New Fortune | The Guggenheim family's revival code: Successful transformation of social and financial capital
Global Family Business Research Center
 
The Guggenheim family were once known as the Princes of Silver and the Copper Kings of the World. At the end of the 19th century, the family dominated the world's mining industry as the second richest Jewish family in the world after the Rothschilds. Despite the difficulties faced by the Guggenheim family in the third and fourth generations, the first and second generations' generous donations in the arts and technology space had allowed the family to gain significant recognition. In recent years, this intangible social capital has been successfully transformed into tangible financial capital by the fifth generation of the family. The Guggenheim partners have become rapidly emerging financial giants and have thus revived the family.
 
Source: New Fortune, November 2014
Author:
Gao Hao (Director, Global Family Business Research Centre, PBC School of Finance, Tsinghua University)
Liu Chung Hsing (Founder of Sino Suisse Capital and previously Head of UBS Ultra High Net Worth Division Greater China)
Jiawei Ye (Head of Philanthropic Foundations and Fundraising, World Economic Forum)

 
Guggenheim Partners is a financial giant that has emerged rapidly in recent years to provide asset management, investment banking, insurance and other financial services to institutional and private clients. As of June 2014, it had $210 billion in assets under management, including $39 billion in advisory services for clients, with an average of approximately $60 million in assets under management for each client. Their headquarters are situated in New York and Chicago, USA, with 25 offices in eight countries and over 2,500 employees worldwide. In addition to these impressive figures, the Guggenheim has led major transactions in recent years that are also remarkable. In March 2012, Guggenheim Baseball Management acquired the Los Angeles Dodgers baseball team and Dodger Stadium for a whopping $2.15 billion. In September 2012, Guggenheim, Mandalay Entertainment and Mosaic Media Investment acquired Dick Clark Production, which creates the All-American Music Awards, the Golden Globes and other television entertainment, for $370 million in a three-way partnership. In February 2014, Guggenheim acquired the Los Angeles Sparks, the sister team of the Los Angeles Lakers; In April, Guggenheim Partners acted as an associate underwriter to support the $23.8 billion IPO of Ally Financial, formerly known as GMAC; In June, Guggenheim Partners assisted Element Financial in completing the acquisition of PHH's fleet management business for US$14 billion.
 
The author of this article, Gao Hao, interviewed Peter Lawson-Johnston, II, the fifth generation head of the Guggenheim family, in New York
 
Guggenheim Partners is formed through the combination of the precious heritage of the Guggenheim family spanning three centuries with today's top Wall Street professional investors, founded by a descendant of the Guggenheim family and two Wall Street financial giants. In the offices of a skyscraper near Bloomingdale's in New York, there are objects that represent a pivotal era for the Guggenheim family: a photograph of Meyer Guggenheim with his seven sons; a three-foot copper bar from the Chuquicamata mine in Chile; a cheque for US$70 million from 1923 documenting the sale of the family's 2 million shares of the Chile Copper Company to the Anaconda Copper Mining Company. Harry Guggenheim's racehorse, also beat American railway king Vanderbilt's racehorse, “Dark Star”, and won the championship trophy at the Kentucky Jockey Club.
 
These artefacts recall a time when the Guggenheim family dominated the world's mining industry in the late 19th and early 20th centuries. At that time, the Guggenheims were so rich that every move could trigger huge waves. In the United States, the Guggenheims were the second richest Jewish family in the world after the Rothschilds, although slightly less wealthy than the Rockefellers, Vanderbilts or Jorgans.
 
From the fourth generation, the family gradually shifted its focus from mining to other industries. The Guggenheims, who were known as the Princes of Silver and Copper Kings of the World, have now separated themselves from most of the industries on which they built their fortunes. Nevertheless, the rich social capital left behind by the first and second generations of the family has once again been transformed into impressive financial capital by today's Guggenheim associates.

 

Meyer Guggenheim, the legendary founder of the Guggenheim empire, led his family on the path to prosperity by entering the mining industry.
Picture source: East IC
 
The foundations of a mining empire
 
At the beginning of the 19th century, the United States was full of opportunities for growth. Simon Guggenheim, a German-Jew living in Langnau, Switzerland crossed the ocean to Philadelphia with his family and this paved the way for his family's destiny.
 
Like other Jewish immigrants, Simon and his son Meyer Guggenheim began trading, mainly in small goods, coffee grounds and black furnace polishing powder. Meyer Guggenheim, the legendary founder of the Guggenheim empire, shortly realized that it would be more profitable to make his own polishing powder. This was the first time the Guggenheim family had moved from business into manufacturing.
 
