Andrew Eberhart is the chief investment officer at a prestigious single-family office located in Virginia. Previously, Eberhart served as managing director at Lazard Freres & Co., managing partner at the Marshall Fund, managing director at Citigroup Private Bank and US Trust and investment consultant at Cambridge Associates. Eberhart earned a BA in economics from Cornell University, actively served for more than a decade as a U.S. Navy aviator and then earned an MBA from University of Pennsylvania.
Mr. Eberhart was recently named to Trusted Insight’s ranked list of the Top 30 CIOs With Ivy League Education. He graciously spoke with Trusted Insight on November 20, 2015. The following interview has been edited and condensed for clarity.
Trusted Insight: Let's begin by talking about your education. You went to Cornell for your undergrad, served approximately 10 years in the Navy, then earned your MBA at Wharton before beginning your professional investment career. Tell me about those three experiences and how they informed your decision making process and led to your current position today?
Andrew Eberhart: At Cornell as an undergrad, I was an economics major, which reflected my life-long interest in finance and investments. I was also fortunate to be part of the Navy ROTC program, which paid for my education and led to a terrific first career in the Navy. After graduation, I went through flight school and served 10 years on active duty and an additional 10 years as a reserve pilot. The experience shaped my understanding of the world’s tensions and instilled a sense of personal accountability that has been fundamental to my career. For those so inclined, I would strongly encourage military service as a uniquely rewarding career option and a cornerstone for future success.
After completing active duty, my most logical career option was to become an airline pilot. Although I considered this seriously, I also had a real interest in seeing what else was out there. That led me to pursuing an MBA at Wharton, while also continuing to fly as a reserve pilot on weekends.
In hindsight, Wharton was very fortuitous. I didn't know much about what I was getting into, but Wharton turned out to be the ideal program for a mid-career transition to the investment world. Coming out of the military with no relevant finance experience, it was essential for me to get up to speed on the fundamentals of business and finance. Wharton more than met that need with a two-year financial fire hose, for which I will always be grateful. Socially, it was just as important, as the relationships I developed there have been absolutely critical at every turn. Overall, I would say that attending Wharton was the single biggest determinant in shaping my investment career.
Trusted Insight: To what degree was your Ivy League education integral in your current success? I understand it's impossible to say, but would you have been as successful going to another university?
Andrew Eberhart: I think it was extremely important, as I was coming into the investment world as an outsider with no business experience. I think if I'd tried to boot-strap my career or had attended an educational program with less visibility, it would have been much harder. I believe the value of a degree from a well-regarded business school, whether Ivy League or otherwise, is hard to overstate. The doors that are opened for you and the professional credibility that you are given are tremendous advantages in this intensely competitive industry.
Trusted Insight: I want to transition to one of your previous positions. You were a managing partner at The Marshall Fund, which was tasked with private equity investment in post-conflict Iraq. In light of everything that has occurred in the past two years or so, can you tell me about your experience there? What was the goal? In retrospect, was there a big takeaway from an investment perspective?
Andrew Eberhart: The Marshall Fund was a truly unique career experience that perfectly combined my military and investment backgrounds. The fund’s investment thesis was to promote economic development in post-conflict Iraq through direct investments in the private sector. Along with my two partners (both West Point graduates), we created the fund in 2007 as the result of our involvement in an economic task force that General Petraeus (then running the Iraq War) had formed for that same purpose. The task force included a number of former military officers who had since moved on to careers in the private sector. At the time, I was working at Citigroup’s Private Bank, which happened to coincide with Citigroup’s financial collapse. Under the circumstances, it almost seemed that going to Iraq was a better career choice than staying in banking.
