Stephen Chang is the chief investment officer of LBCW Private Holdings, a family office based in suburban Philadelphia. He is also the founder and managing partner of Acrewood, which invests on behalf of successful, first-generation wealthy individuals, exclusively providing asset-backed principal participations with their peer group of established and serial entrepreneurs. Chang previously founded and sold two software concerns. He subsequently spent 13 years at Citigroup and Deutsche Bank/Bankers Trust, focusing on M&A, special situations and structured solutions. He serves on numerous boards including New Era Ltd., Elegantree Global Credit, Lafayette Homes and Akkadian Ventures. Chang received an AB cum laude in applied mathematics from Harvard University and an MBA in finance from the University of Pennsylvania - The Wharton School.

Mr. Chang was recently named on Trusted Insight Top 30 Family Office Investors. He graciously spoke with us on November 28, 2016.
 

Trusted Insight: You started out with a degree from Harvard in applied mathematics. Do you have any particular fond memories from your time at Harvard?

Stephen Chang: It's a place where you are surrounded by so many talented people that you're allowed to stretch the bounds of your own imagination- some of my best friends are from college. It was really one of the rare places with unfettered creative thinking and creative dialogue.
 

Trusted Insight: From that approach, how has Harvard’s encouragement for creative thinking influenced you in your investments?

Stephen Chang: In retrospect, it has done two things. It has taught me not to be constrained by the limitations of how people tell you things are done. I think this is particularly important as capital has become more institutionalized -- as a principle, it’s really important not to get drawn into existing institutional frameworks and investing styles, just because those have become codified with size and time. If you think as a principal investor for families, rather than as directed by institutional objectives, it's really important to remain unconstrained by what everyone says you ought to be doing.

The other thing is not to be so benchmark- and objective-oriented, but to aspire to be more idea-oriented, thinking about “what we're solving for” and “what type of exposures are we looking for” as opposed to a certain IRR, a certain duration, or allocation model.  It’s not “all about allocation” in my mind, but all about being able to know, articulate and agree on what the family as a group is really trying to solve for? Thinking about risk in this way comes from being led to believe that you can be unconstrained by what the book says you ought to do, but asking “why would I read that book?”

Trusted Insight: How does investing family wealth compare to your previous experiences within investment banking?

Stephen Chang: Frankly, it’s quite the opposite, which was really helpful for me. Large institutions get larger and are successful because they are methodical and they systematize their approaches -- they get very big and accrue a lot of resources for their discretion in that way.

If you don't fall into the systematic mentality, but you're able to still harness those resources, you can get a lot of things done. I think you need to understand how big institutions work -- It is not my intention to disparage -- I learned a lot about how the big institutions work at a very meta level, which is different from principal investors. You start to realize despite there only being one or two objectives people talk about -- profitability or shareholder -- there are so many competing objectives driven both by the organizations themselves and the many people that comprise them.

Trusted Insight: How did you make that transition to investing for a family office? 

Stephen Chang: I was one of the many at that time who understood that there was going be a disaster around the great financial crisis or whatever we're calling it now, the Great Recession. In my view, individual and family investors, in a time of great chaos, seemed to me to be the only ones who are able to act decisively on limited information and take advantage of real historic opportunity, and I think that's how the transition happened. I kind of worked on my own -- I started to interact only with individuals, rather than my old banking clients. Institutions and people within those institutions were spending all their time trying to save the institutions.

Individuals are more capable of focusing and acting in times of great uncertainty and with very limited information. Individuals, particularly entrepreneurs, build careers on that. Institutions are just not equipped to act very effectively in times like that. I was always drawn to entrepreneurs as I was an entrepreneur myself before going into the sell side, and ultimately that’s where I ended up again.
 

Trusted Insight: What's your approach to manage risks for your portfolio?

Stephen Chang: We don't really take a portfolio-level approach. We look transaction by transaction and we invest specifically in people. In order to find exposures to certain markets, we're trying to find aligned incentives, so we invest almost exclusively privately. It feels like the very liquid capital markets were really meant for institution, and Individuals ought to stay out, frankly. Through my whole career, we always wanted to be on the capital side of the equation, but I think that has now really changed. I think now you want to be on the side facing with the capital formation folks, the entrepreneurs, the business builders.

Now, more than ever, institutions are getting so large that we want to get into markets that work with scale, rather than into a scaled market. We want to get into things that institutions will want to put $20 or $50 million in, and we want to help individuals get their businesses to that level so they can take advantage of this relative ease of capital. 
 

Trusted Insight: Do you focus the venture capital side of things?

Stephen Chang: We actually don't. We are involved in a lot of new ventures, sure, but we work exclusively with previously successful individuals who are involved on a secured basis. We take “hard money” principles and re-formulate them for successful individuals who have “done it” for others before, but are keen to invest on their own behalf. We enable the entrepreneur to invest in himself as a principal rather than on behalf of investors. We're trying to look for opportunities where maybe you could, maybe it’s not the best idea to raise venture capital. Maybe you ought to borrow off your own balance sheet, from assets you wouldn't typically leverage to invest in yourself.

Now, more than ever, institutions are getting so large that we want to get into markets that work with scale, rather than into a scaled market.

Unlike a bank, we're not solving for rates of return. We're not solving for certain rights of return or certain set repayment dates, but we do have strong assets as security subordinated to us. In exchange for that downside protection, our upside is split with the individual who stands to make a lot more than us.
 

Trusted Insight: What kind of assets are you leveraging?

