Currency Shop Re-Emerges as Fund Seeder

Former currency-fund manager Lily Pond Capital is reinventing itself as a seed-capital investor.

The New York firm already has launched a vehicle called LilyPad Investors 1 that takes general-partnership interests in nascent hedge fund shops. Now it is marketing a separate entity dubbed WaterLily Investors that would invest in newly launching funds as a limited partner.

The effort represents the culmination of an April 2012 decision by Lily Pond founder Howard Kurz to unwind a $400 million foreign-currency fund that he had run since starting the firm 11 years earlier. As he pondered his next move in the following months, Kurz began receiving inquiries from startup managers searching for backers.

The idea for the new funds evolved from there, with Lily Pond ultimately taking the unusual step of segregating LilyPad’s operating-capital investments from WaterLily’s limited-partnership interests. That said, the two funds typically would deploy their money to the same managers.

Lily Pond is willing to invest with a range of managers, including those dealing in unusual products such as tax liens and mezzanine financing — so long as it deems their approaches relevant. It’s focusing on startups with pedigreed leaders and strong operations, but also is offering operational and marketing support to those who want such services.

Lily Pond held a first and final close for LilyPad at the beginning of April with an undisclosed amount of capital from 14 investors — six that backed its currency fund and eight family offices that are new to the firm. Lily Pond plans to use the vehicle to get 6-8 hedge funds off the ground. It already has stakes in two shops, one of which is a New York outfit called AlphaParity that former Tudor Investment portfolio manager Steve Gross and ex-Tudor quantitative researcher Josh Smith launched in April with a little less than $50 million.

Marketing for WaterLily, meanwhile, began last month. Lily Pond already has pinned down some commitments for that fund, with expectations of holding a single close with $250 million in the next several months. To assist in the push, the firm hired marketing specialist Harlan Simon this month as a managing director. Simon previously worked at Patriot Group, following capital-raising roles at Academy Investment, Enso Capital, XE Capital and Clinton Group.

Lily Pond expects to deploy WaterLily’s capital in chunks of $25 million to $35 million, reserving the right to pull the money from managers that experience drawdowns of 15% or more. Backers of the fund would get guaranteed capacity to invest additional money with the seed-capital recipients.

Both LilyPad and WaterLily would get cuts of the revenues produced by their underlying managers. WaterLily is charging investors below-market rates of less than 1.5% of assets and 15% of profits.

The effort comes at a time when many established seed-capital shops, including Larch Lane Advisors, Man Group unit FRM and PineBridge Investments, have spent the better part of a year trying to reach the first closes for their own funds. For its part, Lily Pond believes its unusual structure will appeal to investors and aspiring hedge fund managers alike.

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