23/06/2010 Author: Tony Griffiths

Standing shoulder to shoulder

Fund managers seeded by Dutch platform IMQubator must relocate to the firm's base in Amsterdam. Here, IMQubator's co-founders explain why they keep their managers so close and where they see their company heading

Dutch seeding platform IMQubator likes to keep its investments close to home. In fact, it likes to keep them in the same building. Each and every one of the fund managers it seeds must, as part of the deal, relocate to the firm’s Amsterdam base. They not only share a headquarters, but the same floor. Portfolio managers bump into one another in the corridor and converse over coffee. Advice, support and communal beverages – they are all close at hand.

It is not, however, as has been widely reported, about ‘going Dutch’. The project may have the backing of domestic talent promoter the Holland Financial Centre (HFC), not to mention €250m ($307m) in seed capital from Dutch pensions giant APG, but the reasons behind the relocation provision are more practical than patriotic.

“For us, it’s about risk management,” says Jeroen M Tielman, co-founder of IMQubator and CEO of the platform's manager, IMQ Investment Management. “We could sit on the moon and as long as they were sat next to us we would be happy.”

Initiated by Tielman, Tarek Saber of APG and Theo Kocken of Cardano in 2008, IMQubator’s original plan required not only the investment management team to relocate, but the fund itself. This was soon revised to ensure foreign investors were not disadvantaged by their unfamiliarity with the Dutch legal system. IMQubator now allows the funds to domicile in Luxembourg and other traditional European investment hubs. A physical Dutch presence, however, remains non-negotiable.

Despite the potentially awkward proximity stipulation, the firm has been inundated with applications from start-ups, receiving more than 200 since being given the go-ahead by APG in January 2009. These 200 have been narrowed to a shortlist of around 40, with five funds currently the beneficiaries of IMQubator investment.

The application process has, Tielman explains, increasingly labour-intensive stages. One of IMQ’s four-man investment team will trawl through the original applicants, eliminating anything that falls outside the project’s remit, such as long-only or venture capital funds. The presentation material of those left will then be examined, with those funds that impress offered a meeting, either face-to-face or via a conference call – around 80 have made it this far. This group is then halved making the final shortlist.

“There are a lot of meetings,” Tielman admits. “I ended up spending a day or two with each of the 40 managers on the final shortlist.”

The first vehicle to be officially seeded by IMQubator was Roodhals Capital’s Branta Solutions Fund in June 2009. This was followed by Holland Private Equity, Callanish Partner’s new Global Macro Fund, Cavenagh Capital’s Luxembourg start-up and, most recently, mCAPITAL in May 2010. Each fund received the €25m ($31m) standard IMQubator allocation, with a time horizon of three-to-five years. IMQ also takes a stake in the business.

“The investment process has been massively assisted by the credibility of IMQ as an investor,” says Mark Devonshire, CEO of mCAPITAL. “The calibre of its backer [APG] makes a difference, as does its willingness to be so public about its support and to actively get involved in our efforts to raise additional capital. There are some family offices involved in the seeding game but they require it to be anonymous, and while we value that capital it doesn’t help you as a manager to raise new money.” Tielman, Devonshire adds, is willing to speak to prospective investors on mCAPITAL’s behalf, taking them through his firm’s own selection process and the reasoning behind selection.

“Being able to interact with IMQ and other quality hedge fund managers and to share ideas, views, challenges, is rather unique and we find it very beneficial, particularly given the diversity of strategies on the IMQ platform,” says Kristy Barr, a partner in Callanish’s investor relations team. “We are all in the same boat as start-ups so it is also helpful to exchange experiences and to share business management and development ideas.”

“It’s going to be a very interesting mix of managers,” IMQ CIO Rikard Lundgren says. “If you imagine ten different managers of totally different inclinations and totally different market focuses, it would be a very exciting hub. We are the closest thing you can find to someone building a multi-strategy fund from scratch. And that wouldn’t happen if we were not in the same location, where we can all share the experience. We are very interested to see how the dynamism of that turns out to be because, after all, we are in the information industry.”

At present, IMQubator’s capacity is only limited by its formula: €25m per fund from a pool of €250m equals ten managers. Reports in 2009 had suggested that the firm would spend 2010 pushing to boost its coffers, courting Dutch and international pension funds for a further €750m ($924m). Informal talks have taken place with a few pension funds, says Lundgren, but the investment drive has been largely postponed to 2011 to “build up the current portfolio”. The team expects the platform to host a total of eight managers by the end of the year, number six is due by the end of June.  

IMQubator remains focused on hedge funds, despite its private equity venture. The target pool is wide but, when pushed, the team admit they are less interested in long/short equity, as the space is particularly crowded.

“The real limiting factor of the capacity is the supply side of good talent,” says Tielman. “The main criterion is quality, and the quality of our guiding and monitoring. And the teams need to be located in the same place as we are, at least in order to perform the guiding and monitoring. Of course, right now we have an ideal market with a very strong negotiating position with the managers. That may change. It has swung before and it will probably swing again. If we get back to an overhyped market with less talent still getting away with attractive sharing schemes, then we will probably be limited in capacity because we would not go down that route.”