During the American Civil War, the business-minded Meyer and his partners set up a general shop to sell the main chemical raw materials for the production of alkali and soap. The business ended with American Concentrated Soda Co.'s general acquisition of General Stores, but Meyer was paid a cheque for $150,000. In addition, Meyer also received $320,000 for his stock investment in the Hannibal & St. Joseph Railway Company. After earning his first pot of gold, through an accidental opportunity, Meyer quickly turned his main business into textile industry and established Guggenheim & Pulaski with Pulaski, primarily importing and selling lace and embroidered textiles.
 
Meyer had eleven children, and with the exception of Robert, who died prematurely, all of them survived, including seven sons, providing sufficient human capital to support the family business (fig. 1). It is indisputable that this was one of the reasons for the Guggenheim family's great wealth.

 
Fig. 1. Guggenheim family lineage
 
1881 was a key turning point for the Guggenheim family. Meyer financed the purchase of all of Pulaski's shares, allowing the older sons to establish a factory in Switzerland, renaming the partnership M. Guggenheim's Sons. In the same year, Meyer entered the mining business with the purchase of a 1/3 interest in the A.Y. and Minnie mines in Colorado for $5,000 , setting him on the path to becoming a wealthy family.
 
Initially, the two mines produced just enough ore to cover expenses, but after a mine flooding incident, Meyer decided to invest an additional $50,000 and became a controlling shareholder. Eventually, the two mines were found to contain large quantities of silver and lead ore. By the 1880s, the two mines were listed in local newspapers as one of the largest deposits in the West. Their production, excluding smelting costs, amounted to $3.6 million that year and by 1888 they were bringing in an annual profit of $750,000 for the family.
 
In an 1887 ore smelting operation, Guggenheim obtained 185,000 ounces of silver but paid the smelter a high fee. Meyer thus deduced that the smelter was twice as profitable as the mining enterprise. He set up the Pueblo smelter in partnership with Holden, a close friend of Benjamin's, with Meyer investing $80,000 to control 51% and Holden 49%. The Pueblo smelter did not generate any income for the first year and Holden lost confidence and sold his entire interest to Meyer.
M. Guggenheim & Sons thus became the sole shareholder of the smelter. In 1888, Meyer founded the Denver Smelting and Refining Company. The Guggenheim family's reach extended for the first time from the mining industry to the downstream smelting and refining industry.
 
The peak of the business - Guggenheim Brothers

In the 1890s, the Guggenheim family business extended to Mexico. The family decided to build three smelters in the region due to the abundance of minerals and cheap labor. Given the family's important social connections in Mexico, Guggenheim was able to secure a major national smelter project there and was able to survey leased or purchased mines anywhere in the country, with many concessions.
 
By now, the family had withdrawn from the embroidery business to concentrate on mining and smelting, and the A.Y. and Minnie mines were no longer their main source of income. Guggenheim leased both mines to other operators and turned his attention to the more productive mines in South America and elsewhere. Like the Rockefellers and Carnegies of the period, Guggenheim moved his family holding company, M. Guggenheim & Sons, to New York.
 
As the 20th century progressed, the Guggenheims became the world's mining and smelting giants, setting up a Guggenex company specializing in the exploration and operation of land and mineral deposits, and became the largest shareholder in ASARCO, the world's largest refining trust. The Guggenheim family then entered the copper business, buying a 25% stake in Utah Copper and transforming themselves from “Princes of Silver” to “World Copper Kings”. With profits of over $10.2 million, the Guggenheim family was valued at $100 million. The Guggenheim family's Chuquicamata copper mine in Chile is one of the world's richest copper veins. Up to the time of the First World War, the Guggenheim family had a monopoly on 75% of the world's production of three important metals - silver, copper and lead.
 
In 1916, the leadership of Guggenheim had long passed from Meyer to Daniel, the second generation of the family. The seven brothers carried out a major reorganization of the family business and the family office, combining the Alaska, Utah Copper, Guggenex and Chilean properties into the Kennecott Copper Company. Guggenheim & Sons was replaced by Guggenheim's Brothers, with the seven brothers and Harry, son of Daniel, and Edmond, son of Murray, as partners.
 
In 1922, the family sold 2 million shares in the Chile Copper Company of the Chuquicamata Copper Mine for $70 million, and in the 1920s Kennecott made a total profit of $110 million and a net profit of $50 million. By 1929, the Guggenheim family's total assets had reached $200 million, lagging behind the Rockefellers, Fords, Mellons and DuPonts, but already among the richest families in the United States and highly influential in mainstream society.
 
The stagnation of family development

The inheritance of business families is superficially the transmission of tangible financial capital (including the family business and the family's financial assets), but more importantly the inheritance of the other three intangible capitals - human capital (the ability to attach to individual family members), family capital (intra-family harmony/cohesion and family culture/values) and social capital ( The family's social contribution/reputation and contacts network) are handed down (Figure 2). Financial capital is only the result; the other three are the cause.
 
