Infovest21 Special Research Reports

Seeding activity starts to make a comeback

InfoVest21 Seeding Activity.

Funds of funds, as important sources of seed capital to emerging funds, dried up in 2008 and 2009 but is slowly starting to come back, observes George Mazin of Dechert, the law firm.

Many say the environment for hedge fund seeding is the best it has been in many years. Deal terms are favorable to seeders because of the lack of seed capital available. A huge increase in talent exists because of hedge fund and bank stress with the top tier being of very high quality. In addition, the market dislocation has created plentiful investment opportunities. Seeders are increasingly being seen by managers as a partner in their development of their business, notes Reyl Asset Management’s marketing materials.

A number of funds of funds have launched or are in the process of launching funds that focus on seed capital. Blackstone, CYAN Management Group, Larch Lane/PineBridge Investments, Revere Capital, Reyl Asset Management and SkyBridge Capital to name a few.  Not all, however, describe themselves as seeders.

A survey of recent developments include, in alphabetical order:

Blackstone Strategic Alliance

Blackstone launched its second seeding platform in early 2010 which mirrors its first seeding platform, Blackstone Strategic Alliance Fund. The latter launched in May 2007 with $1.1 billion.

Sources say about $500 million has been raised for the second platform while the target may be $1.5 billion. The platform may seed as many as 12 managers over the next two years.

Blackstone reportedly won a mandate from New York State Common Retirement Fund which is preparing a new $500 million hedge fund program focusing on new and emerging managers.

CYAN Management Group

CYAN Management Corp, a recent spin-off of the Investcorp team, has created a multi-product hedge fund platform focused on delivering best-in-class investment talent.

Among other things, CYAN is creating a series of products focusing on individual core hedge fund strategies and single manager funds. Partner managers are practitioners looking to start or restart businesses.

According to its marketing material, CYAN develops products based on the preferences of sophisticated hedge fund investors. Its hedge fund product development process asks, in order: what investment opportunities are of interest now and in the medium term? What are the correct guidelines required to capture the opportunities? What terms, conditions, and structures are best suited for the strategy? What manager is optimally qualified for this mandate?

CYAN plans to develop two to three funds each year for a total of eight to ten funds over four years.

Larch Lane Advisors/PineBridge Investments

Larch Lane Advisors and Pine Bridge Investments have launched a joint venture, Select Plus Fund, which seeds early stage hedge funds. It was launched with $400 million in June 2008, according to its marketing materials. Larch Lane/PineBridge expect to raise another $600 million by year-end, bringing the fund size to $1 billion.

Their objective is to provide early stage hedge funds with critical assets, strategic direction, operational advice and strong institutional sponsorship necessary to help hedge funds attract investors. The plan is to seed 10-15 managers with $50-100 million each and possibly $100 million on a selective basis, according to the fund’s marketing materials.

Select Plus has four existing seed investments with the first distribution expected during the second half of 2011. The four funds seeded so far are Feingold O’Keefe Distressed Loan Master (seeded in May 2008 with $45 million), Stonerise Capital Partners Master Fund (seeded January 2009 with $100 million), Crystal Japan Fund (seeded August 2009 with $75 million) and Sothic Capital European Opportunities Master Fund (seeded September 2009 with $75 million).

Select Plus is targeting over 50% of capital returned three years from the commitment period end with profit interest distribution starting in the second  quarter of 2010.

The commitment period for investors in the fund ends December 31, 2012. Capital distributions for each of the managers is expected within one year of negotiated lock-up, typically three to four years. Any capital not distributed to investors within the one year period can be withdrawn without penalty. It is anticipated that all capital will substantially be returned by the end of 2016.

Select Plus charges a 1.5% management fee plus 25% of profits.The minimum commitment is $5 million.

Revere Capital Advisors

Since its inception in September 2008, Revere has seeded four managers, using a single manager platform. The four founding partners, former Man executives, are using their proprietary capital. Revere is looking to add partners to the platform – investors who want to provide capital to fund additional managers.

Revere Capital’s Andrew Godfrey says flexibility is needed in the use of capital as they may purchase equity interest, provide acceleration capital etc. Revere provides additional functions that can help institutionalize the product such as providing marketing, client service, back office infrastructure, technology, trading – it is a full service approach.

Godfrey says Revere expects to do about two to three full service deals per year, focusing on emerging managers trading liquid strategies who has assets under $100 million.

Reyl Asset Management

Reyl Asset Management launched an Irish-based fund of funds, Reyl Accelerator Fund, in conjunction with FRM on April 1, which specializes in seeding and early stage investments in hedge funds. Reyl is the investment manager of the fund while FRM is the advisor that sources and structures the deals. FRM, which runs a similar structure called the Catalyst Fund, proposes the managers to Reyl. According to Reyl’s marketing materials, the accelerator fund’s allocations range from $20 million to $50 million.

Because Reyl has a private banking client base, its fund has characteristics that are more suitable for private bank clients, says Fabrizio Ladi Bucciolini, Reyl’s head of alternative investments who designed the fund. FRM’s is institutional in nature.

The fund currently has four underlying investments in various strategies including event driven, senior secured lending and Credit and Volatility. FRM has arranged deals with Victory Park Capital, WestSpring Advisors, Isometric Capital Management and JD Capital Management and the Reyl Accelerator Fund has invested alongside FRM.

Bucciolini says the fund differs from most other seeding ventures, and that usually there is no equity participation of the seeder in the seeded managers. There is just a revenue stream share. The returns from the revenue shares are expected to match fund returns over time. Each seed deal has different characteristics.

The Reyl Accelerator Fund also differs from other seeding funds as it is geared toward smaller investors, says Bucciolini. The minimum investment is €250,000 or equivalent. There is a 1.5% management fee and 15% performance fee. Investors’ capital is locked up for one year, and thereafter may be redeemed with semi-annual liquidity.

If you have any questions please contact Infovest21 at (212) 686-6440.