Originally published in Worth, December 27, 2021
Family office needs and preferences have evolved in recent years.
Many families have made broader moves into an array of direct investments. This activity—driven largely by an interest in lower fees and control—contrasts with the more classic pattern of diversifying family money away from the business that generated the original wealth into comingled funds, real estate and the like or by exclusively increasing investment into the sector that the family knows so well as a result of the original entrepreneurial foray and often successful exit.
Still, it is hard to advise on how family offices should invest. Enter Pennington Partners, a firm that is addressing many of these increasing and bespoke needs.
Brian Gaister is a cofounder of Pennington Partners & Co., SaaS Ventures and PTM Partners. A financial entrepreneur, Gaister is passionate about building and investing in companies in the pursuit of innovation.
As the cofounder and CEO of Pennington Partners & Co., Gaister leads the strategy and vision behind the firm. Founded in 2016, Pennington’s mission is to create the leading ecosystem for successful entrepreneurs and their families, helping them navigate the challenges of complex wealth and maximize their greatest potential.
Gaister grew up in an entrepreneurial family where he learned the importance of hard work and giving back to the community. He is an active member of the Jewish Federation’s National Young Leadership Cabinet, the premier leadership development program of the Jewish Federations of North America. He serves on the investment committee for the Bender JCC of Greater Washington and is a committee member for the United States Holocaust Memorial Museum’s National Tribute Dinner. Most recently, as a third-generation Holocaust survivor, Gaister launched a podcast series interviewing second-generation Holocaust survivors who share a similar passion for entrepreneurship, as well as tikkun olam (the Jewish concept of repairing the world) and have overcome great odds to make the world a better place.
Previously, Gaister was a financial advisor at Morgan Stanley and Merrill Lynch. He earned a Bachelor of Science in international business from the University of Maryland’s Robert H. Smith School of Business. He holds Certified Investment Management Analyst (CIMA) and Certified Private Wealth Advisor (CPWA) certifications, both awarded by the Investment Management Consultants Association (IMCA) in conjunction with the Wharton School of the University of Pennsylvania and the Booth School of Business at the University of Chicago. He is also an active member of the YPO Washington D.C.-Baltimore Chapter.
Gaister sat down with Worth to discuss the purpose behind Pennington Partners, how it helps families and family offices and the opportunities he’s seeing in early-stage technology investing.
Q: To start, can you tell me about the private investment and strategic advisory platform that you’ve built for company founders and families at Pennington Partners?
A: Rodd Macklin and I partnered back in 2016 to address the gap between the traditional investment advisory model or large bank platform and the proliferation of single-family offices that benefit from having economies of scale. We built a firm to address the 100,000+ people in the U.S. and many more globally that are ultra high net worth and are looking for a better solution that is truly aligned.
Rodd and I are members of entrepreneurial families. Rodd’s family sold their company and found themselves in need of a multitude of services that would traditionally be handled by disparate individual specialists. My family owns and has owned and sold businesses in health care, retail and the beauty industry.
To address this gap, we founded Pennington on three core pillars that meet the needs of ultra high net worth families. We built a platform to accommodate the unique needs of families that we know so well.
The first pillar is our à la carte household financial administration division that manages everything from complex partnership accounting, personal bookkeeping, medical claims management and performance reporting for families. It is typical to see a family with one to four different investment advisors and 30-100 private investments outside of those managed by their financial advisor(s). We help to create a system that enables the family or family office to see all of their investments in a centralized balance sheet or dashboard, to provide quality reporting and capital call management to enable better measurement, organization and decision-making. We also assist by executing personal bookkeeping and bill payment to ensure the family better understands their actual cash flow and can focus time and attention on other priorities. This division of our firm has channel partnerships with leading registered investment advisors and three of the top 10 wealth management firms in the U.S.
The second pillar of our firm is our multifamily office, where we are serving as a single-family office to entrepreneurs, founders, CEOs and families with net worth ranges from $30 million to over a billion. Our sweet spot is an entity with $50-500 million in assets. These clients represent wealth across many asset classes in terms of how they made their money originally, where their assets are currently invested and where mapping out a strategy going forward can often feel overwhelming. The existing commercial investment advisory “one-size-fits-all” options often don’t fit their needs. These families are very sophisticated and, often, we want to invest in new opportunities alongside them given their unique sector expertise.
Think of us as an MSD Capital, Michael Dell’s private investment office, in place for the mutual benefit of multiple entrepreneurial families.
The third pillar is our tax-advantaged alternative investment platform, where we have built out investment solutions across venture capital, real estate in opportunity zones and broader tax-advantaged, income-generating strategies.