“It is definitely more difficult than we expected and the severe financial crisis in 2008 and 2009 slowed the process significantly,” admits Hans van Ierland, CEO of the platform’s only private equity fund.

“The environment is very tough. There’s no doubt about that,” agrees Devonshire. “And it is tougher still to find people who are like-minded, have the experience and are reasonably open and flexible.” mCAPITAL has been one of the more high-profile casualties of the barren investment landscape. Originally touted as a $500m launch in 2009, the firm has had to revise its expectations – and strategy – as initial investors retrenched in September. It is now looking to launch at the end of the summer with $50m. “The revised launch product was a more liquid vehicle and IMQ saw through to a lot of the positives in mCAPITAL,” Devonshire adds. “They were very flexible and very understanding of our situation.”

“As with other funds joining the IMQ programme, the search for seed capital has been challenging,” notes van Ierland. “Many of the other deals on offer, albeit from an increasingly limited number of participants, have onerous terms that do not align with the fund and other investors’ best interests in the way that IMQ does.”

IMQubator’s relationship with the HFC is such that a deal has been brokered securing an entire floor of HFC's dedicated financial services location, the HFC Plaza. There is enough room for the first round of managers, or ‘IMQubator 1’, as Tielman calls it, with options for further offices when the inevitable expansion takes place. However, with the team reluctant to put a cap on the number of managers the platform could support, and an increased investment pool (‘IMQubator 2’) potentially just months from initiation, the inevitable question is: where next?
“Our requirements would not inhibit us in the future,” Tielman reassures. “Maybe we could export our model to another time zone in another fashion?” he offers. “The model is not restricted just to being in one location. It is not what we are pursuing now as we are busy building up our portfolio. But from what we are capable of it is perfectly doable.” In addition, Lundgren reveals that the current €25m standard investment may prove too small and “will at some point need to be reviewed, not least because of the expected regulatory requirements”. This could see future IMQubator funds seeded with as much as €100m ($123m), he says.

For start-ups, IMQubator’s backing comes at a cost. Relocation can be expensive and time-consuming. But the queue forming outside the Dutch team’s door suggests it is one the hedge fund world is willing to pay. The challenge facing start-ups has rarely been more onerous and seed capital from a well-respected, flexible source is a valuable commodity. If plans to export the IMQubator brand to further afield take shape, the current and, according to some, only, significant hurdle facing its potential seeds may disappear altogether, with more and more start-ups likely to retain a Dutch flavour.

THE TOP FIVE
IMQubator's five seeded hedge funds

1 Branta Solutions Fund
Strategy long/short SRI investment Seeded June 2009
Branta Solutions Fund launched in July 2009. Managed Roodhals Capital, previously London-based, the fund concentrates on environmentally sustainable investments. Roodhals founder Willem Appel worked in Asia with mCAPITAL CEO Mark Devonshire.

2 Holland Private Equity
Strategy Private Equity Seeded December 2009
IMQubator’s only private equity fund anticipates a Final Closing in December 2010 at e200m. “We started working in the same building as IMQubator from day one,” says CEO Hans van Ierland. “It is easy to discuss operational issues by walking down to the IMQubator offices.”

3 Callanish Global Macro Fund
Strategy Global Macro Seeded April 2010
Originally London-based, Callanish Partners went live in Amsterdam on 1 May 2010. “The three-year lock-up of the IMQ seed capital and their taking an equity stake in our business is a positive message to investors,” says the firm’s Kristy Barr.

4 The Cavenagh Asia Fund
Strategy Asian interest rates/currencies Seeded May 2010 The firm, founded by former Morgan Stanley veteran Andrew Gale and JPM Morgan veteran Lee Ka Shao, will move to Amsterdam from Singapore on 1 July.

5 mCapital
Strategy Asian/European multi-strat Seeded May 2010
Currently at around $40m, the firm hopes to launch at the end of the summer with $50m. Like Cavenagh, yet to move into the IMQubator HQ.

GOING DUTCH

The popularity and scarcity of good quality seed capital is in many ways best demonstrated by the willingness of start-ups to meet IMQubator’s relocation stipulation. While most of the funds on the platform have moved from within Europe, Cavenagh Capital has re-domiciled all the way from Singapore. Elsewhere, Holland Private Equity was already based in the Netherlands, but has had to relocate employees and families from as far afield as Los Angeles.
“It is the toughest provision,” mCAPITAL’s Devonshire concedes. “But there is nothing else in the deal that is anything other than good for us.”

mCAPITAL’s focus on European and Asian markets made wholesale relocation more tricky than normal – in the end, a flexible solution was secured that suited both parties.

“IMQ was willing to recognise that, by doing distressed investing in Asia and Europe, there was a clear strategy requirement to have presence on the ground. They did not want us to do something that would compromise the fund. We are domiciled out of Hong Kong, so the licence is with the SFC. We are involved in other European countries as well, so we will continue to keep an office in London.”

The answer was to establish a Dutch base with IMQ but rotate the mCAPITAL team among the three domiciles. “What we have promised to deliver is one of the senior managing partners,” Devonshire explains. “There are three managing partners and one of us will always be available in the Amsterdam office.”

Officially yet to launch, mCAPITAL is to join IMQubator in Amsterdam when it goes live – currently scheduled for the end of the summer.