Assisted by the Defense Department and the Iraqi government, the Marshall Fund evaluated a number of private equity opportunities throughout Iraq and eventually struck a joint venture agreement with a local business group to own and operate a refurbished tomato paste plant in the Kurdish region of northern Iraq. In early 2008, we obtained $4.5 million in investment commitments from three family offices in New York and closed on the joint venture later in the year. The initial operations got off to a good start, with the plant operating profitably and creating several hundred jobs in the local area. Eventually however, the post-2008 economy, geo-politics and indeed, a tomato blight, led to a halt in production. At this point the plant is idle, but operationally capable of returning to full production. Its near-term prospects, however, are clouded by the presence of ISIS, a business risk we had somehow failed to anticipate.
The takeaways from this experience have been many and can be best summed up as “expect the unexpected.” We were investing in a frontier market in an unstable region, and to succeed we had to quickly recognize and adapt to the vast differences in both culture and business. Even with that recognition, the challenges were many, including enforceability of law, corruption, employee expectations, banking practices, quality control, language barriers, safety and environmental standards, farming techniques and the judicial system. At some point we plan to write a case study on this experience – not only is it potentially instructive, it is also a storyline that often reads like fiction.
Trusted Insight: You've been working with private wealth for much of your career. Why this subset of institutional investing versus another type of institution?
Andrew Eberhart: My first position post-MBA was as an investment consultant with Cambridge Associates, a global firm known for its focus on the endowment and foundation (E&F) community. While my initial client list there was exclusively E&F, over time I also became involved with the firm’s expansion into the private client business. Large private clients are institutional in scale and therefore benefit from the same principles of asset allocation and manager selection as their E&F counterparts.
There are, of course, differences, most notably around taxes, but also time horizon and often risk profile.
Taxes lead private clients to consider more tax-advantaged strategies including indexing, buy and hold, tax-loss harvesting, municipal bonds, longer duration investments (private equity and direct investing) and within hedge funds a de-emphasis on trading strategies.
The time horizon of a private client, whose spending is often supported by a finite capital base, may be shorter than an E&F investor, where the portfolio may benefit from ongoing inflows (contributions, tuition, etc.) that can mitigate spending shortfalls and allow a perpetual investment horizon.
With respect to risk profile, private clients vary widely in their approach. Families that come from an entrepreneurial background are often willing to invest with other entrepreneurs, assume more concentration or invest in a specific industry or passion that may involve higher risk. E&F investors, generally overseen by trustees and/or a professional investment committee and subject to public scrutiny from their constituents, will naturally favor more established portfolio construction.
For me, investment management, whether for a private client or an institution, is simply a series of calculated risks taken under near-term circumstances to optimize a future outcome. In hindsight, I think my experience in military aviation, where there was a constant need to assess and adapt to a changing environment, was enormously helpful in developing my sense of risk management.
Trusted Insight: Family offices largely operate outside the purview of the public. Can you talk about the opaqueness of the industry to the general public versus the level of collaboration between family offices?
Andrew Eberhart: Family members and their family offices, for good reason, are often intensely private. Their wealth and profile make them logical targets for financial crime and exposes them to personal security risk. That said, within the community, there is a great deal of collaboration and information sharing around investments, particularly direct deals. Most family offices have limited staffing and therefore develop a trusted network of others in the community to source, research and co-invest in such opportunities.
Families often get access to extraordinary investments as they may be in the industry in which they are investing or they are personally close with somebody who is in a deal or on the management team. Moreover, entrepreneurs and investment managers that are not yet ready for institutional capital often look to family offices for their initial funding, which creates an enviable, steady pipeline of first-look opportunities.
Trusted Insight: Tell me a little bit about your investment team. What sets you apart from other family offices?
Andrew Eberhart: We have a small investment team and invest the core of our portfolio via indexing and several outside managers that provide our base exposure (beta) across all asset classes. This allows us to focus our internal efforts on the wealth creation (alpha) side of the portfolio, which in recent years has been focused on niche strategies, seeding of new managers and direct investments.
