Kinetic

Kinetic

Simon Kerr
2

"Here he is – the Third Musketeer!" quips Julian Korek as one of his fellow founding partners enters the conference room. Raymond O'Neill waves a hand and laughs. This kind of badinage is day-to-day stuff in the slick, London Wall offices of the fledgling investment management advisory firm that they founded, together with David Butler, in January 2005.

Butler, meanwhile is in full flow. He has been explaining what's so different about Kinetic's business model and why the three former partners at RSM Robson Rhodes LLP felt they just had to set up in business on their own: "We had a difference of views on the direction to take our business. Our view is – and our model for Kinetic is – to focus just on one industry. We want to have the reach that's necessary to deal with the investment management industry and we want to be based around clients.

"The typical accounting firm model is that you have a range of disciplines, tax and what have you – and they hold great sway within the firm. They'll wrap some marketing material round their services to the hedge fund or oil and gas industry, whatever it happens to be. That's not quite the same thing as saying: 'What are the services that you, the client want to have? We'll develop our services around you.'"

That might sound alarmingly close to marketing speak. Certainly, all three frequently use many of the industry's contemporary buzz words, such as "solutions" and "adding value". But Butler and his partners clearly mean to do just what they say, in a way that would terrify the strategy junkies at the big accounting and consulting firms.

"We will go out and acquire businesses that make sense for our market, whether they be information technology companies or whatever they happen to be," says Butler. "And we will go to locations around the world wherever investment management is occurring to support them.

"We have a tremendous brief and a model that we think stands out from any of the accounting firm models. The three of us collectively have almost 60 years in, or servicing, the investment management business. We reckon we have a fairly good view of what's needed. A lot of our focus – and all of mine – is round the alternatives end of the market, the hedge fund industry in particular."

The validity of that claim, argues Butler, is demonstrated by hard business reality: "How clients were actually served, what they actually got, was just not good enough in many cases."

Butler, Korek and O'Neill take some care to be polite about their former employer. This may be diplomacy, or it may be that they see Robson Rhodes as being slightly lighter on its feet than the big four accounting firms. In any event, it is the big four's business practices that Butler believes present Kinetic with its opportunity: "Whilst I was at Robson Rhodes, we had more hedge fund managers coming in as refugees from the big four firms than we did new managers coming through the door, referred by prime brokers or whatever. That's an illustration of why the big four's model doesn't work."

The three Kinetic founding partners joined forces with the Chiltern Group (described by them as "gentlemen venture capitalists" – although that term would be seen as something of an oxymoron by some in the industry) who could see the superiority of their vision. So several millions were poured into Kinetic. But how much? The Kinetic partners will not reveal the precise figure, but Butler indicates that more than £10m has been committed to the new venture: "We have working capital and acquisition capital that goes comfortably into eight figures."

The new venture's mission is to be a global boutique which will distinguish itself in the marketplace from existing professional advisers in offering "a closely tailored yet comprehensive range of services to its clients. These will include advisory, assurance, taxation, corporate finance, business consulting, corporate recovery and forensic services".

That, of course, does not come cheap. Offices are already being opened in London, Dublin, the Cayman Islands and the Channel Islands. The objective is to expand the network by opening up in other key financial centres across the world.

"Offshore is a growth area," says O'Neill, who specialises in "business advisory, offshore structuring, listing of product, middle- and back-office operations".

O'Neill argues that Kinetic will diversify geographically as the industry it serves becomes more and more global: "Apart from setting up locations in Cayman and Dublin, we're looking at four more – the US, Luxembourg, Dubai and Hong Kong. Obviously, you can't predict the future, but I believe that our practice outside the UK in four to five years' time will probably account for 50 percent of our business."

But just where and how it will grow has to be a matter of considerable speculation: "A hedge fund manager in Italy may be a completely different animal to a hedge fund manager in London," says Butler. "Our business model says that if it makes sense to do it, we will build an office in Italy.

Kinetic's headcount is currently a modest 40. But the company is targeting growth, and has the confidence to go public about where it wants to go: "We expect to have 250 people and turnover of £25m within three years," says Butler.

All three partners talk about the culture of dealing with the clients' needs, of being "client-centric". But they also believe that their unique corporate culture offers them management advantages and positively helps them to build a team of like-minded people. Again, the logic seems to be to look at what the big four accounting firms are doing – then do the opposite: "Our business model is empowering for the team here," says Butler. "The reason why we've been successful in getting so many people on board so quickly is that there are a number of people here who are being entrepreneurial and weren't being fulfilled, stuck in a pigeonhole in a big four firm. We give them more freedom, a sense of adventure, and we give them equity."

Juian Korek agrees: "If you give people proper roles, client-centric roles, I think they're much happier than merely being told they're in this pigeon hole called 'audit' and for the rest of the foreseeable future they will do audit."

"Another illustration is if you look at the sheer numbers of people, the churn of people within the big four," says Butler. "I saw an amazing quote in a newspaper a few months ago. The head of human resources at one of the big four said they just had to find some more people because they had so many people leaving. Why the hell were they leaving? Why were they so unfulfilled in a sausage-machine environment?"

Finding the right people is seen as a vital component in Kinetic's strategy for success. Butler even claims that the personnel search is a bigger priority than new business: "It's harder for me to get wonderfully talented people than it is to get clients. There's not that many of them around. We're not the cheap and cheerful option – we're the quality option."

The core of that quality is of course the trio of founding partners. Butler is perceived in the industry to be a natural business builder. He grew up in New Zealand and was "a good, rugby-playing lad, who stumbled into accountancy, guided by friends and family". Butler then joined the Inland Revenue in New Zealand before being headhunted to join Deloittes, where he moved to London and had financial services clients.

