05/09/2012

Reservoir Pursues Wealth-Advisory Role

Hedge fund-seeding specialist Reservoir Capital is getting into the wealth-management business.

The $5.5 billion fund operator is setting up a unit, Reservoir Wealth Management, that at least initially would cater to a single ultra-rich individual. Meanwhile, the firm has sketched plans for expanding the business down the road. Under one scenario, Reservoir would offer a range of discretionary and non-discretionary advisory services to individuals and family offices with at least $10 million to invest. It also could seek assignments from institutional investors looking to outsource the function of chief investment officer.

It’s unclear whether Reservoir intends to build an investment-management team from scratch or hire a group from an established wealth manager. In any case, it’s likely the firm would steer client capital to hedge fund and private equity managers, given its experience with those types of investments. Reservoir is in the late stages of raising capital for a fund-seeding vehicle that could reach $2 billion — ranking it among the largest seeding businesses ever.

One industry veteran was struck by the fact that the firm’s nascent wealth-management unit is positioning itself as an advisor only to ultra-wealthy individuals and deep-pocketed institutions. “There’s huge demand for active-managed custom portfolio development — that’s what everyone wants,” the source said. “But it’s a matter of brand. If they go downstream, more wholesale or retail, what do the pensions think? Do the pensions wonder if they are suddenly losing focus?”

That’s no idle concern, given that Reservoir’s latest seeding vehicle has landed commitments from the likes of Texas Teachers, which last year pledged a whopping $500 million.

Reservoir, founded in 1998 by Craig Huff, Daniel Stern and Gregg Zeitlin, operates a series of funds that pursue several strategies, including opportunistic investments in public and private equity and seed investments in startup fund operations.

Among its holdings is a stake in Aqueduct Capital, a Charlotte marketing firm that Reservoir uses to raise money both for its own funds and vehicles run by the hedge fund managers it backs. Aqueduct’s partners, Frank Edwards and Thomas Roupe, both have experience on the wealth- management side — Edwards at AlphaLink Partners and Morgan Stanley, Roupe at Goldman Sachs.

Reservoir’s founders aren’t new to wealth management either. Indeed, they got their start working together at family office Ziff Brothers Investments. There, they made early seed investments in Ellington Management, HBK Investments and Och-Ziff Capital.

It seems unlikely that Credit Suisse, which owns a minority stake in Reservoir, will have a role in the wealth-management business. In any case, the bank will have to withdraw money it has in Reservoir funds over the next two years to comply with the so-called Volker Rule provision in the Dodd-Frank Act.

Reservoir employs about 50 people, including 17 investment professionals, at its headquarters in New York.

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