Fig. 2. The four capitals of the family
 
After the third and fourth generations, the Guggenheim family's financial, human and family capital also stagnated over time. However, the social capital base built by the first and second generations of the family was transformed into financial capital in the fifth generation, leading to a revival of the family.
 
In the 1930s, Daniel, the second-generation head of the family, faded from the family business and joined the family foundation. Harry took over as the family's third generation leader, with excellent management skills, taking charge of the family's smelting and nitrate business and beginning to diversify the business. Yet the Guggenheim family's sale of the Chukchi Kamata copper mine, the loss of control of ASARCO and the disappointing nitrate project caused a significant decline in its standing in American industry and its name gradually faded from the mainstream industrial scene.
 
The fact that wealth can be retained in a family for three generations is a headache for wealthy families around the world. The Guggenheim family's wealth, while largely secure for future generations after five generations, is a little less impressive than its past glory. Its decline was mostly due to the loss of human and family capital.
 
During Meyer's lifetime, the frail and shy eldest son, Isaac, remained at the family headquarters; Daniel, with his leadership skills, became the family patriarch; Murray, with his attention to figures, managed the business finances; the elegant Solomon became the family ambassador; and Simon managed some of the refineries in the United States. Although Benjamin and William retired from the family business at an early age, the five older siblings had a clear division of labor between them and were a solid foundation for the family. Furthermore, Meyer had his sons travel around Europe at an early age, acquiring a number of languages and skills and taking early internships in the family business.
 
After the second generation of the family, Meyer's sons, passed away, the family's human capital began to decline and its entrepreneurial capacity was severely compromised. There were many members of the family who did not pursue a career. William, a second generation member, and Robert and Peggy, a third generation member, were often involved in various sexual affairs, with the cynical Robert describing himself as a pure hedonist. Murray's son Edmond also fails to live up to the family's expectations of him in terms of school and work. William, who was estranged from his older brothers, squandered a total of $8 million in the 40 years he withdrew from the family business, dying with only $12,000 in cash. Similarly, Simon, having lost his son at an early age, doted on his only surviving son, George, giving him access to the proceeds of the family trust of $1 million. George was a manic depressive who indulged in alcohol, drugs and nightclubs and died in a hotel at the age of 32.
 
On the one hand, the growth in family size has made it difficult for future generations to nurture and plan for human capital in the same way as Meyer. On the other hand, internal conflicts led to a loss of family cohesion and the Guggenheim family capital was gradually depleted in the second and third generations.
 
Meyer's youngest son, Wilhelm, had been receiving income from the family business, but in 1912 he and Benjamin withdrew from the Chuquicamata copper project, and the relationship between the brothers broke down. When he learned of the huge benefits the copper project could bring, William asked to rejoin the project, but was met with relentless condemnation and refusal by his second brother Daniel. When negotiations broke down, William took his brothers to court. Although he was eventually partially compensated, the years of court dispute eventually left a scar in the family relationship that could not be eradicated and William has since parted ways with the rest of the family.
 
When Harry joined the family business, hoping to revive the family name without help from his other third generation siblings, he turned his attention to his two grandsons. But with too high expectations may also come excessive disappointment. Excessive interference in education, lifestyle and career choices infuriated his daughters and grandsons and led directly to the break-up of his relationship with his daughter Nancy and his grandsons.
 
Looking back at the first generation of the family, Meyer famously taught his sons the importance of family unity through a parable: "A stick is easy to break, but together you can't break it... unite and the whole world will be yours; divide and you will lose everything." Unfortunately, Meyer's descendants did not understand the importance of family unity. Lacking a long-term succession plan, the family neglected to educate the next generation and develop family spirit, which ultimately led to the destruction of the family's capital and human capital.
 
The family's social network
Although the Guggenheim family's human and family capital disappeared in the third and fourth generations, the fifth generation of the family has revived it. How did they do it?
 
The Guggenheim family had a huge fortune, which was highly controversial in American society. They were well known both as vampires in the eyes of the miners and as philanthropists for the benefit of society. The Jewish community that had emigrated from Europe to the United States was not welcomed by other clubs in New York, so they formed their own circle, Our Crowd. The Guggenheim family was integrated into New York's Jewish elite.
 
The members of Our Crowd included almost every prominent Jewish family from the 19th century to the present day, including the Seligman family, who started out as peddlers and then moved on, the Goldman family, the Lehman family, the Straus family, the Loeb family and the Sachse family. The Guggenheim family, of course, but also the Schiff, Warburg and Kahn families, who have been in the financial business since the beginning, and members of the Belmont family, the American representative of the Rothschild family.
 
