The Kudu Proposition
Asset management, or so common wisdom now has it, has become a challenged business. And certainly the move to beta, the assault on fees, the underperformance of some hedge funds, regulatory pressures, and the increased complexity and cost of distribution have all combined to produce headwinds.
The less appreciated and countervailing trend is that investable assets (the fuel that drives asset management) continue to rise, a function of a global societal shift towards wealth accumulation. While headlines are made of the steady if slow decline in corporate defined benefit assets, almost every other pool that represents capital accumulation (private savings, IRA rollovers, family offices, defined contribution plans, public plans, foundations, endowments, and medical and insurance pools) is seeing secular growth. Every single day more money needs to be managed.
Investment managers with history and capability and culture will thrive in this new environment. Barriers to new competition have grown as regulatory hurdles stifle new entrants, and at the large end assets are flowing out of many mega-managers. Technology no longer builds fences, it tears them down; mid-sized firms are just as adroit users of technology as the leviathans.
Culture—not size—will increasingly dictate success in asset management. Many of today’s largest firms are asset-gatherers first and asset managers second. But the surge of intermediaries – most specifically the growth of discretionary managers, including RIAs and OCIO shops – is poised to alter the dynamic that allowed asset-gatherers to thrive on distribution skills alone. These intermediaries have a business model that incentivizes them to unearth managers with a performance, as opposed to a distribution, story. And industry trends, principally the growing complexity of financial markets, favor the specialists. These are the waters in which mid-sized, culturally-driven firms swim.
The Kudu proposition is that the most successful managers in this new era will be mid-sized firms that are majority owned by their employees. Kudu capital – and the minority revenue participation construct that we favor – is specifically designed to facilitate employee control and ownership. The Kudu construct helps solve for issues that many mid-sized managers face – generational transfer, partner buyouts, management buyouts, and risk diversification. We believe that in every asset class, public and private, mid-sized managers that are owned by their employees and are capable of fostering and maintaining coherent cultures that lead to specific performance outcomes and identities will thrive in the era we are about to enter.