Aurora backs two as it enters early-stage capital space

March 10, 2014  

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  Scott Schweighauser
Aurora Investment Management, a $9 billion alternative investment manager, has entered the early-stage capital space offering strategic investments to Adi Capital Management and Brenham Capital Management, in a move that could see the Chicago-based firm offer two or three of these 'accelerator capital’ deals per year. Aurora is not the only name in the FoHF community that is taking advantage of the dual needs of hedge funds for increased levels of starter capital and investors’ need for enhanced returns.

Nearly 79% of the InvestHedge Billion Dollar Club, which replied to the question of emerging manager investments, has some form of focus towards the smaller or newer end of the manager spectrum.

Only 10 groups said they did not touch this end of the spectrum, while 43% had 20% or more in smaller managers, 27% had 40% or more and nearly 19% had 50% or more – these include Protégé Partners, Kairos Partners, ABS Investment Management, Fundana, Prisma Capital Partners, Pacific Alternative Asset Management Company and Alternative Investment Group.

Protégé Partners, which recently seeded Michael Alsalem’s launch of Ledbury Capital, continues to be a player focusing on this space, while many FoHFs, such as Sail Advisors have a large portion of their assets with smaller managers. More than 25% of Sail’s managers are firms with less than $500 million, while 56% of their managers run less than $1 billion.

For PAAMCO, the bias towards the smaller manager is significant with 84% of PAAMCO’s assets in smaller and emerging managers defined as those with $500 million or less, or which were two years or younger at the time of PAAMCO’s hire. Some firms like LCF Investments and Corbin Capital Partners have created dedicated funds to do what Aurora is doing as a firm.

"We find ourselves at a wonderful intersection of investment opportunity and structural inefficiency that creates a win-win dynamic for both Aurora’s investors and our underlying hedge fund managers engaged in these transactions," said Scott Schweighauser, Aurora’s president and portfolio manager. "It used to be that the critical mass for launching a hedge fund (depending on strategy) was in the neighbourhood of $50 million – that was enough to "turn on the lights" and get going, establish a track record, and then be in a position to attract institutional capital to reach a meaningful asset base in a relatively short amount of time," he noted.

"However, given the substantially greater burdens related to regulatory and infrastructure needs that have arisen in the last several years, the figure needed to reach escape velocity now exceeds $100 million, and that creates a more challenging "chicken and egg" dilemma for many of these talented investors," explained Schweighauser.

"Our underwriting standards have not changed at all. We’re still subjecting these managers to the same comprehensive and thorough due diligence process that every other manager goes through to make it into our portfolios," said Schweighauser, adding: "The economic benefits of providing this early-stage investment capital accrue to the benefit of our clients’ portfolios in the form of an enhanced return on our investment in their funds.

"During our 26 years of allocating capital to hedge funds, there has always been a steady flow of investing talent embarking on creating new funds, and Aurora has excelled in the early identification of these skilled individuals," he said. "We’ve been early stage investors with scores of successful hedge fund managers – in fact, we were day one capital for over one-quarter of our current roster of managers, many of whom have been in our portfolios for years and years and are now considered to be premier names in the industry," he added.

Adi, a New York-based global long/short equity manager with a value and event bias, was founded by Paritosh Gupta, formerly of Brahman Capital, while Brenham Capital Management, a Dallas-based energy-focused long/short equity fund that employs an opportunistic, fundamental approach to the publicly-traded energy sector, was founded by John Labanowski, who has worked in the energy sector at Walker Smith Capital, Goldman Sachs and Deutsche Bank.

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