Stephen Chang: It runs the gambit. Real estate of course, including private residences, but also carried interests, private company shares, loyalty contracts, employment agreement, GP carry agreements and management agreements. We look at basically anything that a bank would have a hard time leveraging. 

People who have sold their previous companies or rolled it with private equity is a great candidate for someone we'd work with because they're usually starting something else new that we'd probably be interested in. Equally, GPs of large private equity firms have a lot of deals that they wouldn't do on the books of their firms but things they want to do for their own pockets, because they are idiosyncratic situations that they come into contact with, that they may even leave their firms for. We're very encouraging of that kind of behavior and we're there to help them.


Trusted Insight: Do you have a particular opinion on the U.S. real estate market right now? Do you think its assets are being over valued?

Stephen Chang: I think real estate is dramatically overvalued by institutional capital, but I think folks that are able to invest as a principal in real estate, either as a developer or as a GP, managing real estate assets is something that is pretty interesting because of the “leverage” you can get from institutions that are willing to promote capital. If you try to sell us a building, we may not terribly interested. But if you are going to have a program where you require 50 buildings or you're going to get a large private equity firm to put a bunch of money around you, then we'd be very happy to finance your co-investment and help you bring that institutional capital in, because the assets will be a good store of value, and it's a magnet institutional capital comes rushing toward. 
 

Trusted Insight: Can you tell me a little about your investment team and how the team makes decisions? 

Stephen Chang: In terms of origination, we're really trying to interact in the world of our peers. We're looking specifically for folks who have done it before, but maybe haven't completely ripped it personally. They've made money for other people. High eight-digit, low nine-digit first-generation wealth. That is our peer group, and that is who we tend to find potential deal partners who have the greatest investment ideas, and the highest conviction. They may already have the best access to capital, but are very keen to invest on their own behalf, but maybe don't have the liquidity to put enough of their own capital in to make it worth their while. So myself and my team originate by staying in the community of the peers of the families we invest for -- successful GPs, successful entrepreneurs, former CEOs of operating divisions, former CEOs of small companies that were bought by private equity, etc.  

We're structured like any small investment team. I'm focused primarily on origination and speaking to other families, secondarily on execution. I have a senior right-hand person who is primarily focused on execution, but is becoming an active originator. We then have a couple of pure execution and administration people who support all activities. Outside of Clay’s family, we manage capital on behalf of many other peer families, so there is a fair amount of administrative and operating duties in our small group, so we are trying to automate a lot of our internal and external processes.

In terms of decisions, we have formal memos and meetings and the like, and we confer regularly with the family, but often it is more for transparency and information than actually an investment gateway. 
 

Trusted Insight: Does the family for LBCW give you free rein to make these investments or are they deeply involved in what you're doing?

Stephen Chang: Because we're focused on doing the same type of trade over and over, it’s pretty uneventful to get their buying on things, but they participate in all decisions.  They're very supportive of us building businesses, and they're interested in the investments we're doing. I wouldn't say they're overly involved in investment or origination process, but they take an active interest in all of the stories and characters behind our transactions. When we started, we really had a more open mandate which required a lot more hand-holding and involvement, but now we are focused on a repeatable “product,” which makes it a lot easier and the conversations a lot shorter.

Trusted Insight: How has your investment mandate has evolved? 

Stephen Chang: Clay is the founder and longtime CEO of a public REIT. He didn't grow up in big properties -- rather, he went around and bought up small properties, and then joined up with big capital, bought more small properties, and then joined up with institutional equity, and then reversed it into a public company.

It's really helps inform the DNA of our currentinvesting style. We love to find individuals who can really scale themselves. That's really what Clay's own personal history was, which is why I think what we resonated with him and with many other entrepreneurs for that matter. 

We were very fortunate though that. LBCW a Clay's family was willing to support us, and Acrewood really the business we built for other families so that are our peer groups could participate with us. It was a real validation in both directions that what we are doing was what other families wanted, so that's what made sense if that's what Clay wanted to do. Equally validating, now that we've been doing it for a while, we have a number of really large exits for our partners and they have gotten liquidity, they've come back and invested in us.

They see us very capital protected and secured -- principal investors have little appetite for capital loss, but we still retain uncapped upside in something exciting -- debt-like but equity-like as well. Again, started as an open mandate, but it was pretty unique as no one was really doing this.
 

Trusted Insight: Are there any particular interesting trends you are seeing emerge in family office investing? 

Stephen Chang: I think now that family office has become kind of a segment of focus. Families are increasingly targeted by marketing efforts from institutional capital raises, cap intro, and also direct deals. I think it's really important that family offices confer with each other and stick together now that we have been identified as a target. I also think there is a trend to start to realize there are different types of family offices with different objectives. 

I also think gradually people will realize that the size of the family office matters, and there is going to be some increasing differentiation in who approaches whom with what. $100 million is very different from $1 billion. Equally, there is a need to understand that generational status matters. The objectives of an intergenerational family office are very different from an entrepreneur, first-generation wealth creator who invests his newfound capital. Understanding the differences and circumstances amongst family offices and understanding those objectives are something that aren't well understood, but become more important when families start to band together and confer.

The absolute fundamental trend is that folks are starting to realize that the principal investors and family offices want as much discretion and transparency as possible. We don't necessarily even care about direct control or sitting on boards. That's the last thing Clay or many of these families want to do, but they don't want blind pools or to lose money. The IRR is much less important than not coming back with 90 cents on the dollar.

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