Value Added: The Secretive Rales

Here's Tom Heath's latest column on Washington's entrepreneurial set:

So which two local business legends braved an economic downturn and an all-but-dead IPO market and took public a boring pump company based in Richmond?

And now, with the firm valued around $1.1 billion, own $220 million each in company stock?
And can't even count it as their biggest home run?

The Rales brothers -- two of the richest guys in Washington -- are still printing money.


Mitchell P.
and Steven M. Rales, who went to Walt Whitman High School in Montgomery County, are already worth billions from their flagship industrial firm, District-based Danaher Corp., named for their favorite Montana trout-fishing stream.

Forbes recently placed Mitchell as the 412th richest person on earth, at $2.8 billion. Steve ranked 446th, at $2.6 billion.

But they made a significant leap in net worth in May with the public offering of their latest home run, Colfax Corp., which friends say is the name of an elementary school that the brothers attended.



Colfax is a lot like Danaher, which makes unglamorous stuff like measuring tools, dental office instruments, water treatment equipment and microscopes. Ever hear of Craftsman hand tools?

That's Danaher.

Now comes Colfax, founded as a private company in 1995 and "a global leader in critical fluid-handling solutions," according to an SEC document.

Colfax makes industrial pumps.

Lots of money is flowing through those pumps. In the first quarter of this year, Colfax sold $130 million worth of pumps and had $6.8 million in profit. The company recently was awarded a $1.3 million contract for work on British Navy patrol vessels.

Each Rales brother owns more than 9.1 million shares of Colfax, a stake valued at $220 million each at Tuesday's price.

So I got a call from a noted Washington business wag: "You've got to write about the Rales. They take a billion-dollar company public when no one is doing IPOs. They make a few hundred million apiece. It's amazing. Just leave me out of it."

No surprise there.

This wag and others spoke on condition of anonymity because they believe the Rales would be offended by anyone talking about them, even if they say something nice. They're notoriously reclusive, like the McLean-based Mars candy family.


The Rales are so publicity-shy that we can't find a more recent photo of them. (Acey Harper)

Washington venture capitalist Mark Frantz, who cut his teeth at the Carlyle Group, the District-based private-equity giant, said everyone knows of the Rales brothers' success. But Mark wasn't afraid to talk about it.

"These guys are brilliant," Frantz said. "They are just freaking brilliant. These are massively dynamic guys doing non-sexy stuff and, God forbid, they are making tons of money."

Another Rales business associate who spoke on condition of anonymity put it this way: "Everything they touch turns to gold. They own lots of things you have never heard about."

The Rales over the past two decades have built Danaher into a mini-General Electric. Danaher, which has a market cap of around $25 billion, is known for its Danaher Business Systems, a super-efficient manufacturing process modeled after the Toyota Production System.



Danaher shareholders have done well. From 1997 through 2007, total annual return to Danaher shareholders is 19 percent. If you bought $10,000 of stock in early 1997 and reinvested its dividends, your shares would have been worth $67,766 at the end of last year.
The Rales brothers didn't respond to inquiries. So I asked a former employee and a business analyst how they do it.

"They are very shrewd business people, and they have a knack for selecting management talent that knows how to win," said Mark DeLuzio, a former Danaher executive who was instrumental in developing DBS. "And they know how to get out of the way and let people run the company."

Ned Armstrong, managing director at Rosslyn-based Friedman, Billings, Ramsey Group, said the Rales brothers do three things right. They don't overpay pay for acquisitions. They control costs. And they hire smart people.

"People who invest in Rales brothers enterprises for the most part made very good returns," Amstrong said.

What do the brothers do with all that money?

Equity Group Holdings, the brothers' private investment vehicle, shares space with Danaher on Pennsylvania Avenue.

Mitchell has been a big supporter local children's charities. Steven is a major donor to DePauw University, the Indiana liberal arts college known for its school of music and his alma mater.

Both Rales brothers -- each is in his 50s -- collect modern and contemporary art. Mitchell turned his Potomac home into an invitation-only museum called Glenstone. I'm waiting for an invite. He also sits on the National Gallery of Art Board of Trustees. ArtNews a year ago called Mitchell one of the 10 most important art collectors, alongside buyout king Henry Kravis and perfume heir Ron Lauder.

