How Did The Pritzkers Make Their Money

Anthony Pritzker, left, and Jay Robert Pritzker, who inherited at least $2.7 billion after helping break up a storied dynasty, are investing in private-equity and venture-capital deals. They are co-founders and managing partners of Pritzker Group. (Mike McGregor/Bloomberg Markets)

Anthony and Jay Robert Pritzker, brothers and heirs to the Hyatt Hotels and Marmon manufacturing fortune, settle in for salads and sandwiches at their 40th-floor office in Chicago's West Loop. A decade ago, the duo joined family members who allied against their sister, Penny — who's now President Obama's commerce secretary — and two cousins.

The legal battle broke up the family empire and distributed at least $1.35 billion to each of 11 cousins. Now the brothers say they are putting the discord behind them. They are primed to talk about investing their inheritance in companies that include a distributor of janitorial products and a maker of circumcision devices — much like the grab bag their father and uncles assembled.

"Our family divested a bunch of assets over the 10 years leading up to 2011," says Jay Robert, 48, who goes by J.B. and has been investing since 1996. "We have taken the cash and essentially have been in a process of investing that cash."

Big brother Tony joined him in 2002, after the family's infighting set in motion a decade-long sell-off of holdings.

"We could spend the next 10 years working with family to break up the business," Tony, 52, recalls thinking. "Or we could spend the next 10 years building our own business."

The split completed two years ago, Chicago-based Pritzker Group is expanding. The brothers hired Paul Carbone as a managing partner from Milwaukee-based Robert W. Baird & Co., where he oversaw private-equity funds totaling $2.8 billion.

They want to spend at least $1.25 billion over four to five years for companies involved in health care, manufactured products and various services valued in the range of $100 million to $500 million. Those purchases would augment the more than $1 billion in private-equity investments and $350 million in 48 venture capital holdings that J.B. began amassing 17 years ago.

Tony says the 55-person Pritzker Group generated an internal rate of return of 28.7 percent from 2007 to 2012 — and did it by investing for the long haul in family-run and entrepreneurial businesses. Of the eight companies the pair have acquired since 2004, they've sold only one.

"We realized we were doing really well," Tony says from Los Angeles, where he lives with his wife and seven children in a 49,300-square-foot mansion with views from Santa Monica Bay to downtown. "We wanted to be world-class."

The firm's name doesn't hurt — especially in Chicago. The city is home to the Jay Pritzker Pavilion, the University of Chicago's Pritzker School of Medicine, the Pritzker Family Children's Zoo and more.

Tony, intense and athletic — he's completed eight Ironman triathlons and 22 marathons in 14 years — handles industrial companies. He oversees stakes in a metal-castings firm, a maker of medical devices for maternity care and a distributor of construction materials.

J.B., garrulous with a build few would mistake for a marathoner's, focuses on services companies such as a wooden-pallet rental company and party-ship operator Entertainment Cruises. He was also the original venture capital guy.

Reprising Marmon

The brothers invested in online seller TicketsNow, which Barry Diller's IAC/InterActiveCorp bought for $265 million in 2008. They also backed Playdom, a gamemaker that Walt Disney acquired in 2010 for $563 million, plus as much as $200 million in performance-based payments.

With their eclectic tastes, the fourth-generation brothers are in many ways reprising Marmon Holdings — a major source of the money staking the 11 cousins to pursuits such as movie production and boutique hotels. Their late father, Donald, and his brothers, Jay and Robert, led the family's third generation. Robert, the middle brother, built Marmon into a hodgepodge of 125 companies.

Tony and J.B. joined a seven-cousin alliance that formed in 2000 and split the empire apart. They accused Penny and cousins Thomas and Nicholas of paying themselves too much to run the collection of Pritzker companies and moving assets into their own trust funds. The squabble went public when another fourth-generation cousin, Liesel Pritzker, Robert's daughter from his second marriage, sued her father in 2002 claiming he had drained her trust accounts.

Robert denied in court documents that he'd done anything wrong. As did Thomas, Penny and Nicholas. To avoid a court fight, the family had agreed to a 10-year restructuring. Marmon was sold piecemeal, beginning in 2007, to Warren Buffett's Berkshire Hathaway, which had paid $6.2 billion for 92 percent as of June 30 and planned to buy the rest by March. The family took Hyatt public in 2009.

As they go their separate ways — some cordially and others barely speaking — today's fourth-generation Pritzkers are in the same league as the 90 percent of wealthy families that crumble by the third generation, according to Family Firm Institute, a Boston-based trade group.

"Wealth is just a magnifier," says Sara Hamilton, chief executive of the Chicago-based Family Office Exchange, a for-profit information and consulting group. "If things are good, they get better. And if they're bad, they get much worse."

The preponderance of cousins may have led to different perspectives on how to run their companies, says Dennis Jaffe, a professor at Saybrook University.

"Like other very wealthy families moving past the third generation, the Pritzker family got so big and had so many ventures that by the current generation, they really didn't have a basis for a shared vision," Jaffe says. "It made sense to split down into families and let individuals go off on their own."

For J.B., there was little doubt he'd choose a career in business. He always had a knack for deals, says his cousin John, 60, one of five children of Jay Pritzker, who died in 1999. When J.B. was 8, he wrangled five cases of Bubblicious gum out of the president of the manufacturer — a company the Pritzkers didn't even own. He then flipped the gum to kids on his school bus.

'A shake-and-howdy guy'

"If there ever was a shake-and-howdy guy, J.B. knows how to talk to people," says John, who built Commune Hotels & Resorts, which managed 43 properties in early October. "Tony is more quiet and intense. J.B. was just out there. He has a big personality."

