Debt pays. Just take a look, if you can get close enough to it, at Eric Smidt’s 10-acre Beverly Hills estate, a monument to a fortune built by the leveraging of Harbor Freight Tools USA Inc.
Smidt is chairman and chief executive officer of the discount tool retailer known for its $49.99 chainsaws and a 130-piece tool kit that goes for $37.99. He has raised $5.1 billion in debt against the closely held company since 2005, according to data compiled from Moody’s reports and court documents. He’s received about $2 billion in dividends, according to calculations by the Bloomberg Billionaires Index, which puts Smidt’s net worth at $2.3 billion.
“It’s like a money-printing machine,” said Lloyd Greif, founder and CEO of the investment bank Greif & Co. in Los Angeles that specializes in representing entrepreneurs and their companies. “He’s mastered the art of the dividend recap.”
Smidt declined to be interviewed for this article or to comment on Bloomberg’s valuation.
The Beverly Hills property, with a white-brick Regency mansion, outhouses and manicured gardens offering uninterrupted views of the city, is valued by area brokers at around $250 million. Smidt bought the Knoll, as it’s called, from the estate of the late industrialist Marvin Davis in 2005 for a sum the local media reported was around $46 million and has since given it an extensive facelift.
“There are only a couple of privately owned properties in Beverly Hills that are in the same league,” said Joyce Essex Harvey with Coldwell Banker Residential Brokerage in Beverly Hills. “The house may be one of the finest.”
Smidt also has an apartment in Manhattan, and an art collection that includes works by Mark Rothko and Jackson Pollock. ArtNews magazine has named him one of the country’s top 200 collectors for eight years running.
“High leverage,” Greif said, “in this case equals high lifestyle.”
It’s a strategy often embraced by private equity firms such as KKR & Co. and Platinum Equity, though some entrepreneurs have joined the party in recent years as historically low interest rates have enabled Smidt and others to diversify their investments while still retaining full ownership of their companies. Dividend recaps, when a company incurs debt to pay a dividend, totaled about $50 billion in the U.S. in 2016, up from $38 billion in 2015, after hitting a record $70 billion in 2013, according to LCD, an offering of S&P Global Market Intelligence.
Smidt’s father, upset by management changes made to re-position Harbor Freight after the 2008 recession, criticized the practice of borrowing to take cash out of the business in a 2010 lawsuit, filed over a decade after he sold his interest to his son. Allan Smidt, who died last year, said Eric Smidt had “dramatically leveraged the company” and enriched himself at its expense. The suit cited a loan in excess of $500 million that “has had serious negative consequences, including inability to keep inventory on shelves.” Interest on the loan, the suit said, was at one point as high as 10 percent.