FA Magazine Cover Story: Lido’s Origins & Growth
Published 12-03-2019, by Gregory Kushner
Greg Kushner remembered when he first started investing in a residential development as a 25-year-old. He bought land in Utah to prepare it for a 67-lot housing development. The land was in a suburban area near Roy, Utah, and the Hill Air Force Base and there was definitely going to be a demand for housing stock.
“I’ve always had an interest in real estate,” he says. “I did a 67-lot real estate development in Utah with a partner of mine that lived up there. … We brought in partners. I didn’t have much money back then.”
What insight did he have as a 25-year-old? “I was dumb,” he says. “I didn’t know what I was getting into, to be honest with you.”
His biggest mistake was not fully understanding how the entitlement process could delay the deals. Also, “in Salt Lake City they have the 100-year flood where the actual Salt Lake rose.” The rising water table meant additional sewer drainage was needed.
Flash forward to 2019, and Kushner finds himself serving as chairman of an RIA firm set to take on some $5.5 billion in assets by the end of the year, and he has an ambitious plan to get to $10 billion in the next three years. Much of his firm’s growth has come in the last decade, and stemmed from those expansive plays in alternatives, especially real estate lending and ownership. Lido Advisors has, as a partner with other family offices and limited partner pools, come into ownership of apartments, industrial buildings and retail outlets in far-flung places beyond its Southern California roots such as Seattle, Kansas City, Dallas, Reno, Las Vegas, Austin, San Antonio and Nashville.
After eschewing RIA acquisitions for most of its 20-year existence and building organically as an RIA, Lido Advisors this year decided to start acquiring talent to add to its team. The firm has acquired four teams this year, bringing some $1.5 billion in AUM. Most recently, in October, the firm added Robert Marton and John Bute, an ex-Merrill Lynch team from Boca Raton, Fla., who stewarded some $700 million in assets. At the beginning of the year, Lido brought on board San Diego’s Ken Stern & Associates with some $400 million. Erica Ghotra brought over $60 million in September when joining as vice president, and Lido also made its first East Coast purchase in July, acquiring Coliseum Wealth in Rockville, Md., a deal that brought $50 million over. Lido is opening a new Boca office of 1,500 to 1,800 square feet to serve its Florida clientele. (The firm started the year with around $4 billion.)
“If we can add a billion a year organically and add another half a billion a year inorganically, that would be our desire,” Kushner says. “We’ve beefed up our technology, our compliance, our marketing, all the things that you do to get larger.”
As it heads eastwards, Lido is looking to expand strategically. “The decision for tuck-ins has been more of a geographical decision,” Jason Ozur, president of the firm, says. That means entering markets “where we have a large client base but we don’t have a larger home office. So in San Diego we now have a pretty sizable office.”
Attracting younger advisors is also critical. “We have had clients who’ve come from firms where the advisors were the same age as them,” Ozur notes. “What they didn’t want was a situation where they were 75 and their advisor was 75 years old.”
With the firm’s family office origins, it does estate planning and wealth and investment management for the very wealthy. Its clients range in assets from $5 million to $500 million, Ozur says, and have in the past been tied to the entertainment industry but now more to businesses in the tech industry; they are different kinds of clients whose problems require different kinds of solutions. Lido has offices in its home of Los Angeles, where it once did 90% of its business, and now other cities like Seattle, San Diego, Denver and Chicago, since now about three-quarters of its business are outside L.A.
Kushner spun Lido Advisors out of a consulting firm (also under the Lido brand name) he had launched in 1995. A CPA by training (he is son of an entrepreneur whose retail and wholesale business distributed Blaupunkt car stereos in the United States), Kushner spent the first 12 years of his career doing personal financial planning for high-net-worth individuals, passing through the halls of accounting giants like Price Waterhouse and Peat Marwick Mitchell. At the end of the ’80s, partnership at a CPA firm beckoned, but he didn’t want it. He said to his mentor: “I don’t know if I want to be a partner at a firm where one of my other partners who I don’t know can do something bad and take down the entire firm.” Accountants are also conservative about investment management, he says, noting that many of them don’t have the entrepreneurial gene.