Steven has taken to funding small, offbeat movies. He is listed as an executive producer for "The Darjeeling Limited" and for the upcoming "The Fantastic Mr. Fox."

Then there's the fantastic fortunes of the Brothers Rales.

By Terri Rupar  |  July 1, 2008; 3:12 PM ET  | Category:  Value Added
Previous: Zier Heads to Air America | Next: Roundup: Hogan & Hartson, Emergent, Dominion, Carlyle

Comments

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Another interesting article - I guess if you are really smart you can still do well in hard times.

Posted by: David | July 1, 2008 3:51 PM

Sounds like they had a fantastic business model: they combined an efficient organizational system with a move into a niche in a market that wasn't being exploited. Combine that with a little luck, and a decision to hire smart people, and you have got yourself a company that will be worth tons of money.

Or maybe I just can't help being impressed; they went to my high school. Who doesn't like apparent and yet meaningless ties to success?

Posted by: Lauren Winer | July 1, 2008 3:53 PM

Interesting article. Amazing to me how they figured out the market for such non-descript products. Also interesting that they prefer to stay out of the media.

Posted by: Sheila | July 1, 2008 3:57 PM

What's with all of the anonymity? Why so secretive and reclusive?

Posted by: Jackson | July 1, 2008 3:59 PM

Interesting piece about very media shy investors with interests in such a different market.
Some of the industries in which the brothers have invested in may not be perceived *cool* but if you have a good plan and a will to execute it you can make money even under such uncertain conditions.

Posted by: ag | July 1, 2008 4:04 PM

Its surprising how many people like the Rales brothers exist around the world. I guess the trick is to let the people who know what they are doing to run the show whilst quietly amassing a fortune. What is especially hearting is that they plow their money back to the benefit of society. Great success story.

Posted by: Aakif | July 1, 2008 4:07 PM

So - are either of the brothers single?

Posted by: Just Curious | July 1, 2008 4:16 PM

Who knew? It's nice to see people who avoid the media for a change. Good for them!

Posted by: Anne | July 1, 2008 4:27 PM

It's a shame they wouldn't talk to you, Tom. They sound like interesting guys, and I like that they name their companies after things in everyday life (fishing holes, grade schools, etc.). That makes them seem down to earth to me. It also sounds like they're enjoying their money... good for them. We need more Roald Dahl classics turned into screenplays/movies!

Posted by: Chris | July 1, 2008 4:35 PM

Glad you're back talking business, Tom.

Your previous story about the immigrant businessman was not on topic. In this story, you give us the kind of details about a successful business and how it was built. That's what makes your column interesting. That's what we want.

Lay off the tear jerkers.

Posted by: Frank Frugal | July 1, 2008 7:07 PM

frank. that's what i love. honesty. tell it like it is. glad you are back in the fold. tom.

Posted by: tom heath | July 1, 2008 7:11 PM


THE RALES BROTHERS USED THEIR BUSINESS ACUMEN
IN A SUBDUED WAY THROUGH THE YEARS.

THIS IS A TRIBUTE TO THEIR UPBRINGING.

Posted by: ROBERT | July 1, 2008 9:32 PM

I LIKE THE CHEMISTRY BETWEEN THE BROTHERS.
WHAT ARE THEY BUYING NEXT?

Posted by: a regular reader | July 2, 2008 9:00 PM

very interesting and informative piece. I had heard of these guys but didnt realize they were as big time as they are.

Posted by: kevin | July 3, 2008 2:13 PM

Saw your July 7th article about the Rales brothers today. Mitchell and Steve were both born in Pittsburgh, PA, where Colfax Elementary School still sits in the Squirrel Hill section of the city. They attended Colfax until the family moved to Bethesda (Pittsburgh's loss, let me tell you) in the mid-1960's. I wish I could share more with you, but it's very true that the brothers value their privacy.

Posted by: Rick | July 12, 2008 5:08 PM

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