The principals of Australian investment management company Channel Capital are buying back a minority equity stake from Highbury Partnership — and they're doing it with financing from Kudu Investment Management, which takes passive permanent capital stakes in both asset and wealth managers.
Kudu is also providing additional funds to Channel Capital, which offers incubation, operations, distribution, and marketing and has partnerships with eight investment management affiliates, servicing about A$16 billion ($11.6 billion) in assets. Kudu itself is backed by permanent capital, from White Mountains Insurance Group, a public company.
Although the financial details weren’t disclosed, employees of Channel will own more of the equity in the firm with Kudu than they have under Highbury, a banking and advisory firm. Once the deal is closed, which is expected to happen this month, Kudu will hold minority stakes in 14 affiliate firms with combined assets of about $75 billion.
In some ways, the transaction marks another maturation of the so-called GP stakes business. Channel Capital is getting out of one deal and moving to a minority investor it views as a better fit for the firm. Unlike Neuberger Berman’s Dyal Capital or Goldman Sachs’s Petershill, which dominate GP stakes in the largest private equity managers, firms like Kudu, Investcorp, and Capital Constellation target smaller traditional and alternative investment shops.
Rob Jakacki, Kudu’s CEO and chief investment officer, told Institutional Investor that non-U.S. boutiques are particularly open to deals with the firm.
“Boutiques are thriving outside the U.S. as well, and the permanent capital proposition that we represent is one that they haven’t heard as much,” he said. Jakacki previously co-founded Asset Management Finance, a firm similar to Kudu, where he oversaw new investments.
Boutiques have an array options to raise capital for succession and other growth strategies, including selling stakes to private equity funds. But, “This is permanent capital, not fund capital,” Jakacki said. “There’s no exit strategy for this effort. We don’t have to come back to the management team in ten years and extract ourselves from the investment.”
Charlie Ruffel, Kudu’s chairman, said the firm will end the year with four to five deals under its belt, even though the coronavirus has prevented face time with a lot of candidates and has had a huge impact on the asset management industry. “But it hasn’t altered the opportunity we’re seeing,” he said.
Jakacki and Ruffel aren’t looking for distressed managers hit hard by the pandemic or other long-term trends like fee pressure.
“We’re not in the business of fixing broken managers. If somebody has a real problem, whether with distributions or returns, we’re the wrong partner,” said Ruffel. “We’re looking to find successful boutiques that have a capital challenge, but who still want to be in control.”
Kudu is looking to raise additional permanent capital to invest in boutiques from several investors alongside White Mountains. Potential targets include public pension funds.
“There clearly is an opportunity to find a partner not only who understands the merits of a GP stake, but putting LP money alongside that,” Jakacki said.
He explained that some asset management firms, particularly in private markets, are often open to selling a GP stake, but also want a partner who can fund new products that they want to create from scratch.
Kudu's near-term goal is to put $1 billion to work in about 20 to 25 global boutiques.