What kind of founder client is right for Pennington?
We specialize in partnerships with the type of entrepreneur or family who builds a single company or multiple companies and has an exit typically of $50 million or more per entity. We also work closely with families as an extension of their single-family office. For example, one of our operating partner families sold their business for over $360 million and has their own single-family office, and we cofounded our opportunity zone platform with them. We recognized that together we could generate a better investment return and more compelling social impact with greater control than the existing solutions in the market could deliver.
As I shared, we are truly functioning as a single-family office for the mutual benefit of multiple families.
How does the Pennington Partners platform integrate with your efforts at SaaS Ventures, PTM Partners and Pennington Alternative Income Management? Please tell us a bit about how these pieces fit together.
Our tax-advantaged alternative platform that invests across (software) venture capital, real estate in opportunity zones and a private income platform (which targets eight to 12 percent unlevered returns) were born out of the need to invest and maximize our own capital.
Our select operating partners participate in investment opportunities alongside my family and receive preferential terms, including general partner economics.
Each platform was built on compelling themes in sectors where we had or could develop a unique competitive advantage.
As early-stage technology investing is your primary focus at SaaS Ventures, what are the most interesting opportunities you’re seeing right now?
SaaS Ventures invests in businesses located in second- and third-tier cities across North America, as there is a relative dearth of capital in these less traversed cities and markets. We’ve invested in over 80 software companies in the U.S. and Canada. We tend to avoid firms based in cities like San Francisco or New York City, given the high valuations. By focusing on second- and third-tier markets, we can work with amazingly talented individuals who are changing the industries they operate in, and who unfortunately do not have the same access to capital that startups in major coastal tech hubs have historically enjoyed.
We are focused on investing across four main themes: e-commerce, ESG technology, logistics and cybersecurity. About 75-85 percent of our investing is happening in these four subsectors right now.
When it comes to early-stage technology investing, are there any subsectors you avoid and why?
There are currently a lot of capital-chasing real estate proptech opportunities. We are open to investing there, but we haven’t prioritized it as much as other subsectors. We see lots of innovation in EdTech, but the sales cycle into university verticals is longer than that of other sectors so we tend to avoid that.
We’re bottom-up investors. What we’re looking for is a great team with a big market that can be a category winner. We don’t completely avoid any subsectors, but rather we look at each opportunity individually based on team, market and the partners around the table.
Of the 8,000-plus opportunity zones across the country, how do you narrow the range of investments you will consider at PTM Partners? Does the zone need to have any specific characteristics?
There are a few factors. The most important thing to keep in mind is that the opportunity zone program doesn’t make a bad investment good, but it can make a great investment better (largely because the capital gains are tax-free after an investment is held for 10 years). We ask, “What is the need in the market? What problem can we help solve by creating a new product with a great experience for tenants? Is this investment consistent with the spirit of the program—namely, is the investment facilitating ‘social good’? What are the demographic trends in the market, and do we see strong population growth, job growth and strong educational facilities (and opportunities) in the area from which to hire and draw talent?”
What are the biggest challenges that investors face right now?
If we separate from the “oh my God, Omicron” sentiment for a moment, we have to look at interest rates being super low and there being greater risk when considering equities, real estate, private equity, private credit and fixed income strategy sectors due to historically high valuations. Of course, everything is tied to interest rates. If you look at a traditional growth-focused 80/20 portfolio and fixed income that is expected to generate five percent year over the next 10 years, inflation and taxes can bring that return closer to zero in real terms. From our perspective, this requires investing as a specialist in areas where we have a competitive advantage with a greater emphasis on alternative investments and being thoughtful about after-tax returns.
What is a big economic challenge that we face in this country right now?
A very big challenge, and one that I’m personally very passionate about, exists around how to train a domestic workforce during a technology revolution in our country.
When you look at labor participation rates, it is evident that a growing subset of people are left out of the new economy and in need of new skills and training.
I’ll mention a couple wonderful organizations that are making a difference. I really like what Catalyte out of Baltimore is doing. The firm is helping the underserved sharpen their skills and will train individuals from any background to be developers; training is followed by job placement. You can be an Uber driver or a factory worker, for example, and engage with them. The program places people on a different career path to drive overall productivity.
On the nonprofit side, the impact that organizations like Genesys Works are making is pretty inspiring. Genesys Works is a not-for-profit focused on training high school students across multiple geographies and placing them at leading employers. Students are engaged in a one-year internship while in high school. Quite often, the individuals chosen are the first generation of college attendees in their families. Genesys is laser-focused on underserved communities. A high percentage of the people going through this program earn above median incomes once they graduate from college; they find themselves in the economy of the future after participating.