Timing is everything in business. Some may have quietly thought Jacob Walthour was insane to start an alternative multi-manager investment firm in 2015, with the FoHF industry continuing to lose assets year on year.

To the critics’ chagrin, Walthour’s move was well-timed from a technological and market perspective, as investor interest in emerging managers and managed accounts has been ticking up.

He founded Blueprint Capital Advisors with the architecture in place for an investor-friendly fund structure suitable for customisation and by 2017, aimed to grow AuM to $1bn, a target that has been hit.

Blueprint managed roughly $1.3bn as of 31 August, of which discretionary assets accounted for $350m.

According to Walthour, the hedge fund industry is undergoing a growth phase when it comes to managed accounts.

Between January 2015 and June 2018, managed account platform assets increased by $48bn, or 63%, from $76bn at the beginning of 2015 to $123.6bn as of 30 June 2018, according to HFM InvestHedge research.

Credit Suisse revealed earlier this year that managed accounts made up 48% of all inflows into non-traditional structures.

“We see a sustained 10 to 15-year period where managed accounts will be valuable as a structure for alternative investments,” he says, adding that the structure has already been adopted in the real estate and the traditional investment spaces.

Rather than following the road map of their larger multi-billion-dollar peers, Blueprint’s goal is to focus on small, nimble and niche managers under-represented in most institutional investor portfolios.

It remains a difficult fundraising environment, particularly for newly launched managers, which is always good for investors looking to negotiate structures and terms, according to Walthour. He adds that emerging managers are also coming around to the idea of using managed accounts.

“We are making progress in terms of the ‘missionary work’ we do,” Walthour says. “Now only 40% of our client calls are focused on educating the investor, rather than 80% early on.”

Sketching the background
Walthour is well known in the hedge fund industry. Prior to founding Blueprint, he was vice-chairman of product and business development at Cowen & Co, where he was responsible for developing the firm’s seeding and acceleration effort for emerging alternative investment organisations.

He has held senior roles at Moore Capital, Quellos, Morgan Stanley Asset Management and Citadel and has also worked at consulting firms Cliffwater and Aksia.

Joining Walthour on the investment team are experienced institutional allocators, including Carrie Pickett and Ed Robertiello, both managing principals and members of the firm’s management committee.

Pickett worked at Cowen & Co with Walthour prior to co-founding Blueprint. She was a managing director at Ramius, the firm’s investment division, where she helped establish the firm’s emerging manager seeding and acceleration effort in 2014 and focused on manager sourcing across the liquid and private alternatives space, negotiating and structuring the revenue share transactions.

CIO Robertiello was most recently a senior portfolio manager at CalPers, responsible for absolute return and multi-asset class strategies. He handled the implementation and management of the investment strategy and policy for the pension’s $6bn hedge fund portfolio. Staffers decided to exit the hedge fund space in 2014 because of their perceived cost and complexity.

He has also worked at the RJR Nabisco pension plan, Russell Investments, Blackstone and Credit Suisse.

“Everyone at the firm has more than 24 years’ experience,” says Walthour. “We don’t get turned on by good numbers. Performance gets our attention, but we have all found funds that have good numbers and we wouldn’t invest because we don’t trust the people or the process.”

More recently, Blueprint has hired John Trammell in a senior capacity to oversee the company’s business operations, align resources with the strategic and tactical initiatives of the company and manage execution of the company’s core business functions.

He previously served as CEO of Cadogan Management and Cantor Fitzgerald Investment Advisors.

Institutional backing
Core to Blueprint’s ethos is to focus on managers who are open-minded about fees. The multi-manager firm looks to pay a 1% management fee and a 10% incentive fee to the hedge funds it invests with, over a 2% to 3% hurdle rate.

When the Blueprint team drew up its plans and began building the business, they found a US public pension fund who embraced their model.

The $77bn New Jersey Division of Investment (NJ DoI) agreed to be their first major public investor, in exchange for a 10% revenue share, and Blueprint’s research on fees became the foundation of New Jersey’s FAIR program, which pays managers 1/10.

The NJ DoI approved a $300m commitment to the firm in January 2017, although as of 30 June that capital had not been deployed, due to personnel turnover at the allocator, which has seen its CIO, head of alternatives and head of credit depart over the last 18 months.

The deal required a separate legal agreement with Blueprint, restricting the percentage of overall AuM that the pension fund could represent to 20%.

In 2016, New Jersey halved its hedge fund portfolio and eliminated equity hedge funds, due to their low performance relative to fees paid and the high beta found within many strategies.

