Small fry find big supply of capital, support

Make way for the enablers.

If boutique asset managers were ever looking to expand their businesses — or if individual investment teams and portfolio managers ever wanted more independence — there is a new breed of firms focused on supporting entrepreneurial bids in the money management industry.

Firms such as Frontier Partners LLC, Chicago; Proctor Investment Managers LLC, New York; MD Sass Macquarie Financial Services LP, New York; and most recently Northern Lights Ventures LLC, Tacoma, Wash.; each is taking aim at the smaller end of the asset management spectrum, an area that officials for these firms say is lush with opportunities.

While a number of private equity firms have focused on investing in mid- and large-size money managers, there has been less emphasis on supporting smaller firms and talented investment teams, said Paul Greenwood, partner at Northern Lights. He recently launched the firm along with Andy Turner, former managing director and head of investment management and research at Russell Investment Group, and Tim Carver, former managing director at private equity firm Orca Bay Partners, Seattle.

Mr. Greenwood said Northern Lights has based its new business on "empowering," or lifting out investment teams that want to operate independent of larger financial services firms. "Money management is a business based on intellectual capital," he said. "And it's remarkable how easily, and often, that intellectual capital can be alienated by bureaucracy."

In addition to helping teams start their own firms, Northern Lights supports recapitalizations in which teams buy themselves out from their parent company.

The firm has several transactions that Mr. Greenwood expects to complete in the first quarter of 2007.

Targeting teams or smaller asset managers gives firms such as Northern Lights and Proctor a large universe of talent to evaluate, which can be both a challenge and a blessing, said James Coley, chairman and CEO of Proctor Investment Managers, which was launched earlier this year with backing from National Bank Financial, Quebec.

"When is there more opportunity for a firm to grow — when they have $1 billion in assets, or when they have $50 billion?" asked Mr. Coley. "There are a lot of smaller firms out there that have established themselves with strong performance, but they need a boost to get to the next level."

When working with smaller firms, or supporting startups, Mr. Coley said it's not just about providing capital to the firm's principals.

Often, he said, smaller firms have limited sales, marketing and client services functions that inhibit their ability to attract institutional investors and work with investment consultants.

Such was the case earlier this month, when the firm took a 10% stake in growth equity manager Aletheia Research and Management Inc., Santa Monica, Calif., which has posted remarkably strong returns on its flagship large-cap growth strategy in recent years. (The strategy has outperformed the Russell 1000 Growth index by 12.42, 21.14, and 18.61 percentage points over the one-, two- and three-year periods ended Sept. 30, according to the eVestment Alliance, Marietta, Ga.)

Mr. Coley said Proctor's preferred business model is to partner with established boutiques such as Aletheia, but he also is evaluating individual teams at larger firms that could be lifted out and operated as independent entities with the proper distribution support.

Specifically, he added, Proctor is in the market for a small-cap value equity team right now.

Both MD Sass and Frontier Partners also have set out to enable these types of entrepreneurial ventures, said executives from both firms.

Opportunities are increasing to work with top-performing investment teams and individuals who may now be "disenfranchised" as a result of a major spike in money management merger and acquisition activity over the last 18 months, said William Forsyth, partner and co-founder of Frontier.

Frontier, which has predominantly served as a third-party marketer for asset managers such as New Star Institutional Managers LLC and Reams Asset Management Co., has expanded to provide investment managers with accounting and operational support, as well as capital that the firm has cultivated from private investors, said Mr. Forsyth.

"It's a natural progression of our business, as well as the money management business, in a lot of ways," said Mr. Forsyth.

"We wanted to build a one-stop shop for investment professionals who want an appropriate equity stake in their own business." Mr. Forsyth added.

M.D. Sass and the Macquarie Group, which launched a joint venture in August, teamed up specifically to target investment teams for start-ups in both traditional and alternative asset management in which they would invest no more than $30 million.

The MD Sass Macquarie Fund has roughly $273 million invested in five ventures, most recently helping in the launch of Crow Point Partners LLC.

Two former portfolio managers at Evergreen Investments, Boston, started the company at the end of September.

In addition to providing capital, MD Sass Macquarie has allowed its venture to leverage MD Sass' infrastructure and 120 employees. The teams they pursue "have to have the entrepreneurial spirit," said Martin Sass, chairman and CEO of the firm. "And they have to be able to produce real alpha for us to consider having this kind of relationship."

Mr. Sass said he's evaluated "hundreds" of opportunities, and is in the final stages of closing two more deals for a private equity fund and a hedge fund operation based in Asia.