Mountains in Clouds


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Hall Road Investments #53 (Family Office Sherpa, Index & ESG)

The Sherpa Update

GL vs IBOR – We often get asked by clients to look at the investment software (Investment Book of Record) that sits alongside the incumbent accounting software (General Ledger). Most family offices are moving to Xero if they are low on complexity or Oracle NetSuite if they have a significant operating business. This is great because with the advent of APIs a lot of the good accounting packages will integrate with the investment reporting.

This article from Knowledger gets to the issue that some face – should the GL and IBOR be part of the same system? I can understand why and there are a few firms that are getting there in terms of functionality (Eton Solutions etc) but this misses the point for some. Often, there is a need to keep them parallel as each team requires different detail and are governed by different expectations – tax vs performance.

General Advice – as a firm that provides general wholesale advice, it was interesting to read the ASIC report into why they had decided not to change the label. Turns out, general advice as a term means nothing to people that don’t understand the definition.

Antler Capital – I met with Antler in Perth which was very interesting. They have a global follow-on fund that already has the pro rata rights to deals so sits a bit differently to most VC funds as it taps directly into their early-stage funding program. Family offices are big supporters as well as large instos that would not normally invest in early-stage companies. It’s a ten-year fund that pays out as they exit the companies. It’s a called structure over a 5-year period (around 20% a year) and targets 30%+ IRR.

A few things really resonated in the meeting – the need for access to deal flow and the types of companies that are staying private these days. Antler is attempting to capture that deal flow from incubation and angel investment which is novel and increases the information advantage. The data they are collecting would also be helpful for those looking to gain an edge in determining where the successful companies are coming from.

I learnt a lot about their early stage investing program from this podcast.

Access – some clients have multiple broking accounts with the reason most cited being access to IPOs or favourable allocations to new offerings such as hybrids or corporate bonds. I’m not sure I buy this most of the time and the fact that there is a corporate fee that can cloud some brokers pitch provides me with pause. Morgan Stanley is the latest to cop it in the press for recent floats – if you were lucky enough to be on their preferred client list and received allocations to some of their recent IPOs, access may not be a great thing. As mentioned above, it seems that the best opportunities may be in companies that choose not to list or do so when the valuations are most stretched.

Sayers – keeps on hiring, this time they’ve landed ex Westpac boss Brian Hartzer as part of their consulting offering. Apparently, he was contracting to them anyway so makes sense to become full time.

Vanguard – I’m hearing a lot of ads for their direct to investor services on the radio. They are now targeting adviser’s clients.

Pendal – taking advantage of the strong AUD and the return to value as a factor, Pendal has followed Perpetual in purchasing a US fund manager. With Nick Good running the show now, it makes sense that Pendal is looking to expand alongside it’s already strong branded JO Hambro where Good was the previous CEO and still resides in Boston.

Pictetthis article in Bloomberg provided some insights into how the most white-gloved of the Swiss private banks is coming to terms with a changing landscape and a growing desire to tackle Asian clients. One thing that comes through in the article is the new breed of managers may bring in a more accountable and numbers driven business, but its still the people and relationships that make staff and clients stay for the long run. As someone that managed a business unit for a large US bank, I can attest that the tedium of numbers only strategy wears thin.

Spears – similar to Barron’s Top 100 list for HNW advisers, Spears has published their rankings of Best Family Office Service Providers in the UK. I had a dig into the firms (Pall Mall, Stonehage Fleming etc) and the main asset of these seems to be that they “reduce complexity” for families. An example from one of the top 10 was that they had introduced an encrypted cloud-based document storage system.

So, not a hard thing to provide (Citrix, Masttro Vault etc) but an important piece in the digital experience for clients and an indication of how complexity shouldn’t be confused with sophistication.

I had way too much fun trawling through all the names on the list as there were firms that I hadn’t heard of and were very successful despite being only a few years old.

Private Equity - Bain & Company has released their 2021 Private Equity report (all 76 pages) and it has some interesting data points in relation to expectation for 2021. As mentioned previously, the amount of dollars chasing deals is rising as investors pump more money into alts. "Total investment value last year was supported by ever-larger deals, not more deals. This fact is important because it means many GPs did not get the deals done that they had intended to in 2020. With soaring levels of dry powder, robust credit markets and recovering economies, 2021 deal markets promise to be incredibly busy." The report covers Direct Lending, ESG in PE, SPACs and they have a go at picking the next evolution of this space and the fate of the "classic" buyout fund

Meetings & Presentations – Illio (HK), Van Eck (EM Bonds), BlackRock (ESG), Mine Digital (Grant Colthup), Antler (VC), Generation Life (Tax Optimisation), Gresham (Tenke).

ETFs & Indexing

Bitcoin ETFs – Van Eck and Betashares have both applied to launch a Bitcoin ETF. These two firms make sense, Van Eck already has US form in this space (and is seeking to launch an Ether fund) and Betashares launches a new product every month. I am interested in the underlying constituents - are they going to be the futures contracts or actual Bitcoin? I also have concerns of the ability of the market makers to hedge out their risk – remember this asset trades over weekends and we saw some of the biggest moves on a Sunday. I wouldn’t want to be holding unhedged inventory going into a Friday close.

ESG & Philanthropy

Evergreen – have built an ESG index and are now selling a fund of fund product that matches their criteria. They have partnered with Generation Life to build a tax effective portfolio using 21 (!) different underlying from 18 managers. Gen Life is the old Auststock Life.

Evergreen has set a target of RBA +3.5% and will employ a dynamic asset allocation model. No mention of who is providing the DAA but they would require around RBA +5.5% pre-tax. According to their factsheet they have a long-term allocation of 75% to growth assets.

Cheap and AverageA great Bloomberg piece on why ESG overlays rarely move the dial. The high correlation to the main benchmarks makes most ESG index plays pointless. The article rightly points out that the reasons most opt for ESG investing – reduce the cost of capital for those companies you believe should thrive and there is a long-term investment benefit for this type of business model. Moving the weight of Apple in your portfolio from 3.5% to 4% is hardly going to achieve this.

High tracking error is the key and direct indexing is being used more and more for this purpose.

As always, if you want daily updates on what I’m looking at, start following the Hall Road LinkedIn page here.



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