Three simple rules for sustaining and growing family wealth

Over the past three decades, Dr. Paddy Walker has helped to devise, execute and evolve a successful plan for growth that builds upon the legacy of his fifth-generation single family office, The J. Leon Group.

Paddy’s impressive education (which includes periods at Durham University, the Royal Military Academy Sandhurst, an MSC at the Johnson Graduate School of Management at Cornell University, a Masters at Buckingham’s School of Modern War Studies, and a PhD from Buckingham’s School of Humanities), and extensive experience in the family office space (he previously chaired the UK’s Institute of Family Business Family Office forum), has allowed him to hone a proven strategy for maintaining the group's wealth and purpose.

Here, in his own words, Paddy discusses the establishment of a governance and investment structure that continues to align with the values and visions of this enduring single family office…

Arriving at the docks in London’s East End at the end of the 19th Century, the Leon family’s antecedents disembarked without a penny to their name. In the absence of becoming the likes of a tailor or a milliner, they will have bought a sack or two of tobacco leaves and started in the business of rolling cigarettes and cigars for a quick cash return.

The family’s real wealth was created between the two World Wars when the second generation started a chain of tobacco shops in southern England. A J. Leon and Company kiosk was soon to be found on the concourse of most railway stations and throughout London’s emerging Underground system. Whenever there was cash, either a freehold would be purchased, or some mixed-use commercial real estate was started above London’s emerging suburban tube stations. Fast forward to 1970, and an acquisitive Imperial Tobacco decided that their business could not do without Leon’s shop portfolio and bought the family’s distribution business.

So ended that key contribution from the family’s energetic and focused second generation, leaving the next generation of management, my father-in-law and his accountant first cousin, in the fortuitous position of having some financial wherewithal following Imperial’s acquisition of the business, a portfolio of mixed-use properties together with a rather lopsided collection of UK-listed equities that had been gathered along the way. The 1970s and 1980s were then spent building a considerable collection of commercial shop properties up and down the country. 

I joined the business with my wife Tania, a family member, in 1992. A small management ruckus and a wish by the third generation to find a new business saw the two of us, together with Vince, a colleague who is still with us 32 years later and now runs Leon’s direct investment activities, start a captive private equity operation on Leon’s balance sheet. For me, this was half a decade after having left the army and having recently returned from an MBA in the USA. Tania was a newly qualified lawyer, while Vince was an accountant at the development capital arm of FTSE-100 Hillsdown Holdings PLC where he and I had been working.

We have spent the past three decades gradually refining the group’s real estate holdings such that the balance sheet today, still ungeared, is a quite different beast to what we took on in the early 1990s. Half is deployed internationally in Tier 1 private equity partnerships. One quarter is invested in long-only listed stocks held in an efficient and UCITS-compliant wrapper managed by Thesis Asset Management, one of the UK’s larger Authorised Corporate Directors, where we also own a stake. The rest of our balance sheet is in farmland, a portfolio of residential Hampstead properties dotted around close to the office and a core holding of prime retail properties, as well as cash, a clutch of hedge funds and, five percent of what we do, a group of directly held stakes in private UK companies.

We have properly embraced diversification as the only free lunch available to the family office whose principal aim, after all, is to steward wealth.

Three matters define our past three decades…

Firstly, the company’s shareholder register is a much tighter affair following two significant share buybacks which we orchestrated during our first decade in office. In two separate tranches, more than half of the balance sheet was used to buy in shares of more than 90% by number of the group’s then beneficiaries. 

Secondly, and as a married-in member of the family, governance has been a key priority during our tenure. The group has in place a family constitution, a non-legal document that sets out the mission, values and operation of the family’s business in what, after all, is now its second century of being. The constitution covers family duty, the behaviour expected of family shareholders, as well as interesting discussion around the family’s purpose. It creates a useful degree of separation (not that it is particularly required) between matters business and matters family. In this vein, we have a majority of non-family members on the group’s executive board, as well as a further family non-executive director, all of whom have been with the business for between one and three decades. Decision-making has evolved over time as a somewhat informal process based upon trust and muscle-memory, although coalesced around a regular investment committee to process investment decisions. Rarely is an investment undertaken quickly or reflexively. 

