, such as Baldwin Park in Orlando, Fla., and shopping centers.

Her assets include income from or stakes in many legacy projects developed by Pritzker Realty Group or other family businesses, including references to the Park Tower development on Michigan Avenue, home to a Hyatt, and condos in the Gold Coast's Sandburg Village, the 1979 apartment-to-condo conversion her grandfather, A.N. Pritzker, helped finance.

Since starting her own investment firm, her real estate holdings have expanded to include a $5 million to $25 million stake in Artemis Real Estate Partners, which owns real estate mostly in coastal states, ranging from 13 office and industrial buildings in and near Charlotte, N.C., to a self-storage facility in San Jose, Calif.

Her investment firm owns a stake in student housing in Austin, Texas, valued at $6 million to $30 million, and is building apartment buildings in Washington, D.C., and near Baltimore; Gambrills, Md.; Los Angeles; and Los Altos, Calif.

Tax shelters

The family's oldest offshore trusts were set up by A.N. Pritzker in 1963 and 1971 in the Bahamas. Penny Pritzker was a child, and she has benefited enormously from her grandfather's foresight.

According to Forbes, key assets in the trusts along the way were healthy, cash-flow-positive businesses, including AIC Holding, which owns Hyatt International, operating hotels outside the U.S. and Canada; Rockwood, a holding company that had a 10 percent stake in the Marmon Group industrial conglomerate; a stake in Royal Caribbean Cruise Lines; interests in reinsurance companies; and Triton Holdings, a lessor of passenger jets and cargo planes.

By establishing foreign trusts for foreign-based assets, the Pritzkers ensured that the income from those businesses rarely reached their pockets and thus wasn't taxed.

As first reported by Forbes, almost all of the income coming from the foreign trusts' assets — Hyatt International, Rockwood, etc. — went to a lending organization created for the family. The income would pass through the trust and be used to pay off loans used to invest in and expand family businesses, for example building a new Hyatt in Paris.

It seems like a revolving door but, because the family rarely took money out of its trusts, the more appropriate analogy is that of a snowball. The tax benefits enabled the ball to grow bigger, quicker.

The strategy can't be duplicated today. "The loopholes have been closed," wrote Stephane Fitch in Forbes in 2003. "But they remain available to families that had the foresight to set up offshore trusts four decades ago, as the Pritzkers did."

A source close to Pritzker has said she has asked her trustee to begin the process of reshoring her foreign trusts so her money will come home.

Salaries and cash

Stock dividends, interest and capital gains are immense sources of income for Pritzker.

But records show that Pritzker also receives old-fashioned salaries and "consulting fees" from a number of sources, which are perhaps the most surprising sources of income included in the federal filing.

She received $53.6 million in consulting fees from her family's Bahamian trustee, the Canadian Imperial Bank of Commerce Trust Co. She paid taxes on that income. A source close to the family said it was a fee pertaining to 10 years of work managing and dividing up the family's assets among 11 cousins; she does not receive such a large fee annually.

Her additional consulting fees included about $32.4 million from hundreds of domestic trusts, which, according to a source, will be adjusted higher through an amended filing; $118,667 from credit reporting agency TransUnion Corp., which her family sold; $508,000 from CC Development Group; and $436,250 from The Pritzker Organization, which her cousin, Tom, leads. Her salaries include about $1.66 million from two Pritzker Realty Group entities; nearly $1.17 million from the Horton Trust Co., a recently created trust based in Illinois; and $125,000 from her investment firm, PSP Capital Partners LLC.

She also has received cash in the form of loans from PSP Capital Resources LLC. One $25 million to $50 million loan is related to her residence in Aspen, Colo., and another loan in the same range is for "investment operations." The form doesn't list a specific interest rate. It's safe to assume it's low.

Expertise

Large family investment offices like PSP have savvy investment pickers and tax strategists working full time. Sometimes they make direct investments, as Pritzker's did in mortgage-backed securities. But they also turn to outsiders: hedge funds, private equity firms, and stock and bond pickers.

Pritzker has turned to some stars in the world of stock and bond investing.

For bonds, she has more than $50 million invested in a fund that is open to individual investors, the DoubleLine Total Return Fund, managed by Jeffrey Gundlach, a former Morningstar mutual fund manager of the year.

For blue-chip stocks, she has more than $50 million in the GMO Quality Fund. GMO runs numerous funds with renowned strategist Jeremy Grantham providing direction. The fund is open only to the ultrawealthy, but GMO does manage other funds sometimes found in 401(k) plans.

For bonds throughout the world, she invests $50 million-plus with another Morningstar manager of the year, Michael Hasenstab of the Templeton Global Bond fund. Morningstar notes that the fund has the best record for a world fund over the past 10 years.

mmharris@tribune.com

gmarksjarvis@tribune.com

Twitter @chiconfidential

Twitter @gailmarksjarvis

Investment highlights

Some of Penny Pritzker's assets, by size, contained in the financial disclosure form the White House released last week:

$1 MILLION TO $5 MILLION

•Berkshire Hathaway common stock, investment company founded by Warren Buffett

•Alden Global Distressed Opportunities Fund, hedge fund that invests in troubled financial companies

$5 MILLION TO $25 MILLION

•Illinois RBG, owns an interest in the Grand Victoria Casino in Elgin

•Lizard International Fund, Chicago-based investment fund run by Leah Zell

•ASH I and II, owns an interest in student housing in Austin, Texas

$25 MILLION TO $50 MILLION

•BDT Capital Partners Fund I, Chicago-based investment firm run by former Goldman Sachs investment banker Byron Trott

•Candlelight Holdco, owns Halo Branded Solutions, a Sterling, Ill.-based seller of promotional goods

•Marmon Holdings, industrial conglomerate founded by the Pritzker family, now controlled by Berkshire Hathaway

•Newport Asia Partners Fund, invests in Asian stocks

ABOVE $50 MILLION

•DoubleLine Total Return Bond Fund, diversified bond fund

•GMO Quality Fund, blue-chip stock fund

•Templeton Global Bond fund

Copyright © 2014, The Baltimore Sun
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