Our Crowd also provided marriages for the Guggenheim family, with Benjamin Guggenheim marrying Florette Seligman of the finance family; Isaac and Daniel Guggenheim marrying Carrie Sonneborn and Florence Schloss, respectively, and Simon marrying both before and after. Schloss Simon married Irene Rothschild and Olga Hirsch; and daughters Rose and Cora married Albert Loeb and Louis Rothschild respectively. It is worth noting that all these marriages were to prominent families.
 
The Guggenheim Foundation
What really made the Guggenheim family famous was their generous donations to the arts, science and technology. The social capital that the family had built up in this way was transformed into new financial capital many years later.
 
Professor John Davies of Harvard Business School once said, "The only thing the Guggenheims were better at than making money was donating." Indeed, the Guggenheims carried on the tradition of the Jewish family, with much of their wealth going to hospitals and schools. Each of Meyer's seven sons has set up their own foundations to provide funding for different faiths.
 
The John Simon Guggenheim Foundation is one of the family's most important foundations (Figure 3). It had an initial endowment of $3 million and later received $13 million of Simon's $17 million estate; at the death of Simon's widow Olga, a further $41 million was received; by 1972, total assets reached $115 million.

 
Fig. 3. Guggenheim Family Foundation
 
Inspired by the Rhodes Scholarship, the foundation created the Guggenheim Fellowship to support the Brightest Minds in America, awarding prizes and research grants to scholars, scientists and artists. It has become one of the most prestigious awards in the United States. Many prominent figures have received Guggenheim Awards, such as Paul Samuelson, Saul Bellow, Chen Ning Yang, Friedrich von Hayek, Henry Kissinger and former Federal Reserve Chairman Ben Bernanke. The Guggenheim Awards have been awarded to date. So far, 220 of the Guggenheim winners have gone on to win the Pulitzer Prize and 107 have gone on to become Nobel Prize winners.
 
Influenced by his son Harry, Daniel worked to fund the development of the American space industry. With the support of the Daniel Guggenheim Foundation, the United States achieved the first instrument flight, which led to the invention of the directional gyroscope and the artificial level. Meanwhile, the Foundation provided $150,000 to Western Air Express, one of only two cargo airlines in the United States at the time, to support the development of a passenger air service from Los Angeles to San Francisco, and in 1925 Daniel personally contributed $500,000 to establish the Guggenheim School of Aeronautics at New York University.
 
When he passed away, the majority of Daniel's estate was donated to American Airlines and other charitable causes, in addition to $6 million to his three children and $7 million to his wife. A total of $1.5 million of this amount benefited the Daniel and Florence Guggenheim Foundation. The Foundation has donated a total of six aviation schools in the United States, with over $30 million invested in all causes by 2003, and $475,000 to the Daniel Guggenheim Foundation, which has invested a total of $5 million in the advancement of commercial aviation. In addition, Daniel is a long-time financial supporter of Robert Goddard, the father of modern rocketry.
 
Daniel and Murray both funded approximately $100,000 a year for the Goldman Band to perform concerts in Central Park. Over a period of 30 years, Daniel and his foundation invested approximately $3 million in a variety of concerts for New Yorkers.
 
Harry, the third generation of the family's leaders, had a passion for aviation and invested millions of dollars in the promotion of American aviation over his lifetime. Though much of the Guggenheim family's support for American aviation came through his father Daniel's foundation, it was Harry who was the main implementer and leader. He believed that if there was a way to put a man on the moon, then surely it would also be possible to study why there was a war between humans. He thus established the Harry Frank Guggenheim Foundation, which supports academic research primarily in the areas of domination, violence and aggression, including religious violence, drug violence, power violence and media violence.
 
In addition to his funding in the field of music, Murray founded the Murray Leonie Guggenheim Foundation to establish free dental clinics for young people in the five boroughs of New York City and to establish a training school for dental workers. When Murray was alive, he decided to set aside an additional $5 million from his $18 million estate to fund the foundation.
 
Guggenheim Museum

The Guggenheim family's contribution to the arts has brought them great social recognition as well.
Members of this family have all funded artistic activities, particularly Solomon's promotion of modern art. Solomon had a large collection of modern art. In 1937, he decided to establish the Solomon Guggenheim Foundation on the basis of this collection, with the aim of encouraging artistic creation and art education and enhancing public appreciation in the field of art. The foundation was thus entrusted with the mission of establishing one or more museums. Solomon bequeathed his wife and descendants approximately $20 million, while $10 million funded the foundation, of which $2 million was used to build the museum.
 
The foundation invested tens of thousands of dollars in 1938 to establish the Guggenheim Center for the Arts in Paris to encourage the study and promotion of the art of non-physical painting, and to establish a publicity department, a library and the Solomon Guggenheim Center for the Arts Fellowship.
 