Niche strategies are implemented through small funds or managers with a particular expertise in an inefficient market. Examples of this might include asset leasing, structured settlements, appraisal rights or uniquely structured lending. We believe that to truly add value, you need to continuously deploy capital in inefficient and undeveloped markets.
With respect to seeding new managers, we have invested with several start-up funds that we believe have the skill set to both manage money and grow their companies. In return for serving as an anchor investor, we receive a percentage of the firm’s total revenue, but typically we do not seek ownership. This structure has a double bottom line in that we receive an investment return on the funds we have invested, while also benefitting from the firm’s overall growth via revenue sharing.
Finally, with direct deals, we generally co-invest with other private investors and/or venture and private equity funds. We avoid early stage deals and technology risk and are particularly interested in special situations where we have a competitive advantage. While these deals are research intensive and highly illiquid, they are also the opportunities that can deliver outsized returns.
Trusted Insight: Right now is a particularly tough market to navigate on the private side and on the public side. Where, geographically, are you anticipating sustained growth and what sectors might fuel that growth?
Andrew Eberhart: Every market has its challenges and the current pain points are focused primarily around tepid economic growth and an absence of inexpensive assets. In evaluating any investment, we have two relatively simple guidelines:
1) Is the investment attractively valued? This is basic adherence to Graham & Dodd’s principles of value investing, which overwhelmingly demonstrate that, over time, a basket of undervalued assets will substantially outperform those that are valued otherwise.
2) Is the investment uncorrelated to our existing portfolio? This is the key tenet of Modern Portfolio Theory (Markowitz) which clearly concludes that you can achieve excess return by combining widely uncorrelated assets.
In the current market, there are relatively few assets that are inexpensive, but there are pockets of value in master limited partnerships, which have arguably been oversold, and in emerging markets, especially parts of Asia, where low pricing is out of sync with above average economic growth. Investments that are uncorrelated to the richly valued public markets can be found in niche markets. For us, we have recently reviewed or made investments in direct private equity deals with unique circumstances (“special sits”), rail-car leasing and appraisal rights.
Trusted Insight: What is the biggest challenge to being an institutional investor that is unique to family offices?
Andrew Eberhart: The key to any family office is the relationship with the family members. If you don't have a good relationship with the family members, then the performance of the investments is not going to overcome that.
I think the family members expect good performance, as they should, so the differentiator is how the family office principals interface with the family members. You need to maintain social awareness, strong communication skills and have an instinct for service. In other words, if a family member calls, it doesn't matter what you’re doing, you take the call. This is a subset of people, wealthy families, who expect and receive high levels of service, and if that is not a priority for a family office, then it will be challenged to succeed.
Trusted Insight: What’s the number one lesson that you've learned in your career as an institutional investor?
Andrew Eberhart: I think it's the willingness, in fact the desire, to invest outside the traditional opportunity sets.
You can have a satisfactory career in the institutional and family office world by investing within established frameworks, but if you intend to add value, you have to seek out truly unique opportunities and embrace the notion of calculated risk taking.
For me, that includes investing in new managers and asset classes and in having an open mind about opportunities that at first glance may not seem attractive. You can't get a better-than-average result if you're doing the same thing as everyone else. You’ll also have to turn over a lot of rocks to get one or two good ideas, but that discovery process exposes you to a steady stream of smart, accomplished people who will enrich your own thinking – and often leave you inspired. It is truly a fascinating profession to be in.
Trusted Insight: What have I failed to ask that I should either know about you, the family office or about family office investing, in general?
Andrew Eberhart: Over the last decade, family offices have grown substantially in number, size and sophistication and are currently one of the few growth areas in the investment industry. They have also increasingly become advocates for change – using their capital and influence to foster profitable innovation around some of the globe’s most pressing issues. As wealth transfers to a generation raised with an acute awareness of such issues – and a desire to address them – investment mandates are evolving to solve for and benefit from this reality. Such “impact investing” is still early in its institutional development and sophistication, but is no doubt a real need to be met – and one that requires professionals with backgrounds varied well beyond traditional career paths in finance.
