PAAMCO LaunchPad Takes Off In First Year
It’s been a year since $24bn alternative asset manager PAAMCO Prisma announced its new emerging hedge fund manager seeding platform ‘LaunchPad’, with the Employees Retirement System of Texas as its anchor partner. The idea came about organically to address two issues that both organisations kept coming up against, as Jeff Willardson, Managing Director at PAAMCO Prisma and Head of Investments for PAAMCO LaunchPad, explains.
“It was really a coming together of two like-minded institutional investors [ERS Texas and PAAMCO Prisma] and recognising that the hardest part about emerging managers is actually sourcing them. On our side, we’ve done a good job of building those sourcing networks over the past 20 years”, he said, referencing PAAMCO Prisma’s historical focus on sourcing and allocating to smaller, emerging hedge fund managers.
“On their side, [ERS] Texas recognised that they have a liquidity time horizon that’s different to many hedge fund investors. We are much more willing to extend our duration of capital if it means that we can get compensated for doing so. The ‘aha’ moment in conversation with Texas was us saying ‘we have the emerging manager talent; if we had capital that’s longer term, more locked up and more committed, there is extra return potential in these manager situations’. Because we can provide locked-up capital, and do so in a meaningful way, from an economic standpoint we can get revenue share from a manager if we’re willing to give them a longer-term commitment”, he said.
That long-term commitment is anywhere from three to five years – in stark contrast to the typical 6-12-month lock-up - and PAAMCO LaunchPad plans to commit upwards of $100mn to each manager from its $1bn war chest earmarked for this program.
“The most important thing is that the managers get started with a critical mass of capital. We want to start managers with $100/$200/$300mn because, depending on the strategy, that’s what’s required to build the kind of team that they want to build. The activities they are engaged in – hiring people, paying people, office space – these are very expensive activities”, Willardson said.
To find the right opportunities, PAAMCO Launchpad has cast a deliberately wide net - “we’re looking for any manager that is looking for start-up capital. We have no strict definition on size, age, or anything else”, Willardson said - and has screened more than 300 hedge fund managers, a third of which come from outside the U.S. Willardson is positive on both the volume and quality of managers that the program has reviewed to date.
“There has been significantly more interest – and demand – than we would have thought. We’ve been surprised – pleasantly – at how high quality the managers are. The backgrounds of the managers we are looking at are often the bluest of blue-chip. We’ve seen managers who are spinning out from very high-quality shops”, he said.
The program is designed specifically for hedge fund managers looking for their first injection of outside capital, but the program won’t completely rule out other firms which might be further along.
“We do have an opportunity to seed managers that have existing capital but for some reason haven’t been able to reach critical mass. Those managers would typically be between $200-$500mn in assets and 0-5 years from launch”, Willardson said.
The entire process from initial meeting to an allocation takes approximately one year. The first seed investment from PAAMCO LaunchPad is due in Q3 of this year, and the second in Q4.
Successes and learning experiences
Willardson considers the initiative to be a great success so far, for all three constituents of the initiative – PAAMCO Prisma, ERS Texas and the hedge funds themselves.
“The biggest win is that the idea is right. Managers need capital now more than ever” he said. “There are many more ideas – managers to consider – than we have money to fund them with. So it’s been heavy on the supply side” he said.
For PAAMCO Prisma and ERS Texas, Willardson says the wins are two-fold.
“The revenue shares that we are negotiating are coming in higher than expected; managers are willing to share a significantly higher percentage of their business than they have in the past”, he said. “Investors like [ERS] Texas are saying to themselves ‘if I’m going to have a relationship for multiple years, I can potentially double the returns of my hedge fund program by getting more alignment of interest and better economics. Why don’t I look for partnerships that can do that?’”
As with any new initiative, there have been growing pains.
“The deals take a lot longer than you think. These are complex, almost private equity style transactions”, said Willardson. “You need internal legal and structuring expertise – which we have – but you need to fortify it with external providers.”
Improving communication with managers, both in terms of frequency and clarity, is something that Willardson and his team have grown more cognizant of.
“Because it takes so long, you need to over-communicate with managers. These managers are starved for capital and they’re eager to get going and sometimes don’t quite understand how long the process takes”, he said. “Also, we have to be careful that feedback isn’t confused with ‘fix it and we’ll fund you’. A lot of times, the more transparent you are with feedback, the more managers think that you’re really interested and as long as they fix the things that you suggest, they can come back to you for a check. That’s not the case.”
PAAMCO LaunchPad is a wholly owned subsidiary of PAAMCO Prisma, and the plans for the next twelve months take Willardson down two roads.
“We want to do 3-4 deals in the next 12 months [with ERS Texas] and we want to add more strategic investors over the next 12 months. There’s a lot of interest in the value proposition that LaunchPad solves for”, he said. “I give Texas a lot of credit for being able and willing to move first. They are our anchor investor, but we hope to build LaunchPad with a small syndicate of like-minded and large institutional investors who desire similar seeding partnerships. Texas has been very good about introducing us to other investors they know who have an interest in similar relationships or partnerships. At some point we intend to build out the LaunchPad business beyond this great starting point.”
Willardson stresses that the initiative takes a collaborative approach; ERS Texas is heavily involved and he expects the same engagement from new investors with which PAAMCO LaunchPad partners.
“We want our partners in LaunchPad to be the architect of their solution and not just invest in some blind pool. Texas is very involved in our screening of managers and our sourcing of managers and we want other partners to have a similar influence in the program. That customisation is a big part of how we’re innovating with Launchpad”, he said.
Willardson believes that PAAMCO Prisma has hit on something big and feels passionately that the LaunchPad project ticks all of the boxes for both asset owners looking to get more out of their hedge fund programs and in turn for PAAMCO Prisma.
“Investors are starved for uncorrelated returns. This [hedge fund investing] is a way to do it, and if you can do it the right way you can add significant amounts of value in ways that current hedge fund programs cannot. You can improve your alignment of interest. You can improve your transparency. You can lower fees”, he said. “I expect this to appeal to a number of not just smaller institutional investors who can’t access these managers but to very large sophisticated plans who are looking to improve upon the way that they do things now. We’re looking to build this business and make it a meaningful part of PAAMCO Prisma.”
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