Thirdly, we have properly embraced diversification as the only free lunch available to the family office whose principal aim, after all, is to steward wealth. We understand that we are not entrepreneurs and are instead custodians for future generations. The aphorism that we work for our children to the end turns out to be correct. The downside to the investment model is that the family’s unique selling point is limited in part to the art of choosing managers, securing access to best funds and constructing the most durable portfolio that we can in these volatile times. And this definitely turns out to be an art and not a science. The family needs to feel and be part of these processes and, in my opinion (and the reason, I suppose, for incurring the costs of a family office), cannot be left solely to third party managers or, heaven forbid, to the larger banks to undertake unsupervised on the family’s behalf. 

And that free lunch of diversification covers manager selection, currency, geography, stage and type of investment. And vintage. Although ungeared, we tend to run fairly fully invested. Furthermore, the advantage of not taking individual stock positions (relying instead on highly incentivised managers to make those decisions on our behalf) is that we rarely try to time markets and have an eye instead to the compounding effect of duration on the portfolio’s performance. 

Today, we focus more on the behavioural, softer aspects of each new commitment and let diversification work out the rest.

Our three-decade bets have really been limited to being long-equity (we want to have stakes in growing companies rather than investing in their debt), being long-dollar and long-US PLC. The group has four rather woolly investment rules. We don’t tend to do anything quickly. If we miss a particular opportunity because we would rather wait a quarter or so before committing, then so be it. We are also unlikely to take sizeable bets. Indeed, sizing positions turns out to be a key consideration in creating that durable portfolio. Don’t get carried away by the moment or an appealing investment thesis. One or two percent of the balance sheet is all we will spend in any one asset. A third consideration (not really a rule) is that we much prefer to have potential investments pre-qualified to the extent that others in our trusted circle of advisers, colleagues and co-investors properly know the opportunity. In olden days, we used to model to death the portfolio in an effort to identify the possible consequences of new investments. Today, we focus more on the behavioural, softer aspects of each new commitment and let diversification work out the rest. 

A final rule (newer, in that it has only been in place for a decade and a half) is that we are more cognisant of costs. Look back to our roster of managers around 2005 and it has a few (a very few but still an annoying few) examples of large banks putting together what appeared to be an excellent cohort of underlying hard-to-access managers round some dejour theme. And then slapping on a one-and-ten-percent additional fee (one per cent management fee over and above the underlying manager and then ten percent of all net profits accruing from that new partnership), the result of which meant in effect that we were paying three-and-30 for the product. They actually did fine but at what cost. We should have done it ourselves. And this, it turns out, is usually the case. Beware the complex, the structured and the multi-layered. Do it yourself. Or skip entirely. 

And so the three of us who joined in 1992 are now in our early sixties. The constitution says that we should pack our bags by the time we reach 75. Succession is clearly important but, in our case (and I imagine in others’), has proved a quite self-sorting issue. We are in no rush and are careful to make sure that we have options at all times. We have board members who have been at Leon for decades who are still in their 40s. And the first member of our fifth generation is also already in place after an apprenticeship at a large American private equity fund of funds. Angus runs our seed and venture investing activities and is generally involved in the group’s activities. A recent daughter-in-law who studied law and is an accountant might be newly available in the wings. Hurray! 

After all, the group’s constitution clearly articulates the family’s wish both to cascade wealth down the generations but also, crucially, to embrace change. Just as Leon’s first generation rolled cigarettes and the second built that portfolio of shops to be developed by my father-in-law and his cousin, it is not inconceivable that the asset mix of the group may change again over the coming decades to reflect the competencies and judgement of the incoming generation and beyond. What, surely, is more important is the conservative nature of our investing, the properly long-term outlook that drives how we allocate our balance sheet and the benefits of diversifying our interests across the very best management teams that we can access.

And luck. Lots of luck. And having purpose, in our case the work undertaken by Leon’s Philanthropy Council and the activities in which it engages. Years ago, our first Family Forum saw me spend the weekend going through the group’s asset allocation line by line to our 18 bemused shareholders. 15 years later, and I get less than an hour to rattle on about group performance and the make-up of our investments. This is not to dismiss in any way the commercial imperative of our family office but speaks instead to the importance of family legacy and footprint and the lasting impact we can make through the family’s philanthropy.