There was a brief time when P. Vincent Mehdizadeh ranked among the wealthiest people in Los Angeles, with a fortune valued at more than $1 billion.
“I’m officially a billionaire,” he told the Business Journal in January. “It seems like the Earth, moon and stars are all aligned. Everything that’s happening was meant to happen.”
But the stars have been less kind of late. Since January, when he topped the $1 billion mark, Mehdizadeh’s net worth has been cut down to more like $525 million.
How did he lose hundreds of millions of dollars in just a few months? The same way most of the Wealthiest Angelenos make or break their fortunes: by keeping it all in one place.
His wealth is almost entirely locked up in shares of Medbox Inc., a public company he founded that makes automated dispensing machines for marijuana dispensaries. The stock price surged in January, but has since receded, sending Mehdizadeh’s net worth for a ride along the way.
The ups and downs of many of the super rich on the Business Journal’s list of Wealthiest Angelenos are similarly tied to big holdings in public or private companies. Their fortunes would likely be more stable if they cashed out and put their money in a diversified portfolio, but cashing out of their holdings is no small task.
Folks like Kirk Kerkorian, Michael Eisner and Ray Irani have been on the list – some of them for years – thanks entirely to huge holdings in large public companies. While those holdings have made them extraordinarily wealthy, they come with constraints.
Though shares trade on an open market, major shareholders, board members and executives of public companies – or insiders, in regulatory terms – are subject to rules governing how and when they can sell stock. And they’re also likely to move markets with their decisions to buy or sell. If Elon Musk started selling shares of his Tesla Motors Inc. tomorrow, investors might flee, devaluing the rest of his holdings, said Evan Pondel, president of Century City investor relations firm PondelWilkinson Inc.
“Just because an executive may have significant holdings, it’s not as if they’re going to be able to reap the benefit of the valuation of those holdings,” he said.
Insiders often create plans that govern how much stock can be sold and when. And wealth managers who work with those clients say they trade shares slowly, trying not to flood the market.
Ross Gerber, of Santa Monica wealth management firm Gerber Kawasaki, said it can take months or years to sell a big stock position. “It’s quite a task to do it correctly,” he said. “It’s about knowing how many shares I can put out in the market and be absorbed without affecting the stock price.”
Comfort in control
What’s more, many business owners – public or private – don’t want to cash out, even if that’s a safer way to preserve the wealth they’ve built, said Olivier de Givenchy, West Coast head of JPMorgan Private Bank in Century City, which manages the fortunes of super-rich clients.
“If you’re an entrepreneur, you do not see the investments you’ve made – and that have made you rich – as risky,” de Givenchy said. “Even if they could make you bankrupt.”
That’s because entrepreneurs know everything about their own companies: products, competition, costs. They don’t – and can’t – know all that about every company in the S&P 500.
Jim Freedman, chairman of West L.A.’s Intrepid Investment Bankers, said when business owners talk to him about selling, they’re often concerned with how they’ll manage the money generated in a sale.
“They’re used to having control,” he said. “When they have all this liquidity and they have to entrust that to money managers, they get very nervous.”
Still, business owners do have options if they want to take cash, and those options are illustrated by some of the billionaires on this list.
The most obvious way is to sell your company outright. Dr. Patrick Soon-Shiong built the base of his fortune by selling pharmaceutical company American Pharmaceutical Partners for $3 billion in 2008. He sold another pharma company a few years later for nearly $2 billion.
Another billionaire, auto financier Don Hankey, was able to get some cash out of his Westlake Financial Services a few years ago when he sold a 20 percent stake in the company to a Japanese conglomerate for $250 million.
Then there’s Eric Smidt, majority owner of Calabasas discount hardware retailer Harbor Freight Tools USA Inc.
Smidt has gotten money out of the company by taking on debt: Every few years, the company takes out an increasingly larger loan, using it to pay off the last loan and fund a sizable dividend for Harbor Freight investors – notably Smidt himself.
Last summer, the company took out a $1 billion loan, using $744 million to pay off an older loan and the rest to pay a dividend, according to a credit report from Moody’s Investors Services.
Freedman said such debt recapitalizations are common these days, as interest rates remain low and competition among banks for new loans is fierce.
Still, Rob Babek, a partner in charge of accounting firm Marcum’s Century City office, said that’s not something he’d advise for most clients. You’re getting cash, sure, but you’re also devaluing the company.
“You’re kind of robbing Peter to pay Paul,” he said.
For his part, Mehdizadeh said he isn’t worried about the ups and downs of his net worth. He knows Medbox stock was overvalued earlier this year, but he believes the company will eventually have the kind of revenue and profit to justify a sizable valuation.
And he managed to get a few million dollars in cash over the past six months, selling some shares in private transactions. It’s not much, but it was enough to put aside some money for his father’s retirement, and to buy a new Porsche Turbo and Tesla Model S.
“They’re both daily drivers,” he said. “I’m keeping things levelheaded.”
FOLLOW THE MONEY
The Business Journal calculates the net worth of L.A.’s wealthiest residents using several methods. It asks each candidate for details on their portfolio, including holdings in stocks, real estate, private equity investments and debt. Some decline to participate, some ask not to be included on the list and others offer relatively detailed information. Some will confirm numbers reporters have calculated, others might suggest general adjustments, either up or down. Our reporters double-check the valuations provided to them by the same method they calculate valuations for those who do not participate: Public records and databases are researched; industry experts and money managers are consulted; comparable values based on market research and information available for public companies in like industries are established.
The final numbers, then, are as accurate as possible given the constraints associated with obtaining more than a rough estimate for wealth held in private holdings.
Other than wealth, the primary criteria for joining the list is holding residency in Los Angeles County. This information was based on county voter registrations, along with interviews with the individuals or their representatives.
Based on that research, a number of people have made their debut on the list this year. Some were below the radar until identified by the Business Journal, others saw transactions – through a large sale of assets or a public offering of stock – vault them into the realm of the super wealthy and into the public eye. Those additions helped push this year’s tally to include 48 billionaires; barring an economic downturn, it will likely be the last year a centamillionaire will qualify for the list.
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