In 1939, the Foundation established the Museum of Disembodied Art on rented premises on 54th Avenue in New York. Meanwhile, Solomon and the Foundation had been thinking of building their own museum. After numerous choices of venue and architectural style, Solomon finally hired the famous architect Frank Lloyd Wright to build what is now the Solomon Guggenheim Museum on Fifth Avenue. Years after Solomon's death, the museum finally opened to the public for the first time on 21 October 1959 and was a great success.

 
World architect Frank Lloyd Wright directs the design of the Guggenheim Museum in New York
 
In the 1970s, the Solomon R. Guggenheim Museum merged with the private collection of his niece Peggy Guggenheim at Palazzo Venier dei Leoni in Venice. Peggy added to the Guggenheim over 300 masterpieces by avant-garde, abstract and surrealist artists from her earlier collection.
 
The museum expanded under the stewardship of Krens. Believing that art was a branded consumer product, he established branches of the Guggenheim Museum around the world, including in Manhattan's Soho district and southern New York. His exceptional management skills attracted the attention of the Basque government in Spain, and eventually the Guggenheim agreed to open a branch in Bilbao. In exchange, the local government fully covered the $100 million cost of building the museum and donated $20 million to the Guggenheim Museum Foundation. The Bilbao branch has been an extraordinary success. The Guggenheim Museum now has branches in New York, Venice, Berlin and Bilbao, with plans to move into Abu Dhabi and Hong Kong. And the Solomon R. Guggenheim Foundation continues to receive invitations to establish museums from all over the world.
 
At the end of the 20th century, when the Guggenheim family withdrew from business and the family members were quietly estranged, the only remaining testament to the family's glory was the Guggenheim Museum and the Foundation. The social capital that had been built up over the years served as a bond of harmony and maintained the family's reputation and standing in society. In the 21st century, the family made the transition from intangible social capital to tangible financial capital, thus recreating the family's wealth.

 
The Guggenheim family's contribution to the arts brought the family a high level of social recognition. At the end of the 20th century, when the family withdrew from business and moved away from the world of commerce, the only remaining testimony to its glory was the Guggenheim Museum.
Photo credit: www.gettyimages.com
 
The creation of Guggenheim Partners meant that the Guggenheim family business was transformed from a single family office to a monolithic MFO. It continues to manage not only the family wealth, but also the wealth of other people or financial institutions, becoming the family's new business.
The Guggenheim family's success in the business and art world is closely linked to their strategy of chasing top talent.
 
The transformation of intangible social capital to tangible financial capital
The burden of reviving the family fell on Meyer's grandson, Peter Lawson-Johnston II. The author of this article, Gao Hao, visited the fifth generation of the Guggenheim family in New York in 2012. During the interview, Peter pointed out that the Guggenheim family's wealth management model used to be that of a big bank. Large financial institutions provided the family with services such as financial asset management, credit and advice on M&A transactions. But in the late 1990s, Peter realized the shortcomings of this model and became dissatisfied with the services provided by private banks and other wealth management institutions. He said: "I had a lot of friends who were successful professional investors and they used to come to me and ask me if my family would like to try to invest in their companies? I have known these friends for many years and they are honest and trustworthy and have been running very successful businesses with strong corporate roots. If I had told this to our advisers at the big banks, they would have advised us against investing our money in these companies on the grounds that they didn't understand them or would have said that the hedge base was too complicated, etc."
 
After a number of financial crises, the Guggenheim family found that the large banks were actually struggling to be truly independent and objective. With performance pressures often putting clients' interests ahead of their own, the family needed to bring in top external expertise to manage the risks and rewards associated with today's complex financial environment.
 
The challenges faced by the Guggenheim family were addressed in a meeting between Peter and a close friend, J. Todd Morley. Morley managed a bond trading company and introduced Peter to Mark Walter, who headed Liberty Ham. The latter headed Liberty Hampshire, a firm specializing in the restructuring of asset-backed bonds. According to an interview in Fortune magazine, Morley suggested merging the three men's businesses into a more ambitious and larger institution.
 
They suggested using the Guggenheim family's prominent reputation to attract more investors.
Alan Schwartz, executive chairman of Guggenheim Partners, who joined later, said in an interview with The New York Times, "Reading the Guggenheim family history, many of the great values associated with the family fit with our ideal business." In a move that was right up the Guggenheim family's alley, Peter decided in 1999 to set up a private investment firm with two partners to provide more sophisticated wealth management and financial services to his clients and himself by employing top talent.

 
Guggenheim Partners has formed a unique model with family members in charge of image PR and professional managers such as CEO Mark Walter (left) and President Todd Bailey (right) responsible for management.
Photo credit: www.gettyimages.com
 
From a single family office to a global financial giant
In 1999, Guggenheim Brothers merged with Molly and Walter's businesses Links Securities and Liberty Hampshire to form Guggenheim Partners.
 