Blueprint’s solution to concerns such as New Jersey’s was to structure bespoke relationships in managed accounts with smaller and mid-sized managers, with a goal of negotiating lower fees. Any fees savings made which are attributable to Blueprint’s efforts are termed “structural alpha” by Walthour.

The fees charged to clients by Blueprint were kept low for New Jersey, with public documents revealing a blended management fee of 0.3% with no performance fees. New Jersey’s revenue share is 10% of Blueprint’s adjusted gross revenues in perpetuity in exchange for being an early investor with the firm.

Blueprint aims to negotiate investor-friendly terms with its managers, using the large asset base of clients such as the NJ DoI as leverage with managers seeking to accelerate their growth.

Walthour and Pickett spent a good deal of time marketing to other US public pension plans and Walthour said at the time of the New Jersey allocation that they wanted to help pensions reduce their alternative investment fees by 40% to 50%.

Another early investor was the $2.8bn Chicago Policemen’s Annuity and Benefit Fund, which selected Blueprint in 2017 to allocate $28m between four specialist credit and yield-bearing managers, funded from the pension’s core fixed income portfolio.

The offering
Blueprint’s target manager group is those managing between $250m and $1.3bn, either in liquid alternatives, such as long/short equity, all the way to the less liquid opportunistic spectrum, such as direct lending.

So far 11 managers have agreed to work with Blueprint and there have been approved investments in seven, including a European direct lender. The firm has also explored opportunities to invest in Latin American and Asian managers.

Blueprint has started developing multiple offerings. It has a legacy platform, which works with managers that have been in business for several years. As well as appealing to US public pension funds, it is designed to provide institutional manager selection to the RIA community, Walthour says.

It is not about revenue share, he adds, but simply providing access to the most talented managers across differing categories.

Blueprint CAP I includes six underlying strategies: insurance-linked securities, healthcare royalties; litigation finance; franchise lending, short-duration direct lending and real estate bridge loans.

The firm is also developing a discovery platform, which will allow small managers to put in place a commingled fund structure at the fraction of the cost, with access to prime brokers and high-quality administrators provided by Blueprint.

“We are trying to get some of these small emerging managers a more economical way of entering the business and getting rid of the distractions to the running of the money,” Walthour says.

Currently the cost of launching a commingled fund is $400,000 on the low end and as much as $800,000 if using big-name firms, he estimates. Those figures exclude personnel costs. Blueprint’s goal is to get costs down to $100,000.

A third segment is Blueprint’s advisory business, which is driven by investors that have commingled funds but who are looking to structure better deals through managed accounts, while another product that is in its early stages of development will have a social impact emphasis.

That offering will implement the ideals of impact investing on a customised basis for institutions. Investing in strategies such as credit, investors could find a manager providing loans in situations where there would be a greater impact than if the investment was done through purchasing equity, for instance.

The social impact piece is about the three Ps – people, planet and profit, Walthour says. Investment strategies could include healthcare investing, affordable housing and resource conservation. With capital-flows into certain areas scarce, it would allow Blueprint’s managers to write loans with higher coupons.

The strategies may include short-term lending such as real estate bridge loans and infrastructure projects that are more intermediate in duration. Right now, Walthour and his team are discussing the possibility of such a portfolio with potential investors. It could also include investments with minority and women-owned firms.

Benefiting from the blueprint
For potential allocators, working with a firm that can source managers and provide managed account structures is a draw, says Walthour.

“Managers are almost always nervous about the idea of managed accounts. They often think they will need to add staff to create managed accounts and they don’t due to service providers and improved technology,” he adds.

Over the long term he says it is no different than managers running a traditional LP fund because of the improved ability of software, such as portfolio accounting systems, to handle the back-office work of separately managed accounts with ease.

Blueprint relies on Gemini Companies’ managed account offering as the backbone of its own platform; it uses Backstop Solutions’ manager database as well as Castle Hall for due diligence services.

Not having to build the technology and back-office capabilities in-house has helped Blueprint to focus on the investment side of the business.

Sketching out the structure for strong alpha takes time, but Walthour feels he and his team are up to the task of housing the next generation of hedge fund talent in a way that benefits managers and investors.

The emerging manager investing blueprint • There is a misconception that bigger is better, but it is really talent and execution that matters
• You must pick carefully, and that means taking your time and watching managers for a while
• You need to get into the alignment of incentives with the firm and its employees, even though it seems intrusive
• Don’t think about emerging managers as products, think about them as partnerships
• Fees and expenses matter and an investor should never be afraid to discuss them
Source: Blueprint Capital Advisors

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