First We Take Manhattan…

NewSmith Capital Partners unveils US ambitions

Stuart Fieldhouse

The appointment of Jun Miyazaki as Chief Executive of NewSmith Capital Partners' Japanese subsidiary is a major coup for the $5bn London-based investment and advisory firm that was set up only three years ago. Miyazaki was formerly the CEO of Gartmore Investment Japan Limited, and credited with helping Gartmore achieve considerable penetration of the Japanese institutional marketplace, to the envy of many of its competitors. Miyazaki is one of the most respected names in hedge funds marketing in Japan, and has worked in the Japanese investment industry since 1975, including a two year stint on the board of the Tokyo Stock Exchange.

The Tokyo office was the fourth NewSmith office to open its doors, with other operations in Hong Kong and Singapore already up and running previously. NewSmith itself was set up in 2003, its asset management unit initially concentrating on UK equity, global macro and private equity, soon adding European credit, and Asian equities. Taking the latter specialisation into consideration, it comes as no surprise that the firm should open three offices in Asia. Not only that, but following Miyazaki's appointment, its Japanese company has shifted from being a specialist marketing operation to also managing money, with the appointments of Shusaku Saito as Partner and CIO of NewSmith Japan, and Atsushi Sakaji and Shirane Sasanuki as Partners and Senior Fund Managers. All three joined NewSmith this month from Sphere Investment and are expected to be providing advisory services in Japanese equities to NewSmith clients in December.

The next great frontier

For many successful hedge fund firms that make it in Europe, the US often beckons as the next great frontier, laden as it is with sophisticated investors already familiar with the concepts of hedge fund investing. Yet NewSmith originally turned its sights eastwards, where the Asian hedge fund sector has been booming for a couple of years.

NewSmith's founders worked together at Merrill Lynch Investment Managers, and represent between them the sort of depth in terms of experience and industry knowledge that has helped the firm to grow so quickly. Taking Michael Marks, Chairman of NewSmith Capital Partners as an example: Marks has 40 years of experience in the securities and banking industry, and was Executive Chairman of MLIM's EMEA operation before joining NewSmith. His co-founders have similarly lengthy track records. Paul Roy, Chairman of NewSmith Financial Solutions, has been in the business for over 30 years, and was co-president of the Global Markets & Investment Banking division at Merrill. Steven Zimmerman, ex-COO at MLIM, is also in his fourth decade in the industry, and now chairs NewSmith Asset Management; and Check Low, who heads up NewSmith Capital Partners in Asia, and has been on the sharp end of the firm's expansion in that region, can look back on over 20 years in the Asia Pacific investment industry, including latterly as Chairman of Merrill Lynch Asia Pacific.

It is not a bad team to be founding a fund management firm with. At the end of March this year the firm had over $5bn under management, 47 partners, and 16 employees. Separately, NewSmith Capital Partners has also built up NewSmith Financial Solutions into an independent, debt-focused adviser to institutional and corporate clients, specialising in structured, non-vanilla finance, predominantly in CDO work-outs and event-driven structured finance. Having achieved all this, including the launch of separate hedge funds and segregated equity mandates for pension fund clients, the time had finally come to consider the other great investment frontier for a fast growing European investment management and advisory business.

To this end NewSmith opened its New York office at 717 Fifth Avenue in Manhattan in September. This coincided with the appointments of Jefferson Hughes and Suzanne Crosby as new US partners in the business. Hughes comes with a pedigree familiar to those who know NewSmith, namely over three decades of industry experience, all of it with Merrill Lynch, which he joined in 1972. Hughes heads up the new office, and is an excellent choice, as he was previously Head of Global Relationship Management at Merrill Lynch, as well as chairing the Global Markets & Investment Banking business in Latin America and Canada. Crosby will be taking on marketing responsibilities for NewSmith strategies to institutional clients in North America, and is also well-chosen for this role, having been head of the Endowment & Foundation Practice for Merrill Lynch Global Markets and Investment Banking. She will also be marketing NewSmith Financial Solutions in North America.

Colorado conference

Even as the new office in New York was being set up, Crosby was on the road, meeting major US institutional investors at a conference NewSmith co-hosted with the University of Colorado. Investors with control over approximately $26bn in assets, including 20 CIOs attended the conference. The smallest investor present had responsibility for $250m, and the average allocation to hedge funds was 16%, amazingly high compared with the relatively small allocations being made in most European countries, despite the undeniable interest. This compares with an estimated average allocation of 10% to private equity amongst those investors Crosby met in Colorado.

"Hedge funds are still new for endowments," she says. "Their allocation models have admittedly been boosted over the last few years, and people are putting less around the long-only manager/consultant-driven model we've been used to. We're seeing more investment professionals working inside endowments – a lot of these guys are coming from the investment banks."

Crosby says the investors she is meeting are on the look-out for what she describes as "diversifying strategies", and that there remains a high degree of caution around not just hedge funds, but all alternative investments amongst investors in the endowment space. Yet by contrast with the European industry, the non-profit community in North America is still far more adventurous in the alternatives space. This can partly be attributed to the regulatory situation in Europe, where, by contrast, property seems to be the only widely-accepted alternative asset class for charitable organisations, even though their long-term investment horizons would suit higher exposure to private equity.

In the USA, Crosby sees the asset base of non-profit organisations taking off: "This has bred the hedge fund world," she says. Despite the caution, 16% average allocations still represent major injections of capital. Private universities have been among the more aggressive investors, but now public universities are beginning to invest as well, and Crosby does not see an immediate waning of interest in hedge funds on the part of the sector anytime soon.

As for NewSmith, with Crosby and Hughes in place in North America, the firm can start to boast of a truly global set up which draws heavily on the skills of seasoned Merrill Lynch personnel across a wide range of areas of expertise, and is the kind of mature operation that can attract serious hedge fund investment from the get-go.

There are no plans afoot in the immediate future to launch a US investment advisory capability, as has happened in Japan in recent weeks, but Paul Roy is not ruling it out. "We're not building a large organisation there," he says. "If we found the talent on the asset management side, however, we might look at recruiting."