In other words, the first Guggenheim Fathers and Sons and Guggenheim Brothers were both partly functional Family Office (FO). On the one hand, the Guggenheim FO has been responsible for the allocation and management of resources throughout its long history, investing financial capital in an external family office. It is similar to the family investment banking model of the Dell family office MSD Capital or the family office Nan Fung Investment Advisory Limited of the Nan Fung Group in Hong Kong. On the other hand, the Guggenheim FO is also a headquarters where fathers and sons and brothers define corporate strategy and carry out equity management. However, the FO's responsibilities end at this point. The Guggenheim Fathers and Sons or Brothers do not assume responsibility for family governance, family legacy or get involved in the shareholder rights of family members.
 
The Guggenheim family governance implicitly reflects the Asian family model of the "chief of the family", with major decisions within the family being dominated by the patriarch. There are occasional instances of consultation with family members and discussions with brothers or children, but the patriarch has absolute authority and a greater say in the decision-making process. For example, despite the opposition of his sons, Meyer decided to leave the relatively stable business of lace embroidery and enter the unknown mining business. The family governance or most of the gatherings were also dominated by the patriarchs, such as Meyer, Daniel, Harry or Peter. The members of the family had their own system of inheriting wealth. Meyer's children had their own funds, each with their own wills, and the FO had no further involvement.
 
When the Guggenheim family separated from the business, Guggenheim Brothers continued to manage the family's financial assets for a time, serving as a breakaway FO. And now with the creation of Guggenheim Partners, the Guggenheim family business has been regenerated. This business has been transformed from the single family office of the past into a monolithic MFO and has become the family's new business, which continues to manage not only the Guggenheim family's wealth, but also the wealth of other people or financial institutions.
 
The unique governance model of Guggenheim Partners
Guggenheim Partners boasts a unique governance model. Although the financial institution is named after the family, there is neither absolute ownership (equity) nor absolute control (management) in it. The combined business is operated and managed by professional managers. However, the reputation of the Guggenheim family was crucial to the business, creating a unique model in which the family was responsible for image PR and the professional managers for management. Peter Lawson Johnston II is now the global brand ambassador for Guggenheim Partners.
 
At its inception in 1999, Guggenheim Partners had $5 billion in assets under management, including $30 million brought in by the family, according to public reports. Guggenheim Partners' earliest client was Sammons Enterprises, a Dallas-based holding company with multiple insurance companies. Today Sammons owns 35% of Guggenheim Partners, Guggenheim executives and employees own less than 50% (Walter and President Todd Bailey each own less than 10%), and the Guggenheim family has only a minority stake of about 15%.
 
In an interview with Bloomberg, Todd Boehly, President of Guggenheim Partners, explained its unique business model. As Guggenheim Partners employees are also shareholders/investors in the company, their role is to find investment targets and close deals, as well as to act as long-term partners for Guggenheim in mergers and acquisitions.
 
Nevertheless, Guggenheim Partners' investment decisions are still driven by management. They pursue investment opportunities globally, and yet also find partnership opportunities through investor relationships. For example, Guggenheim has been managing the assets of its largest shareholder, Sammons & Company, since 1999. After gaining familiarity with the insurance industry, it began managing and acquiring other insurance companies, thus gaining further business opportunities from insurance company clients.
 
Guggenheim Partners' business can be divided into six segments and 11 divisions (Figure 4). Its clients include families, university endowments or foundations around the world. The average client has $60 million in assets and the entry threshold for new clients is typically $30 million in liquid assets.

 
Fig.4. Guggenheim Partners organizational structure
Source: Tim Murray, IPAA Oil and Gas Investment Symposium, Private Capital Conference, Guggenheim, 2006
 
The Guggenheim Partners' talent strategy

The Guggenheim family's success in the business and art world is closely linked to their talent strategy. Peter Lawson Johnston II is proud to say: "Our approach to success is simple, practical and effective. Essentially, talent is the best way to achieve success, by finding and hiring the best people. When you have the best employees or the best team in the business, inspire them to be innovative and creative, and allow them to elevate their products and services to a higher level, constantly pursuing success and being persistent."
 
The Guggenheim family's history of chasing top talent dates back 100 years. In 1903, in a desperate bid to find the best mining engineer, the Guggenheim Company approached John Hays Hammond and offered him a base salary of $300,000 per year (equivalent to approximately $8 million in 2013 at the rate of inflation) plus 25 per cent of the profits from all his discoveries. This made Hammond the highest paid employee in the world at the time.
 
Hammond also made a significant contribution to his family with the discovery of Kennecott Creek, a copper mine in Alaska; the discovery of diamonds in the Congo with King Leopoldo of Belgium; and the discovery of Bingham Canyon, Utah, the world's largest copper mine. Canyon, Utah.)