"I learned at the feet of some of the great tax minds of the time," he says. "I went back to New Zealand, but missed London and the investment management industry, so moved back permanently with Ernst & Young, because they had a very strong investment management practice at the time, stronger than the other firms.

"At the beginning of 97 I was sort of thrown in to hedge funds, because it was a new line, and no-one else was doing it. I was looking after the Marshall Waces of this world and so forth."

He joined Robson Rhodes at the end of 2000, where he met the other three Kinetic partners. O'Neill had been there for a year before, and Korek, in his own words, "had been with Robson Rhodes – for a few years". They all laugh at the contrast between the entrepreneurial atmosphere of Kinetic's smart London Wall offices and the decades that Korek spent at a big practice.

Korek's has a background in consulting: "So my key skills include corporate governance, regulation, risk, compliance, operational efficiency,and advice on outsourcing. I have been dealing with these for 20 years across the whole of the investment management industry. We'll be building service offerings around these," says Korek.

Butler, with his formal accounting experience, "spends a lot of time looking at business structures". O'Neill, meanwhile, in addition to his offshore expertise offers general skills in areas such as "corporate advisory. We share most of our clients. By putting together our different skills, we have a great offering – and we don't compete with each other for business or the 'ownership' of a client."

One of Kinetic's first clients, incidentally is Vega Asset Management, which has some $14bn under management, and is one of Europe's largest managers.

So Kinetic has it business model, its backers and a very confident public face. But why? What does the Kinetic team make of the investment management market – and the hedge fund market in particular – that it is so determined to do well in?

"There are a number of issues that confront managers," says Butler. "The traditional houses are moving more into the alternative space, because they believe there's value to be had. We've helped F&C and a number of others in our previous lives to move into that area."

But such industrial change is going to require the Kinetic team to use its skills not just as consultants, but diplomats, according to Butler: "Out of the move to the alternative investment scene comes conflict, friction. One of the first jobs that I did in my Ernst & Young days illustrates that. The traditional investment house had a strong culture. They were looking to set up a hedge fund business, and there was a lot of friction around the teams. Who was going to be on the long-short side of the wall and who wasn't? The remuneration was an issue. The hedge fund team wanted remuneration commensurate with the outside industry, and that was the biggest point of friction of all. It was a very emotive issue."

On top of that there are plain-vanilla, technical issues: "Then there are the firewalls and so on – the issues around operational risk," says Butler. "You have to work with a client to help them deal with that, and you have to get them to consider the structural options they can use. Limited liability partnerships and other structures can be used to achieve the desired result."

Korek sees Kinetic's target market as being "semi-mature". But there are lots of different segments within the market, and they're all at different stages of maturity and need different levels of help and assistance.

"The traditional market is moving in and replicating some of the processes adopted by the early settlers of the hedge fund world. They've got their own incubators, for example, and are often more flexible than they used to be on remuneration. The move to alternative investment is driven partly by talent and not wishing to lose it, and partly by pressure that's remunerationorientated. And also there's pressure to provide these products – they are being demanded not only by institutions but also the wider retail clients."

A further source of future business, according to the team is "family offices looking to take third-party money under management. They have systems and processes that won't stand up to any serious scrutiny by an institutional investor. They're coming to us and asking us to overhaul them."

Butler sees growth for Kinetic as a service provider as hedge fund managers' businesses mature and then need to change to move with the times: "You've got a lot of successful hedge fund managers who've got to a size where they might want to do something with the business. They might want to expand the platforms, they may want to take on institutional money; they may want to scrub up the business tosell it. In all of those scenarios they need someone to say what the issues are and identify the process, the controls and the measures, that have to be put in place. Some hedge fund managers have got a bit behind. They've been closed to new business for years, and the world is changing."

Kinetic believes it is positioned to offer services even to those who make a conscious decision that they will not move with the times, and revamp governance and accounting practices: "It's not for everybody," says Butler. "There will be successful managers with a billion under there belt, and they won't have anything to do with it. They may want to shut the shop, sell up and go away. What we do for those guys is basically sort out their taxes."

Another symptom of a maturing market is the search for a wider client base. O'Neill argues that the trend to market hedge funds to individuals will definitely continue, and that – providing the fund is well managed and the investor understands the nature of the risk – retail marketing of hedge funds is a good thing: "There'll always be some who look to get into a portion of the market – and are looking to diversify."

Korek agrees, and adds that "one could argue that with pension funds piling in, alternative investments are tapped into the retail market anyway."

Butler has a concern about the drive to retail, but this is based on industrial rather than regulatory factors: "There are quality issues," he says. "If you look across the spectrum and ask where the quality managers are, and whether they are interested in the retail market, the answer in large part is no. As the retail market opens a number of organisations will see that as an opportunity to sell product. The quality of that product will be good – in patches."

The sense of dynamism and drive in the still largely empty London Wall offices is palpable. One imagines that the three partners have their disagreements, as any collective of hard-working entrepreneurs must. But Korek, when asked for his vision of the future and Kinetic's place in it is ebullient to the point of optimism: "First of all, we see the investment management industry becoming more important going forward. The dynamics of pensions, of self-provision, and investments for individuals will drive that. It's being driven not just in the UK, but globally."

"Secondly, people are looking for a global service, across jurisdictions. We see it as an attractive industry to be in for anybody coming from a client-centric perspective, and we will be truly different in the way that we treat and work with our clients to deliver value."