While doing a stint at Chase Manhattan, he got tapped by a recruiter to run a family office in L.A. for a clan in the garment business. While there, he launched a network of other family office heads who would meet six times a year and have an annual conference with educational seminars. It attracted family offices and high-net-worth investors (speakers from D.C. speak on things like tax policy, and the event has also drawn the likes of former President Jimmy Carter, Howie Mandel, Magic Johnson and Jay Leno to speak or perform). Soon, other managers were showing up asking how clients who were slightly less wealthy than super-rich might get this sort of family office treatment. Lido was born in 1999.
The firm cites a couple of reasons for its enormous growth. One is that family office model, so popular in Lido’s first 10 years.
But in a decade when many advisors have embraced index funds and non-investment services, Lido has marched to a different beat. For the last decade it’s been real estate—the asteroid that brought down so many financial giants but offered unique opportunities for a firm like his, Kushner says.
Shadow Banking Takes Off
Real estate was a great opportunity for the ultra-wealthy for the purest of reasons: taxes. Among high-earning Californians who can face state and local tax bills of 14% of their income, this investment strategy resonates. Lido clients may hold between 5% and, in a few cases, 30% of their portfolios in various real estate vehicles.
“All of our clients pay a lot of taxes,” Kushner says, “and real estate ownership is still one of the very few things that is given tax-advantaged status in the tax code.” That’s mainly through the advantages of legal depreciation, he says. He points to properties the firm has owned in the Dallas-Fort Worth area for some five years, as an example, that haven’t triggered any income taxes from cash flow.
“It’s not an aggressive tax position or anything like that,” he says. “It’s the fact that you can depreciate the entire value minus the land, including the amount that you financed. That’s where you get the big boost. So if you buy a building for $10 million and let’s just say the land is worth $2 million, you get to depreciate the $8 million, even though you might have only invested $4 million.”
Lido’s first big real estate push started in the lending space. In 2009, at the height of the recession, Kushner’s team was asked for bridge financing help on a Beverly Hills mansion selling for $5 million. It was around the time Lido’s Jason Ozur joined the firm.
The firm heard through other family office acquaintances that a developer needed help for a deal that sounded too good to be true. “He felt he was getting a smoking hot deal on this opportunity. He had $3 million to put down and he wanted a $2 million loan,” Kushner says. You would think that would be an easy accomplishment, but not in 2009. The usual suspect bank lenders were suddenly staring blank-eyed at developers, he says. This buyer was willing to pay a bridge financier 12.5% interest plus 2 points up front. “We did our own homework, did our due diligence, did our own appraisal,” Kushner says. The house, they found, was actually worth $5.6 million.
As a real estate lender in this case “you’re in first position,” says Kushner. “You’re the mortgage holder. Basically, you’re the bank.” Even in foreclosure, Lido figured it was ensnaring a $5 million property for $2 million. So it struck a deal, and eight and half months later got paid back when the developer found cheaper financing.
Realizing it was onto something, Lido later went to operators and asked them to set up pooled partnership vehicles so that multiple qualified clients with multiple operators could put their money across multiple real estate loans. Different geographies. Different building types. But they were all doing the same thing. “So they created funds, and these funds created multiple deals. So from a diversification perspective, as I would tell my clients, ‘I’d rather you own a small piece of a dozen loans or 30 loans or a hundred loans or in some instances hundreds and hundreds of loans [in many geographical areas] depending on the fund vehicle versus owning just a single loan.’”
In 2012, the firm started investing directly in distressed real estate, especially taking advantage of some markets like Las Vegas, which had been crushed during the financial crisis. “The houses that we started to identify were selling in the low-$300,000s, and we were actually able to start buying them at an average price of $141,000 a house, which was far below the cost to replace and build the house.
“We started buying as many houses as we could that we would be able to buy and provide our investors with a 6% return on an all-cash basis. We didn’t even bother getting debt. We just said, ‘This is a bond substitute that’s going to give our clients a 6% [return] … partly sheltered with depreciation. So you get a 6% return on your money while we’re waiting. … In the time we do this, the 10-year [bond] had dropped all the way to 1.41%. It was a great opportunity to sell bonds and buy these houses.”
Around the same time, the firm got into distressed office space. Another deal, again in Vegas, with another family, included a medical office building. The building was only 40% occupied. “We bought this building at what I believe was $65 a square foot,” Kushner says. “To rebuild that building, it probably would have cost closer to about $200 a square foot. So again we bought it well, well below replacement cost.