To learn more about the top-tier institutional investors, check out Trusted Insight's list of Top 30 Ivy League Graduate Chief Investment Officers - Part 2.
Mr. Eberhart was recently named to Trusted Insight’s ranked list of the Top 30 CIOs With Ivy League Education. He graciously spoke with Trusted Insight on November 20, 2015. The following interview has been edited and condensed for clarity.
Trusted Insight: Let's begin by talking about your education. You went to Cornell for your undergrad, served approximately 10 years in the Navy, then earned your MBA at Wharton before beginning your professional investment career. Tell me about those three experiences and how they informed your decision making process and led to your current position today?
Andrew Eberhart: At Cornell as an undergrad, I was an economics major, which reflected my life-long interest in finance and investments. I was also fortunate to be part of the Navy ROTC program, which paid for my education and led to a terrific first career in the Navy. After graduation, I went through flight school and served 10 years on active duty and an additional 10 years as a reserve pilot. The experience shaped my understanding of the world’s tensions and instilled a sense of personal accountability that has been fundamental to my career. For those so inclined, I would strongly encourage military service as a uniquely rewarding career option and a cornerstone for future success.
After completing active duty, my most logical career option was to become an airline pilot. Although I considered this seriously, I also had a real interest in seeing what else was out there. That led me to pursuing an MBA at Wharton, while also continuing to fly as a reserve pilot on weekends.
In hindsight, Wharton was very fortuitous. I didn't know much about what I was getting into, but Wharton turned out to be the ideal program for a mid-career transition to the investment world. Coming out of the military with no relevant finance experience, it was essential for me to get up to speed on the fundamentals of business and finance. Wharton more than met that need with a two-year financial fire hose, for which I will always be grateful. Socially, it was just as important, as the relationships I developed there have been absolutely critical at every turn. Overall, I would say that attending Wharton was the single biggest determinant in shaping my investment career.
Trusted Insight: To what degree was your Ivy League education integral in your current success? I understand it's impossible to say, but would you have been as successful going to another university?
Andrew Eberhart: I think it was extremely important, as I was coming into the investment world as an outsider with no business experience. I think if I'd tried to boot-strap my career or had attended an educational program with less visibility, it would have been much harder. I believe the value of a degree from a well-regarded business school, whether Ivy League or otherwise, is hard to overstate. The doors that are opened for you and the professional credibility that you are given are tremendous advantages in this intensely competitive industry.
Trusted Insight: I want to transition to one of your previous positions. You were a managing partner at The Marshall Fund, which was tasked with private equity investment in post-conflict Iraq. In light of everything that has occurred in the past two years or so, can you tell me about your experience there? What was the goal? In retrospect, was there a big takeaway from an investment perspective?
Andrew Eberhart: The Marshall Fund was a truly unique career experience that perfectly combined my military and investment backgrounds. The fund’s investment thesis was to promote economic development in post-conflict Iraq through direct investments in the private sector. Along with my two partners (both West Point graduates), we created the fund in 2007 as the result of our involvement in an economic task force that General Petraeus (then running the Iraq War) had formed for that same purpose. The task force included a number of former military officers who had since moved on to careers in the private sector. At the time, I was working at Citigroup’s Private Bank, which happened to coincide with Citigroup’s financial collapse. Under the circumstances, it almost seemed that going to Iraq was a better career choice than staying in banking.
Assisted by the Defense Department and the Iraqi government, the Marshall Fund evaluated a number of private equity opportunities throughout Iraq and eventually struck a joint venture agreement with a local business group to own and operate a refurbished tomato paste plant in the Kurdish region of northern Iraq. In early 2008, we obtained $4.5 million in investment commitments from three family offices in New York and closed on the joint venture later in the year. The initial operations got off to a good start, with the plant operating profitably and creating several hundred jobs in the local area. Eventually however, the post-2008 economy, geo-politics and indeed, a tomato blight, led to a halt in production. At this point the plant is idle, but operationally capable of returning to full production. Its near-term prospects, however, are clouded by the presence of ISIS, a business risk we had somehow failed to anticipate.