 
Hammond discovers Bingham Canyon copper mine in Utah, the world's largest copper mine
 
Since then, the Guggenheim family has collaborated with the best and brightest in the world of finance, art, space or architecture. In building the Guggenheim Museum, the family worked with the likes of world-famous architects Frank Lloyd Wright and Frank Gehry; the development of Denny Island enlisted three highly renowned designers, Andrés Duany, Elisabeth Platt Zabach and Jacqueline Robertson, to plan it.
 
"Finding the best talent in the world, wherever they are" is a value that Peter has internalized in the family DNA. This standard of conduct led to the Guggenheim's discovery of the genius CEO Mark Walter and his team.
 
Mark Walter was born in Iowa, USA. According to the Los Angeles Times, Walter worked for several years at First Capital Markets in Chicago and co-founded Liberty Hampshire in 1996. In a Singaporean Wealth-X survey, Walter's personal wealth is estimated at $1.3 billion. Walter also holds trustee or directorships for a number of businesses and organizations, including the Solomon R. Guggenheim Foundation, the Field Museum of Natural History and some of the Guggenheim Partners' partnerships. Decent and discreet is often used to describe Walter. An internal employee of Guggenheim Partners also described him as a dedicated and cautious investor, one of the great financial minds of his time.
 
Guggenheim president Todd Bailey is a graduate of William & Mary and spent a year on exchange at the London School of Economics and Political Science (LSE). Prior to joining Guggenheim in 2001, he was a vice president at the US venture capital firm J. H. Whitney, where he was responsible for private equity, leveraged credit investments and special opportunities investments. Bailey began his career at Credit Suisse and Citibank, where he founded Shelter Rock Capital. Before joining Guggenheim, Bailey had managed the Guggenheim family fortune. He now also serves as a trustee or director of a number of businesses and organizations, including the Solomon R. Guggenheim Foundation, the Brunswick School and FACES. As reported by Fortune, the high school wrestling champion and workaholic never tires of charging ahead for his company. He brought many valuable clients and partners to Guggenheim. He has close ties to Junk Bond king Michael Milken, a financial mogul with a net worth of $2.3 billion in 2012, who was an early investor in the Bailey-run fund. Today, Milken has invested around $800 million in various Guggenheim projects and funds.
 
Alan Schwartz, the executive chairman of the Guggenheim, is an even more powerful figure in American finance. A graduate of Duke University, he joined Bear Stearns' research department in 1976, became head of investment banking in 1985 and took over the presidency in 2001. When the Federal Reserve forced JP Morgan Chase to take over Bear Stearns in 2008, Schwartz held the position of President and CEO. J.P. Morgan, Goldman Sachs and Morgan Stanley then vied for Schwartz, but he joined Guggenheim Partners in 2009, strengthening Guggenheim's business in mergers and acquisitions and thus upgrading it to a full-service financial services firm.

 
Alan Schwartz, executive chairman of Guggenheim, is a giant in American finance. It was Schwartz who was president and CEO of Bear Stearns during the 2008 financial crisis.
 
After joining the Guggenheim, Schwartz attracted considerable outside talent through his alma mater, and professional connections. He hired Peter Comisar, a veteran banker with over 20 years' experience at Goldman Sachs, to lead Guggenheim's Los Angeles investment banking team and brought in clients such as Boeing and Disney. Mark van Lith, head of multimedia investment banking at JP Morgan Chase, was also invited to join, having run major deals for CBS, Time Warner, Viacom and others. Schwartz also hired John Casesa, formerly a senior managing director in the investment banking and capital markets group at Merrill Lynch, and Robert Brennan and Anand Gajjar, real estate finance and asset securitization specialists at Credit Suisse, among others. In the 18 months since he joined Guggenheim, Schwartz has recruited more than 100 top talents.
 
The Guggenheim Partners team also includes Scott Minerd (now Chief Investment Officer CIO) from Morgan Stanley and Credit Suisse, Ross Levinsohn, former CEO of Yahoo, Henry Silverman, former Vice Chairman of Apollo Global Management, and other industry veterans.
 
Harry Lawson Johnston, a cousin of Peter Lawson Johnston II, was also invited to join the business in 2006. He believes that Guggenheim strives to identify the best outside talent, but will only allocate assets to unaffiliated, neutral investment managers in order to deliver the Guggenheim family's tradition of excellence and professional asset management services to its clients.
 
Todd Berry eloquently sums up the Guggenheim ethos in one sentence: "These businesses are human capital businesses, and your business is no better or worse than the talent you attract to it and the commitment you give to them."

 
Guggenheim has led notable major transactions in recent years, including the acquisition of the Los Angeles Dodgers baseball team and Dodger Stadium by Guggenheim Baseball Management in March 2012 for $2.15 billion.
 