“We were getting a decent cash flow even at 40% occupied,” he says. The building is now 80% occupied, the firm got all its original capital back and it still owns the property today, he says. “We got cash flow for five, six, seven years. Let’s say we put in $3 million and we borrowed $5 million. The total is $8 million for the property. Let’s say the building [is later worth] $16 million. We go to the bank. They are happy to give you a $10 million loan because you have $6 million in equity. You pay off your $5 million original loan out of your $10 million in loan proceeds. You put $5 million in your pocket. And you only put in $3 million originally, [so you have] an extra $2 million, plus whatever cash flow you’ve been collecting for seven years.”
Lido has since pursued other deals in multifamily housing in places like Dallas and Austin, gussying up properties where the previous operators are doing a bad job managing the places. In many cases, what the firm offers is an ability to see through onerous fee structures offered by some pools and poor financing in other cases.
He mentions one apartment complex in Fort Worth that the firm bought with 65% financing. The firm paid $27 million. After getting all the value out, the firm turned around and sold to another company for $44 million. That buyer put only 15% down and paid 85% financing at a variable rate. There’s a lot less room for error in that case, Kushner says. “If they start running into operational problems, if they have to drop rents, they are going to have a tough time meeting debt service. When they lose the property to foreclosure and then lose their equity, that’s the time we might be opportunistic and be able to repurchase the property at a substantial discount.”
Lido tapped Brad Hixson as executive vice president a couple of years ago to help Lido with its acquisition strategy. Hixson worked closely with the firm when he was servicing their business as an institutional rep at Fidelity. “You get to see how different institutions function and how they go about conducting their business. And that’s what really intrigued me about Lido,” Hixson says. “What they did that attracted me was that they started putting in place the pieces and processes to move from a business to an entity. That’s a transaction that takes time.”
Not all firms get there. Growing outside of your current market is difficult. The firm had to develop technology and a cohesive message before looking at fresh blood in Florida or Texas or New York. “I can’t have someone in New York doing business completely differently on different systems than someone in Maryland,” Hixson says. “It’s too unwieldy from a technology standpoint. We spent a good part of 2018 on servicing, segmentation, technology, making sure that we had the package put together.”
Lido’s Tech Buildout
Lido’s organic growth in the last 10 years has greatly accelerated, and in the last couple of years it has made major investments in compliance, marketing and HR. The firm’s general counsel and chief compliance officer, Jason Lee, worked at the enforcement division of the SEC. After the firm got its infrastructure together, founder Greg Kushner says, it felt ready to start lift-outs and buyouts of small RIAs that couldn’t grow.
In the midst of its other plans, the firm is planning a technology rollout for a new proprietary database it has built to track thousands of mutual funds and pinpoint those whose performance doesn’t track the funds’ underlying investments. President, Jason Ozur is an Excel savant, Kushner says, and when he joined the firm he started analyzing mutual funds. “We came up with this idea of ‘Wouldn’t it be nice if we could kind of predict how our managers are doing on a daily basis to really track style drift?’” Kushner continues.
“What we did is we built a hedge fund of funds strategy using only liquid ’40 Act mutual funds. … So we created this software that would track how each manager should do based on how they had reported—how short they were, what their holdings were. Remember, mutual funds only report quarterly. So we would be able to take that data and use all of our internal algorithms and thoughts and observations to really calculate on a daily basis how a manager should do.”
There were days that certain managers should have been up, say, 0.5% but instead were up 1.5%. “It gives us a flag that says, uh-oh! Something’s changed here. Why did the manager do so much better than they should have? And the same thing in reverse.” Lido would then pick up the phone and talk to the managers. “Maybe they decided they were going to short biotech. And we don’t want to short biotech.”
The software, known as Infinovate, analyzes what the underlying stocks are doing based on third-party inputs such as those from Thomson Reuters, for example, and shows how the client’s asset allocation should perform daily. The firm looks over mutual funds, ETFs and stocks. “It’s creating model portfolios,” Kushner says.
The firm showed the software to some friendly RIAs, captured their interest and is now rolling out its own software program after developing it with a joint venture partner. “Now we’re going to actually take it out to market first of the year,” Kushner says.