KKR Strikes Hedge Fund Gold With British Billionaire Pair

(Bloomberg) -- A pair of 200-year-old wooden elephants adorn the London lobby of one of the financial world’s biggest beasts. The carvings guard the Chelsea office of fast-growing $39 billion hedge fund Marshall Wace.

KKR Strikes Hedge Fund Gold With British Billionaire Pair

Co-founders Paul Marshall and Ian Wace are an unlikely duo. Marshall, 59, studied at St. John’s College, Oxford, before graduating with an MBA from Insead. He ran unsuccessfully for Parliament before turning to finance and backed Brexit. Wace, 56, went straight to work for SG Warburg before joining Deutsche Morgan Grenfell. He supported the U.K. sticking with the European Union.

Despite their differences, the two have thrived since starting the firm in 1997. Assets have roughly doubled in the past four years, even as the hedge fund industry has struggled, making both of them billionaires. They declined to comment.

Marshall Wace’s success also is benefiting a very different and even larger financial animal -- KKR & Co., the $195 billion alternative-investment firm best known for leveraged buyouts. The New York-based company, co-founded by Henry Kravis and George Roberts, has built a 35 percent stake in Marshall Wace since 2015, valued at more than $2.4 billion.

KKR Strikes Hedge Fund Gold With British Billionaire Pair

“It’s obviously been a home-run investment for them,” said Donald Steinbrugge, chief executive officer of hedge fund consultant Agecroft Partners.

Expansion Wave

The world’s largest private equity firms have undergone a wave of expansion since the 2008 financial crisis, moving well beyond their core business of buying companies with debt and selling them a few years later. While efforts to diversify into real estate and credit have been relatively smooth, investing in hedge funds has been a mixed bag amid long-running pressure on the $3 trillion industry.

In 2010, KKR hired former Goldman Sachs Group Inc. proprietary trader Bob Howard to set up a hedge fund, KES. It shut the unit in 2014 after struggling to raise money. Carlyle Group LP stumbled with investments in firms including Claren Road Asset Management and Emerging Sovereign Group, selling both back to management.

There has also been some major successes, underscoring why it’s such a desirable potential investment. KKR took a minority stake in Nephila Capital in 2013, tripling its investment by the time it sold the energy credit manager last year. KKR has partnerships with BlackGold Capital Management and Acion Partners, while Blackstone Group LP has taken stakes in Marathon Asset Management, Magnetar Capital LLC and Solus Alternative Asset Management. TPG Capital built an in-house hedge fund and has grown it to $2.2 billion since 2013.

‘Nice Way’

KKR’s flameout with KES may explain why it has been more inclined to partner with existing operators instead of trying to build its own unit.

“There are not many top firms out there that you can buy into,” said Jacob Schmidt, chief investment analyst at NLP Financial Management, which oversees 700 million pounds ($915 million) of assets under management. “It’s a nice way for KKR to get into the sector.”

KKR considered hundreds of funds before investing in Marshall Wace, according to people familiar with the investment. They were drawn to its management, compatible culture and ability to innovate, said the people, who asked not to be identified because the information is private.

It bought 24.9 percent of Marshall Wace in November 2015, handing over shares valued at about $150 million and an undisclosed amount of cash. KKR’s stake has risen by 5 percent each of the past two Novembers, as detailed in the deal agreement.

‘Important Partnership’

In November 2017, KKR gave shares worth about $100 million as partial payment for a further 5 percent stake. Last November, roughly $120 million of stock exchanged hands for another 5 percent, which would value Marshall Wace at $2.4 billion even excluding the undisclosed cash. The New York firm’s stake could increase by an additional 5 percent this November to about 40 percent.

“This is an important partnership for us, one built on common values, openness and a genuine desire to learn from each other,” said Todd Builione, KKR’s president of credit and markets. He declined to comment on the valuation.

Marshall Wace gets more than cash and stock out of the deal. It has access to KKR’s resources, network and macroeconomic insights. KKR, meanwhile, gets a more liquid business with an annual performance that’s easier to value than private equity investments. Hedge fund investments accounted for about $26 billion of its assets at end of 2018 with Marshall Wace contributing about half, according to calculations by Bloomberg. The firms will eventually develop new products jointly.

Double Act

Wace runs operations and can often be found walking around checking in with the office’s 170 or so workers (the firm employs about 280 people worldwide). Marshall, who previously worked at Mercury Asset Management and whose son Winston is a member of folk rock band Mumford & Sons, oversees the investment process and is more likely to be at his desk thinking about a new strategy or approach.

This double act was interrupted between 2005 and 2008 when Marshall stepped down as chief investment officer to focus on political and charitable work. Wace described the period as “extremely lonely,” in an interview with EuroHedge earlier this year.

Since then, they’ve found themselves on opposite sides of Britain’s current political turmoil when it was revealed that they’d each given 100,000 pounds to different sides before the June 2016 referendum that saw the British people vote to leave the European Union.

‘Disagreed Frequently’

Unlike Westminster’s politicians, the pair found a way to reconcile their opinions.

“We have disagreed frequently -- that is the essence of a good partnership,” they wrote in a January op-ed in the Times of London that called for political leaders to end the deadlock because the uncertainty had been bad for the economy. They noted U.K. assets were undervalued and that on some measures “the U.K. stock market is close to a 30-year-low relative to global equities.”

Neither Britain’s continuing political turbulence nor Marshall Wace’s growth has hampered results. The $17 billion Eureka fund -- run by Marshall -- returned 13 percent in 2017, 0.7 percent last year and 4.4 percent in the first three months of 2019.

Chelsea Digs

KKR is also taking ideas from Marshall Wace’s Chelsea digs as it plans its move across the ocean to Manhattan’s Hudson Yards. The hedge fund’s office design, which boasts reclaimed wood ceilings and antique industrial lighting, was the brainchild of Wace -- a deliberate move to help the firm attract young recruits to one of Europe’s oldest hedge funds. There are common areas and an open feel. In the cafe, booths surround a big table, where food is plated family style.

Investors say the firm’s systematic approach helps it navigate volatile markets. Marshall Wace invests in technology with about 4.5 petabytes of data stored on its servers, equivalent to 270 billion photos. That amount is doubling every year.

With the firm now managing $39 billion, the founders may find it harder to maintain the same growth of the past few years, although KKR has ambitious plans.

Marshall Wace has been a “great contributor” to the growth of managed assets and fees, KKR co-President Scott Nuttall told investors in July. “They can double again from here.”

©2019 Bloomberg L.P.