Investment philosophy and recent transactions
Guggenheim Partners' investment philosophy is in keeping with the family tradition of investing with a long-term view and seeking long-term returns on assets. This coincides with other prominent family offices.
 
In an interview, Todd Bailey explained that what worries listed companies is quarterly reports, which they need to report to the capital markets on their work performance, whereas we are able to take a longer-term view across economic cycles. Whether it's in investments or in securities, our shareholders have the same vision to define which direction we're going to be in five years from now, ten years from now, what actions we're going to make in the future, not just businesses that disappear after 90 days"
 
A long-term investment perspective also enabled Guggenheim to avoid the financial crisis of 2008 without incident. Like Warren Buffett, the stock god, Guggenheim wanted to own the business for the long term and thus tried to use its own funds and avoid borrowing. Guggenheim was not a listed company and could have scaled down its business and taken a break from the market without fear, while for the management of a listed company this was a torturous decision.
 
Guggenheim planned meticulously and invested carefully during the overheated period, and then grew rapidly after the bubble burst to strengthen its main business. In 2009, Guggenheim acquired the Claymore Group and Wellmark Community Insurance, the 13th-ranked ETF company in the US; in 2010, it acquired Security Benefit Group and its ETF company, Rydex SGI, for US$400 million; and in 2011 it further consolidated its insurance business with the acquisition of EquiTrust, a life insurance company, for $470 million.
 
Guggenheim has also put effort into risk control, combining academic research with practical experience, using Riskmetry, a method developed by Nobel Prize-winning economist Professor Daniel Kahneman, to measure risk tolerance levels from a behavioral finance perspective.
 
Given a choice between short-term hedge funds and long-term equity investments, Guggenheim would have chosen the latter. Todd Bailey also believes that in today's illiquid low-yield bond market, M&A is a good way to maintain yield (the ultimate goal of Guggenheim's asset management division), which can generate yields of 3-5 per cent per annum, 10-12 per cent in an economic climate, and eventually optimize the business even further with control. Bailey says: "The reason we don't want to underperform is because we don't control our own destiny." The Guggenheim CIO led the fixed income department which achieved an annualized return of 7.3% between 1999 and 2012.
 
Guggenheim barely ever advertises. Harry Lawson Johnston says: "The purpose of our services is not to sell products. Family legacy, estate planning and family governance are of paramount importance to the family."
 
Insights from bankruptcy to wealth
The Guggenheim family has witnessed a transition from financial capital to social capital and back again.
 
The family's ancestors were German-Jews who suffered from discrimination in the 18th century. Their great business successes and contributions to the arts and sciences earned them a high status in the United States, but they were not spared the fate of their success. The lack of human capital resulted in the family business being left without a successor and gradually fading from the world stage, and the profligacy, incompetence and rebellion of individual members led to a massive drain of financial and family capital. Fortunately, the first and second generations built up an unparalleled family reputation and the Guggenheim name became the family's most valuable social capital, which is why many Wall Street leaders were willing to work with the family and bring together the financial elite to join Guggenheim Partners. The fame and value that the Guggenheim name represents has given the family the opportunity to create financial capital again through social capital.
 
For Chinese private companies, years of entrepreneurship often cause the first generation of entrepreneurs to devote extraordinary energy to their businesses and neglect to provide the second generation with a good education. Many of the second generation have received their secondary or university education overseas and have embraced Western values, which are vastly different from the ideas carried by the first generation. Second generation family members may not be the most suitable candidates to inherit the management of the family business, but that does not mean that the family has to decline.
 
The Guggenheim family provides a model to follow. Although the second generation may not have the human or family capital needed to pass on the family business, the first generation can still dissipate money wisely through philanthropy, donations to schools and a career in the arts, building up the family's social capital and passing on the family legacy while giving back to society. Perhaps after a few generations of the family, the social capital accumulated by the first generation (corporate brand, family name, education, etc.) will again converge around the family's descendants and be regenerated into financial capital. As the saying goes, "Thousands of gold scattered and come back" not only shelter the descendants, but also benefit the public.
 
Reference
[1] Guggenheim: The saga of the German-Jewish family that became America's second largest family (by Irving Unger and Debbie Unger, translated by Haisheng Yu and Xiaobai Chen, Huaxia Press, January 2007).
[2] Scott Cendrowski, James Bandler, Guggenheim is flexing its $17 billion muscles, Fortune, March 2013.
[3] Halah Touryalai, The Resurrection of Alan Schwartz, Forbes, January 2011.
[4] Graham Bowley, The Guggenheim Connection, New York Times, September 2011.
[5] Guggenheim family archives.
[6] Author's interview with Peter Lawson Johnston II, a member of the seventh generation of the Guggenheim


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