In an area historically dominated by behemoths such as Blackstone, KKR, and Oaktree Capital Management, the Alternative Asset Management industry is in the midst of a diametric shift. Major institutional investors like sovereign wealth funds and pensions are steadily pouring seed capital into emerging managers running specialty strategies.
For example, the Employee Retirement System of Texas and Pacific Alternative Asset Management Company have launched PAAMCO Launchpad, a $3 billion joint venture expressly focused on seeding emerging hedge funds. This transformation comes at a time of underperformance from larger funds, compelling investors to bypass high management and incentive fees in favor of cost-efficient, niche vehicles.
Alchemy Capital Group, a first loss capital allocation firm, launched in 2017 to capitalize on the trend of seeding emerging managers. Lipnick was recognized as the “Ernst & Young Entrepreneur of the Year” in 2002 and founded Alchemy to provide a platform for early-stage funds seeking out non-correlated investment opportunities.
As a first-loss allocator—Alchemy requires the investment manager or investor with Alchemy to contribute a certain percentage (usually 10%) of capital to the firm. In the instance of loss, the capital posted by the first loss provider is used to cover the losses, thus the term “first loss.” Alchemy also arranges for the remaining 90% of capital.
SumZero had the opportunity to sit down with Bruce Lipnick, the founder and CEO of Alchemy Capital Group to discuss Alchemy, his career, what he looks for in managers, and the state of the economy.
Matt Alviti, SumZero: To begin, I want to thank you for taking the time to chat with us. Bruce, you have established yourself as a pioneer in seeding alternative asset managers. How did you get your start within the field?
Bruce Lipnick, Alchemy: Well it all began in 1996 after I noticed there was very little opportunity for small fund managers to gain access to capital and exposure to investors. At the time I was the Chairman & CEO of an RIA that managed institutional capital in alternative investments. In the mid to late 90s, everyone wanted to place money with the more “sexy,” larger investment firms. I recognized that smaller, emerging managers also needed a spot at the table as they had a lot of upside to offer investors and provided better alpha than larger managers (based on multiple studies). I saw an opportunity to fill the gap and help these guys gain access to capital.
As a result, I approached one of my clients at the time, a major insurance broker listed on the NYSE, to share my insight. After conversing with our insurance client, we decided that the industry needed to start serving this unmet need and Asset Alliance was born. Asset Alliance became one of the first hedge fund seeding platforms to offer assistance to boutique managers in earning access to a larger pool of capital. After we launched Asset Alliance, other investment firms (over 30) followed suit, and they too started their own hedge fund seeding platforms.
MA: Can you tell us about Asset Alliance and the growth trajectory you oversaw there?
BL: Asset Alliance was funded with a bank line of credit and investor capital. Over Alliance’s 15+ years in operation, we seeded and purchased 18 funds, raising over $7 Billion with our managers and generated over $400 Million in distributions. IRR on the portfolio was 29%+. We were also responsible for founding the first 40 Act Mutual Fund—funded in 2002 with $10 Million, and grew to $1.6 Billion. In 2008, we sold it to Hatteras.
MA: Very shortly after shutting down Asset Alliance, you founded Alchemy Capital Group. What opportunity did you see in the markets that led you to launch Alchemy? What is Alchemy’s investment strategy and what exactly are you looking for in a manager?
BL: Again, like in the 90s, the reason we launched Alchemy Capital Group was because we were approached by capital allocators looking to take advantage of our track record, expertise, and network. As all things cycle, we identified another deviation from investing with the mega hedge funds to giving money to more granular emerging managers, that produce greater alpha and have more niche strategies. Ultimately, we like to invest in low drawdown managers—managers who typically do not lose money in an overall market decline.
Given our prior returns and success with Alliance Asset, we viewed this as another chance to create a platform to connect investors looking for smaller managers who have to be more careful with their capital allocation.
Alchemy is a specialty fund focusing on smaller, unique, non-correlated firms. We believe that these smaller managers have the ability to produce better returns due to their capacity constraints, the fact that they are less correlated to the overall market, and they use more niche strategies, and reduced market competition.
MA: What does Alchemy’s portfolio of funds look like today?
BL: Alchemy has three managers it is presently working with. Our first manager, Alagna Advisers, focuses on the syndicate “new issue” marketplace, leveraging the relationships of former trading desk managers. It trades in 10 different markets worldwide and we believe this is a great opportunity for family offices and small institutions as they have outstanding returns and have very little competition but are capital constrained.
Our second manager, MountainTop Capital Management, is a credit focused manager who has never experienced a loan default or had a negative month in 7 years.
Our third manager, Manole Capital, is a long/short fund which offers investors liquidity and transparency in the fintech space which has traditionally offered neither.
These ventures are funded through both traditional and First Loss programs. Alchemy is currently in discussions with several potential JV partners (family offices and institutional investors) and we welcome any inquiries from your Cap Intro investors as we again have a new way to enhance first loss programs.
MA: Can you elaborate on Alchemy’s process of due diligence when investing in a new fund and the ways in which your team sources deals?
BL: People come to me all the time asking me to look at their managers, but I like to be very selective as not all managers fit our profile. Hence why we are currently invested in only three managers. We use multiple avenues to source managers from referrals, and our long-standing network of firms and investors.
We look for experienced teams, clean background checks, and strategies that are unique and can do well in most markets, including down markets (reminder- we are in our 11th year of a bull market). The key is to look for guys who have a great track-record with minimal losses during recessionary times and market shocks.
MA: In your opinion, where is the state of the market going? Will the next recession be more financial in scope or societal/political a la Ray Dalio? Do you think socialism/democratic socialism has a shot in America?
BL: Everything cycles and of course, there will be another recession on the horizon. The exact timing? I am unsure. It is increasingly difficult to predict as the Federal Reserve and Central Banks try to prevent recessions with easing and tightening of credit (usually at the wrong time). Frankly, I totally agree with Ray Dalio—most major countries collapse when the diversion between the wealthy and the poor widens.
We already have some socialist characteristics within our governments (federal, state, and city) by giving very profitable (capitalistic) companies tax abatements, credits, and incentives to move to different cities or states. The way I see it is that there are too many controls/prevention. When governments attempt to control markets, that is when we face major problems.
Please reach out to firstname.lastname@example.org for a warm introduction to the Alchemy team or if interested in listing your fund.