RAB Capital

An up to date look

Simon Kerr

The September 2004 launch edition of The Hedge Fund Journal included a profile of RAB Capital. At the time RAB was noteworthy in Europe for being the only large hedge fund group with a stock market quote (aside from Man Group plc, a business which began life as a sugar trader).

The timing of the research for the article was unfortunate – the share price was at a low since the introduction to the stock market (see share price chart, right), and fund performance in 2004 to that point was mixed (see column showing first half performance ie to June 2004 in Table 1). Compounding the sense of being on the back foot was the tragic loss of Robin Cosgrove, manager of the newly-launched Japan hedge fund, killed in an Alpine accident.


Recent results of the AIM-listed money management firm for 2004 showed that RAB did not remain still for long. RAB reported a 65% rise in profit before tax to £17.5 million on a 56% increase in turnover to £36.2 million for the year. Earnings per share rose 42% to 3.47p and the full year dividend is being doubled to 0.5p. The business has benefited from the strong performance of its funds inthe second half of the year (see Table 1 opposite) and the development of new investment strategies. This was all reflected in a 72% rise in assets under management during the year to $1.75 billion (£910 million). During 2004 the group saw a 53% rise in management fees to £10.1 million and a 58% rise in performance fees to £25.6 million.

Not that every element of the business-mix contributed as well as expected: there were some disappointments last year. The semi-hedged UCITS products have yet to gather significant assets, and it would not be a surprise to see RAB take further distribution initiatives to improve the profile of these funds and the reach of the marketing.

 

 

A more significant failure resulted from the negative returns in 2004 from the Global Macro fund. The returns used to be just dull: to the end of the banner year for the fund (2003 return of up 13%) the fund had given investors 26.8% in total since inception (over three and a half years). The returns in 2004 from the Global Macro fund were worse than dull (down 20.2%), and the natural consequence for losing hedge funds is redemptions. They duly followed and the RAB Global Macro Fund is being wound down.

Perversely almost, the demise of the Global Macro fund has demonstrated a strength of the RAB Capital business model. "We want to build a business that will not be harmed by the failure of one fund," says Chief Executive Philip Richards, "and last year we experienced that. We will continue to look to add funds that have uncorrelated strategies to those we currently have, as we seek to diversify the sources of fees," he added. The firm is also building infrastructure as well as investment capabilities. Whilst the number of managers at the firm has now reached 20 professionals, the total number of staff has doubled in a year to 75.

In 2004 RAB's diversification strategy was implemented with the launch of RAB Emerging Europe, RAB Japan and RAB Energy. The RAB Emerging Europe Fund was launched in December 2004 so had little chance to contribute meaningfully in 2004. The Japan fund has had a shadow over it, from the demise of its' founding co-manager, and allowance should be made for the affect of that loss on the co-manager of the fund. The Japan Fund has recently returned its first positive month since launch.

The RAB Energy Fund was launched on the 8th of June 2004. Gavin Wilson, the manager, was ten years at Canaccord, and was Managing Partner of the Oil & Gas Division. He was an Extel rated analyst in oil and emerging markets at different times (the latter because of Russia). His background also includes being a portfolio manager in private banking for Chase, and Wilson has headed derivative operations for brokerages in Australia. The entrepreneurial Wilson has made the most of his great contact list and the good deal flow in his sector – the US$ class of RAB Energy shares were up 75% since launch to the end of February 2005. Because of the limited liquidity of many of the issues held in the fund, and ownership of pre-IPO companies it was envisaged that the Energy Fund would be limited to $100m of assets for a year. As it has turned out, liquidity has not been a problem as yet, and the fund contained $285m of capital at the start of March this year. The RAB Energy Fund was awarded New Fund of the Year for 2004 at the recent EuroHedge Awards, despite having traded for only (a short) seven months.

Gavin Wilson was a broker to Philip Richards before he joined RAB Capital, and Richards had used his energy ideas within the RAB Special Situations Fund. Having joined the firm his influence has grown. Richards was comfortable investing in the energy sector anyway, and RAB Special Situations Fund has had over 20% in energy this year, including the two largest individual positions. Indeed there are some similarities in the early-stage financing done by Wilson and Richard's for their funds – for example, RAB Special Situations was a catalyst in floating Asia Energy after taking a private equity stake in the company, and even now has a 15.8 per cent stake in it.
 

 

The Gavin Wilson/Philip Richards' influences can also be seen in other RAB funds. The RAB Energy Fund has First Calgary Petroleum as one of its' largest holdings. RAB American Opportunities Fund has a 27% net long exposure to the energy sector, and the largest holding in the Fund is First Calgary Petroleum. The RAB Europe Fund's largest sector exposure is also energy with a net long position of nearly 15%.