J.B. says Pritzker Group has an edge in private-equity acquisitions because the brothers know the challenges of family companies from growing up enmeshed in them and managing alongside relatives.

"We think of ourselves as having a kinship with family and entrepreneurial owners," he says, adding that they found many owners are concerned about preserving their company's culture or maintaining charitable contributions.

The brothers say they offer business owners the chance to participate in the deal. "We can structure almost anything because we're not limited by the four corners of a typical private-equity limited-partnership document," J.B. says.

David Lee says he's pleased with the Pritzkers' approach at his Peco Pallet. Pritzker bought the lessor of the ubiquitous warehouse staple in 2011, letting Lee and its managers take a minority stake.

"These guys want to expand, whereas the previous guys didn't," says Lee, who expects sales of $190 million for 2013. "They are long-term investors, so they're not looking to pump something up and get out before the bubble bursts."

Glamorous it's not. Workers at a Peco Pallet service depot in Fontana, Calif., hammer, nail, saw and apply spray paint to piles of bright-red pallets amid clouds of sawdust. A forklift operator loads the units onto trucks, which deliver them to Kraft Foods and Kimberly-Clark.

Lee says he feared the acquisition might fall apart before the agreement when J.B. toured an Illinois Costco Wholesale warehouse that was a Peco customer and decided to grill a random workman who was sorting pallets. "J.B. walked out after that and said, 'That's it — we're going to do the deal,' " Lee recalls.

J.B.'s family-oriented pitch at first resonated with Walter "Terry" Lutz Jr. He sold his metal-castings firm, Signicast, to the brothers in 2008 for an undisclosed amount, even though they weren't the highest bidders.

"We were looking for a generational buyer, somebody who would buy the company looking for long-term growth," says Lutz, 72, who started as general manager at Signicast in 1974 and bought it in 1981. Lutz says he believed the Pritzkers would maintain the entrepreneurial culture he had built.

The goodwill didn't last. Lutz and Tony Pritzker had a falling-out over whether Signicast's new chief executive should be an internal candidate, as Lutz preferred.

Although the Pritzkers later agreed to promote from within, Lutz revealed details about the discord in a book he self-published called "In Pursuit of Manufacturing Excellence: The Signicast Story."

In it, he outlined his deteriorating relationship with the company's new owners and recounted the Pritzkers' financing.

"I was shocked at the amount of debt [Pritzker Group] took on to buy Signicast," Lutz wrote. "Since both Tony and J.B. were billionaires, I'd assumed they'd come up with most of the money. Instead, they heavily leveraged the company and even engaged in fancy interest rate swaps."

Lutz says Signicast paid down the debt by 78 percent, or $83 million, within 2¹ / ₂years.

"We have enormous respect for what Terry built," J.B. said. "Compared to a typical private-equity leveraged buyout, we put a lot less debt onto the company."

J.B. and Tony lost their first business mentor, their father, early in their lives. Donald Pritzker hauled the boys to meetings at Hyatt headquarters outside San Francisco, where he served as president.

J.B. was just 7 in 1972 when Donald died of a heart attack at age 39. He still recalls his mother, Sue, telling him, "You have to work twice as hard as the guy next to you because you didn't earn this."

At 14, J.B. got a summer job at Rickey's Hyatt House in Palo Alto, Calif., picking up dirty linens. Sue Pritzker died three years later, leaving the boys' business education to their uncles. "They were the male parental figures in our lives," J.B. says.

J.B. graduated from Northwestern University School of Law in 1993. His first choice wasn't a Pritzker job. He joined Chicago Corp., an investment bank, where he came across Internet start-ups that were too small to generate fees for the firm. "The companies had terrific ideas, CEOs and founders who were focused on paradigm shifts," he says.

He dabbled in venture capital before setting up his own office in 1996. He invested $3 million in six deals.

Tony, who earned an undergraduate degree in engineering from Dartmouth College, took the more traditional Pritzker path. After a stint at a computer company in Silicon Valley and in a Japanese computer factory, he got an MBA from the University of Chicago.

He went to work in Jonesboro, Ark., as a cost accountant at Marmon's L.A. Darling Co., a maker of shelves and other store accessories. Tony was running a group of Marmon and other Pritzker-owned companies when he and J.B agreed the impending sell-off of the family assets would be a good time to team up.

When the family spun off aircraft-seat-belt-maker AmSafe Partners in 2004, the brothers bought it. They sold it three years later to a pair of private-equity firms, the one instance in which they've shed an investment in a short time.

"The only reason they sold is because I asked them to," says Jon Kutler of Admiralty Partners, among the few outside investors the brothers have worked with. "We were so successful so quickly with the deal — over eight times our investment — that I asked for the liquidity."

'Getting weary'

AmSafe grew in value as the Pritzkers entered the defense market with a lightweight textile armor that can protect against rocket-propelled grenades.

As the brothers expand, their new hires share a disdain of the constant fundraising, quick sales and catering to outside investors that characterize most private-equity work. "I was getting weary of the traditional ways of private equity, selling my winners and all the constraints of a limited partnership," says Carbone, the new managing partner.

Michael Nelson, a former managing director at Chicago private-equity firm Wind Point Partners, oversees manufacturing investments. He says the Pritzkers give him more flexibility to structure deals than did his old firm, where he was limited by the needs of investors.

"We build businesses and back that up with 50 years of family history," Nelson says. "You get a lot of return phone calls."

The challenge for Tony and J.B. is to turn those calls into lucrative investments by showing that their promise to maintain family and entrepreneurial cultures can build companies — even as their own family has been less successful in holding together a dynasty of billionaires.

The full version of this Bloomberg Markets magazine story appears in its December issue.