The takeaways from this experience have been many and can be best summed up as “expect the unexpected.” We were investing in a frontier market in an unstable region, and to succeed we had to quickly recognize and adapt to the vast differences in both culture and business. Even with that recognition, the challenges were many, including enforceability of law, corruption, employee expectations, banking practices, quality control, language barriers, safety and environmental standards, farming techniques and the judicial system. At some point we plan to write a case study on this experience – not only is it potentially instructive, it is also a storyline that often reads like fiction.
Trusted Insight: You've been working with private wealth for much of your career. Why this subset of institutional investing versus another type of institution?
Andrew Eberhart: My first position post-MBA was as an investment consultant with Cambridge Associates, a global firm known for its focus on the endowment and foundation (E&F) community. While my initial client list there was exclusively E&F, over time I also became involved with the firm’s expansion into the private client business. Large private clients are institutional in scale and therefore benefit from the same principles of asset allocation and manager selection as their E&F counterparts.
There are, of course, differences, most notably around taxes, but also time horizon and often risk profile.
Taxes lead private clients to consider more tax-advantaged strategies including indexing, buy and hold, tax-loss harvesting, municipal bonds, longer duration investments (private equity and direct investing) and within hedge funds a de-emphasis on trading strategies.
The time horizon of a private client, whose spending is often supported by a finite capital base, may be shorter than an E&F investor, where the portfolio may benefit from ongoing inflows (contributions, tuition, etc.) that can mitigate spending shortfalls and allow a perpetual investment horizon.
With respect to risk profile, private clients vary widely in their approach. Families that come from an entrepreneurial background are often willing to invest with other entrepreneurs, assume more concentration or invest in a specific industry or passion that may involve higher risk. E&F investors, generally overseen by trustees and/or a professional investment committee and subject to public scrutiny from their constituents, will naturally favor more established portfolio construction.
For me, investment management, whether for a private client or an institution, is simply a series of calculated risks taken under near-term circumstances to optimize a future outcome. In hindsight, I think my experience in military aviation, where there was a constant need to assess and adapt to a changing environment, was enormously helpful in developing my sense of risk management.
Trusted Insight: Family offices largely operate outside the purview of the public. Can you talk about the opaqueness of the industry to the general public versus the level of collaboration between family offices?
Andrew Eberhart: Family members and their family offices, for good reason, are often intensely private. Their wealth and profile make them logical targets for financial crime and exposes them to personal security risk. That said, within the community, there is a great deal of collaboration and information sharing around investments, particularly direct deals. Most family offices have limited staffing and therefore develop a trusted network of others in the community to source, research and co-invest in such opportunities.
Families often get access to extraordinary investments as they may be in the industry in which they are investing or they are personally close with somebody who is in a deal or on the management team. Moreover, entrepreneurs and investment managers that are not yet ready for institutional capital often look to family offices for their initial funding, which creates an enviable, steady pipeline of first-look opportunities.
Trusted Insight: Tell me a little bit about your investment team. What sets you apart from other family offices?
Andrew Eberhart: We have a small investment team and invest the core of our portfolio via indexing and several outside managers that provide our base exposure (beta) across all asset classes. This allows us to focus our internal efforts on the wealth creation (alpha) side of the portfolio, which in recent years has been focused on niche strategies, seeding of new managers and direct investments.
Niche strategies are implemented through small funds or managers with a particular expertise in an inefficient market. Examples of this might include asset leasing, structured settlements, appraisal rights or uniquely structured lending. We believe that to truly add value, you need to continuously deploy capital in inefficient and undeveloped markets.
