It has taken Silberberg and company more than a decade to smooth out their approach to investing and create a successful system; in the meantime, the firm has found it useful to move away from piecemeal investments in small businesses like fast-food franchises. CMS now makes all investments from pooled funds, to which clients contribute, so as to socialize the returns. As Solomon puts it: "We're able to take the grand-slam home runs and doubles and strikeouts and come up with a good average." While CMS's focus on up-and-running companies and real estate minimized the damage from the bursting of the technology bubble, the firm has nevertheless struggled to find big winners over the past few years. For one thing, as the stock and bond markets have grown tougher, the number of investors pouring into the marketplace for alternative investments in private equity and real estate has grown, leading to increased competition and higher prices. At the moment, CMS has scaled back the size of its funds to correspond with what it sees as a scaled-back opportunity to buy good companies--and good real estate projects--at good prices.
"What we're trying to do is generate a 500-basis-point advantage over the public markets," says Silberberg. CMS has easily beaten this goal over the past two decades, racking up a 20% return in its multifamily housing funds (while public multifamily REITs earned on average about 11%) and a 20% return in private equity (while the S&P 500 returned about 15%). Irvin Naylor, a Pennsylvania entrepreneur who made his fortune from a box company and who now owns several East Coast ski resorts, has about 10% of his net worth invested with CMS. "My rate of return, cumulatively for 20 years, is 24.5% annually," he says. But Silberberg says he always tells new clients that "yesterday is yesterday." He adds that if people like Warren Buffett and Jeremy Siegel are correct in predicting more modest returns of, say, 7% over the next few years, then CMS would be shooting for a 12% return in private equity. Says Silberberg: "That would make us and our clients very happy."
The person entrusted with this task at CMS is Bill Landman, the chief investment officer. In the 1970s and early 1980s, before he came to the firm, Landman worked as a sports agent, and his demeanor--casual, friendly, confident, yet completely opaque--hints at a bearing that must have served him well in contract negotiations. During the spring and summer season he worked with baseball stars such as Tony Pe - a, Ken Griffey, and Tim Raines; during the off-season he spent time cutting real estate deals. His interest in private equity deals came later. "I'm the ultimate generalist," Landman says. At CMS, however, where equity investments run the gamut from buyout funds to CD packagers to tube-sock manufacturers, and where the real estate investments range from garden apartments in Birmingham to rental complexes in Seattle, that's not a bad thing. Versatility, and knowing a little about a lot, is a plus--especially since the firm has a big Rolodex of people who know a lot about a little.
Here's how it works: In a roundtable investment meeting with a dozen managers of the firm's real estate funds, Landman's associates give updates on their property investments around the country. Landman fires back general questions about hurricane damage, job loss, market saturation, and competition. But when the topic turns to potential investments in various markets in the South, he insists some members of the group contact their clients with special expertise in the region. "Let's get them on this as quickly as possible," he says. Later, in a meeting convened to discuss a huge equity fund investment in assisted-living facilities and geriatric daycare, Landman asks various deputies to contact specific clients so the firm can get a better sense of what CMS might be able to add to the daycare business. A thumbs-up from these clients, or a strategy for making the facilities spit back a better return, would mean the difference between going forward or tabling the project.
Such an approach drives home the point that CMS's value proposition is not merely something the firm offers its clients; it's something its clients offer one another. As Bernie Marcus points out, CMS's trump card is its clientele. The firm knows that its clients are as smart, and usually smarter, than anyone in the CMS office.
Still, if CMS's decision to limit clients to entrepreneurs essentially translates into a mercenary decision to add value to the firm, CMS's second peculiarity--the decision to make philanthropy a driving force--is arguably more complicated. One explanation goes like this: CMS's two top executives, Silberberg and Solomon, long involved with philanthropic activities themselves, have an authentic desire to sow their ideas with employees (who are urged to volunteer with community projects), fellow partners (who are forced to dedicate to charity 10% of their gross income share), and like-minded, deep-pocketed entrepreneurs (who are invited to attend conventions on charitable giving). While true, all this merely helps explain why CMS does good, not why CMS has done well.
As Silberberg notes, philanthropy has served CMS as an "indicator" of a client the firm would like to work with. And while it may be counterintuitive, there seems little question that CMS's success is due in part to its decision to limit clients and give money away. In Philadelphia, a relatively conservative business community where family connections can be more useful in reaching the upper echelons than raw talent, the firm's emphasis on exclusivity and philanthropy have set it apart. Thus CMS partners sometimes make reference to entrepreneurs who end up on their "LTS list" instead of their client list. "LTS," says Silberberg, "means life's too short."
