Ryan Harrison  on Monday, June 30, 2008

Thames River Capital has ramped up its marketing campaign in the Gulf as it looks to tap into the region’s brimming liquidity.

The London-based boutique manager has been knocking on the doors of GCC heavyweight investors, from sovereign wealth funds to large business houses, in a bid to convince them that a specialist investment house, best known for its hedge fund business, is a safe bet.

At present the region accounts for just two per cent of the firm’s $14 billion (Dh51.3bn) assets under management, but Nigel Sillitoe, Executive Officer for the Middle East, said an increasing awareness of the role of boutiques will change this.

Kuwait is home to the most sophisticated investors, Sillitoe said, and in the UAE Thames River has tended to target banks and family businesses.

A typical investment in one of the firm’s products ranges between $2 million and $10m, although some of the Gulf’s wealth funds have requested a single $250 million investment for a separately managed account.

Sillitoe insists that with 160 employees, 85 of whom are involved with managing money, Thames River is a boutique keen to focus on performance and not asset gathering. Excerpts from the interview:

Why is Thames River Capital present in the Gulf?

I have been in the region for seven years, previously with Mellon. Something that is changing here is the role of boutique managers within institutions in the Middle East. The theme of boutiques is well-accepted in the United States and Europe and these managers have grown considerably.

In the Gulf, investors have been a bit slow on the uptake but luckily that is changing and they can see the benefits of investing with managers who have the bulk of their own wealth invested in the products they manage.

Therefore their interests are more aligned with their investors and they are managing a small amount of money and focused on one or two strategies – not trying to be a jack of all trades. This is quite appealing to investors in the Middle East.

Thames River Capital only established its presence here in the past six months, regulated by the Dubai Financial Services Authority (DFSA).

We have not got an office at the Dubai International Financial Centre (DIFC) because there is no space available for another two years or so. We are operating here and have found an office, but getting one at the DIFC is a bit tricky. This does not have too much of an impact on our business because most of the fund managers are based in London and we are here to raise capital from family offices, sovereign wealth funds and institutions. This is very much a capital-raising operation in Dubai, doing PR, sales and marketing. And all the magicians, as we call them, are in London.

Who are you targeting as a source of capital?

We have some well-known hedge funds and one of them has recently re-opened to new investors, so we have raised a reasonable amount of capital, not so much from the UAE but Kuwait. For us, Kuwait is the most lucrative market, but we have to be based here.

Most of our asset-raising takes place in Kuwait.

In some respects it is a far more developed market, with more institutions and sophisticated family offices with a long history of investing particularly in hedge funds. So we are drawn to those sort of investors.

In the UAE, there are not that many sovereign wealth funds besides Abu Dhabi Investment Authority, so we are looking more at banks and some of the big family offices. We do look at all the markets in the GCC but we have found that it is easier to tap into places like Kuwait and Abu Dhabi with a more sophisticated and developed institutional mind.

Funds such as the Abu Dhabi Investment Authority, Kuwait Investment Authority, Qatar Investment Authority and Dubai International Capital are our clients or prospective clients. Our audience would be sovereign wealth funds, pension funds – of which there are not that many in the UAE – and family offices with specialist investment teams.

How have you been received in the region?

We are targeting institutions with set strategies. We are best known for emerging markets, hedge funds and hedge fund-of-funds and some long-short strategies. It is more a question of cherry picking and from being in the region for a while you get to know which strategies are relevant to which institutions. For us, the lowest hanging fruit is in the hedge-fund. Lots of people are still interested in hedge funds and certain long-short strategies specialising in emerging markets. We have got a reputation in those areas and we are looking at more sophisticated investors who understand these products. We have seen a typical investment for one of our products range between $2m to $10m. We are now bringing a retail product for private banks called Global Boutiques. The fund invests with boutique managers, because we believe the way to make money is to invest in small, more nimble fund managers than larger institutional money managers.

This is aimed at private banks, who will deal with high net-worth individuals.

We also hope to win some separately managed accounts, but they take longer as there is far more due diligence is required.

Our teams here would have to visit the offices a couple of times and kick the tyres and get to know the managers. The managed account business has a much longer time horizon. Whereas the pooled fund business is far easier in some respects, so we are concentrating on pooled funds, but also looking at managed accounts.

What do you currently manage and how do you persuade large investors to choose you?

We are trying to get across to large institutions in the Gulf who are used to big names such as BGI, Fidelity or Schroders, that there is a role for boutique managers. We manage about $14bn, which is quite small in the scheme of things. There are houses out there that manage $500bn and more.

We are trying to educate people here of the benefits of investing in a privately-owned business, which is smaller but quite nimble and performance focused.

Of the $14bn, only around two per cent comes from the Middle East. We have only been doing this for six months. In the past, our business has been more unsolicited, so people just found out about our products from databases. But there was enough business in the past couple of years to convince us to tackle this growing market

Also, given the slowdown in developed markets, you want to be where there is oil – especially with the oil price as it is – so it was logical to come here.

How have some of your funds performed?

We have some funds that are high octane and have achieved returns in excess of 30 per cent a year and others that have done single digits. It depends on the strategy and the type of product, for instance long-short or multi-manager.

We try to offer investors a wide range of products from low to high risk and try to be as transparent as possible. We are also licenced by the Financial Services Authority in the UK, so have to conform to all their rules and regulations.

How do you cope with investments from sovereign wealth funds in the tens of million rather than millions?

We would not be able to handle something as large as say $500m in certain strategies, but we are talking to some sovereign wealth funds who want to give us $250m as a separately managed account. The one drawback with a sovereign wealth fund trying to use a boutique manager like Thames River is that we have a fee structure that brings in performance fee and given the constraints we are not as flexible on the fee negotiation as some of the big money managers.

So in the past we have often had to turn away money from sovereign wealth funds because of the inability to reach agreement on fees, but now that we have a local presence here in time there should be more meeting of minds.

Also, sovereign wealth funds are beginning to realise that if they want a product that delivers consistent alpha then they have to pay for it. The days when they would negotiate and negotiate down to a very low level, which would not make it appetising for someone like us, are fortunately coming to an end.


Nigel Sillitoe
Executive Officer for the Middle East at Thames River Capital
With more than 25 years of experience of working in financial services, Sillitoe has been based in the Middle East since 2001. Previously he headed Mellon’s office in Dubai and was responsible for helping to make Mellon one of the most successful Western asset management companies in the region. He also established Mellon’s first Middle East office in Bahrain in 2001.


The chronology of events

The Global Emerging Markets Fund of Nevsky Capital, an affiliate of Thames River Capital, has offered 37.5 per cent (annualised) returns against its benchmark the MSCI TR Emerging Markets Free Index of 34 per cent.

Managed by Martin Taylor and Nick Barnes, the fund has been consistently ranked first quartile and is placed three out of 100 funds in the sector. The $1.687 billion (Dh5.8bn) fund has been rated AAA by Standard and Poor’s.

Nevsky Capital manages about $4.7bn.

Nevsky Capital team looks to identify, at either stock or country level, pricing inefficiencies created by a clear disparity between market expectations of corporate earnings or macro-economic growth and the teams own expectation of these growth rates.

The team also manages the top performing S&P AAA rated Eastern European Fund and the more recently launched S&P A rated Emerging Asia Fund.

The Eastern European Fund has produced annualised returns of 40.9 per cent over five years to May 30, 2008.


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