With respect to seeding new managers, we have invested with several start-up funds that we believe have the skill set to both manage money and grow their companies. In return for serving as an anchor investor, we receive a percentage of the firm’s total revenue, but typically we do not seek ownership. This structure has a double bottom line in that we receive an investment return on the funds we have invested, while also benefitting from the firm’s overall growth via revenue sharing.
Finally, with direct deals, we generally co-invest with other private investors and/or venture and private equity funds. We avoid early stage deals and technology risk and are particularly interested in special situations where we have a competitive advantage. While these deals are research intensive and highly illiquid, they are also the opportunities that can deliver outsized returns.
Trusted Insight: Right now is a particularly tough market to navigate on the private side and on the public side. Where, geographically, are you anticipating sustained growth and what sectors might fuel that growth?
Andrew Eberhart: Every market has its challenges and the current pain points are focused primarily around tepid economic growth and an absence of inexpensive assets. In evaluating any investment, we have two relatively simple guidelines:
1) Is the investment attractively valued? This is basic adherence to Graham & Dodd’s principles of value investing, which overwhelmingly demonstrate that, over time, a basket of undervalued assets will substantially outperform those that are valued otherwise.
2) Is the investment uncorrelated to our existing portfolio? This is the key tenet of Modern Portfolio Theory (Markowitz) which clearly concludes that you can achieve excess return by combining widely uncorrelated assets.
In the current market, there are relatively few assets that are inexpensive, but there are pockets of value in master limited partnerships, which have arguably been oversold, and in emerging markets, especially parts of Asia, where low pricing is out of sync with above average economic growth. Investments that are uncorrelated to the richly valued public markets can be found in niche markets. For us, we have recently reviewed or made investments in direct private equity deals with unique circumstances (“special sits”), rail-car leasing and appraisal rights.
Trusted Insight: What is the biggest challenge to being an institutional investor that is unique to family offices?
Andrew Eberhart: The key to any family office is the relationship with the family members. If you don't have a good relationship with the family members, then the performance of the investments is not going to overcome that.
I think the family members expect good performance, as they should, so the differentiator is how the family office principals interface with the family members. You need to maintain social awareness, strong communication skills and have an instinct for service. In other words, if a family member calls, it doesn't matter what you’re doing, you take the call. This is a subset of people, wealthy families, who expect and receive high levels of service, and if that is not a priority for a family office, then it will be challenged to succeed.
Trusted Insight: What’s the number one lesson that you've learned in your career as an institutional investor?
Andrew Eberhart: I think it's the willingness, in fact the desire, to invest outside the traditional opportunity sets.
You can have a satisfactory career in the institutional and family office world by investing within established frameworks, but if you intend to add value, you have to seek out truly unique opportunities and embrace the notion of calculated risk taking.
For me, that includes investing in new managers and asset classes and in having an open mind about opportunities that at first glance may not seem attractive. You can't get a better-than-average result if you're doing the same thing as everyone else. You’ll also have to turn over a lot of rocks to get one or two good ideas, but that discovery process exposes you to a steady stream of smart, accomplished people who will enrich your own thinking – and often leave you inspired. It is truly a fascinating profession to be in.
Trusted Insight: What have I failed to ask that I should either know about you, the family office or about family office investing, in general?
Andrew Eberhart: Over the last decade, family offices have grown substantially in number, size and sophistication and are currently one of the few growth areas in the investment industry. They have also increasingly become advocates for change – using their capital and influence to foster profitable innovation around some of the globe’s most pressing issues. As wealth transfers to a generation raised with an acute awareness of such issues – and a desire to address them – investment mandates are evolving to solve for and benefit from this reality. Such “impact investing” is still early in its institutional development and sophistication, but is no doubt a real need to be met – and one that requires professionals with backgrounds varied well beyond traditional career paths in finance.
To learn more about the top-tier institutional investors, check out Trusted Insight's list of Top 30 Ivy League Graduate Chief Investment Officers - Part 2.