The RAB Special Situations Fund was the New Fund of the Year for 2003, and the initial success of the fund has been built-on with more of the same. The Fund has 100% of the equity exposed to long mining positions, plus a further 40% invested long, half of which is in energy. The investment approach, as described in the September issue of The Hedge Fund Journal, is a cross between VC and PE. Like private equity the size of commitments is significant for the company being funded and for the portfolio of RAB, and the capital is expected to be in place for a period measured in years. Like venture capital, there is a sizeable risk element with a portfolio effect anticipated: there will be absolute failures, and there will be ten-baggers. "We're looking for opportunities to help companies that can grow to significant scale in 3-5 years," says Philip Richards.

That this activity can be seen as specialised corporate finance is illustrated by the creation of Falkland Oil & Gas. This company is a joint venture between Falkland Islands Holdings, Global Petroleum of Australia and RAB Capital, which holds 30%. The company was formed to follow up on seismic data, gleaned in recent years, to prove the potential of the eight or nine possible offshore target fields that may contain somewhere between 2.5m to 200m barrels of oil.

RAB Capital has put itself into the position of the mining finance houses of old, or something akin to the merchant adventurers that made merchant banks their money before Big Bang. Working with energy-focused brokers and other industry specialists RAB works to finance mines and oil-bearing structures and point the related companies towards flotation. Mine industry websites carry RAB's name; RAB sees all the proposals for finance that are out there from small, independent companies; and RAB can now cherry pick from prospects and be a major influence in deal pricing and format. A good example of being in the flow of mine financing activity is the holding RAB acquired in Oxus Gold plc, the UK gold mining group with interests in Central Asia. RAB held 17.2% of the issued capital of Australian miner Eurogold Limited, and 12.7m shares of Oxus. RAB sold its' Eurogold shares to Oxus for a consideration of 5 million new Oxus shares. RAB consequently held 18.7m shares in Oxus Gold (7.1% of the enlarged capital), and had been instrumental in putting together the two companies to "develop [their] association" as the CEO of Oxus Gold put it.

This intense deal-making and information flow does not arise by happenstance. Philip Richards makes use of three mining consulting firms and keeps three in-house lawyers fully occupied. The non-contractual networking resources are equally useful, as individual mine prospects are discussed with senior management from companies other than those directly involved. Management of these investments is intensive and non-systematic. There are no short cuts. As a consequence Richards has had to change the balance of his commitments at RAB Capital.
 

One of the changes at RAB Capital since last summer has been that Philip Richards decided to concentrate his investment management time on RAB Special Situations Fund. "We have recruited a very talented and experienced fund manager to be the lead manager on the RAB Europe Fund," says Richards. That manager is James Elliot, a nine-year veteran of JP Morgan Fleming (JPMF), who was head of European retail funds at JPMF's European Equity Group. Elliot was co-manager of five JPMF funds in total, including a number of JPMF's flagship retail offerings, such as, the highly successful UK Dynamic and the £650m Premier Equity Growth funds. The characteristic JPMF style profile – growth and value combined with positive news flow and price momentum – is close to that employed to date on the RAB Europe Fund, albeit long-only. Amongst his mandates Elliot had the latitude to construct the portfolio of the more aggressive funds without the aid of the optimisation process used in other JPMF funds, and he was noted for being unafraid of high turnover. These experiences will serve him well in running RAB Europe Fund with the experienced help of Cherie Sadeque.

Elliot will not be the last fund manager added to the RAB Capital team this year. It is possible that RAB may launch half a dozen new funds this year, but there should be at least three, according to Philip Richards. The firm has the resources to enact its plans with £16.7 million cash at the year-end and investments valued in the market at about £27.3 million. Not that it is necessary to bring in new managers for additional capacity. "We're running over $2bn now," says Richards, "and we have the capacity to run double that with the existing funds."

RAB and Soros

The owner/managers of RAB, principally Michael Alen-Buckley and Philip Richards, have followed a precedent set by George Soros. One of the more astute decisions of The Palindrome was to invest his fees in his own fund, thus increasing his ownership, and compounding his returns. The Preliminary Statement of Results of RAB Capital for 2004 includes a balance sheet showing investments up from £2.4 at December 2003 to £18.2m at book cost. The majority of this commitment is in RAB's own funds and are thought to be partly the seed capital for new funds. So the majority of the $12m capital in the RAB Emerging Europe Fund that was launched on 16th December 2004 was possibly from the management company and the Strancally fund of internal-only hedge funds. For those that have reservations about the wisdom of this self-investment there are two responses. First there is strong evidence from academic analysis of hedge fund returns that immature hedge funds give higher absolute returns. Secondly and specifically for RAB, the returns from some of the recent launches have been outstanding enough to be EuroHedge Award winners in 2003 (RAB Special Situations) and 2004 (RAB Energy). The proof of this particular pudding is a book value for investments of £18.2m and a market value of £27.3m at the recent year end, up respectively from £2.4m and £8.9m at the end of 2003.