Stake a chance on… Kudu Investment Management

“We are big believers in boutique firms and want to let them grow independently,” opens Charlie Ruffel, managing partner at Kudu Investment Management.

The firm executes investments across a wide remit of asset and wealth managers in the lower midmarket. And while it started out in the US, today Kudu is active across the globe, exemplified by the firm’s latest deal, which saw it take a stake in European private debt provider Apera Asset Management.

During the last two years it has increasingly focused on private capital firms. In this segment of the market, it typically invests in GPs that have existed for five to 10 years and whose AUM sits somewhere between $1bn and $5bn.

While it does not compete with the upper market segment, Ruffel thinks the “big players” had an important role in legitimising this strategy: “They demonstrated that private equity firms benefit immensely from permanent capital and make for a strong asset in a portfolio.”

Investment permanence
Unlike the typical private equity strategy, which sees a GP exit its investment after a holding period, Kudu does not exit its investments but provides permanent capital instead. “This is our differentiating factor and competitive advantage,” explains Ruffel. “We provide the long-term stability firms look for as there is no change in ownership that comes with the end of a holding period.”

While this makes Kudu sound like a driving force behind the increasing consolidation in the market, Ruffel disagrees: “We are an anti-consolidation driver. Our mission is to allow boutiques to continue operating, particularly under increasingly challenging market conditions.” He likens the firm’s approach to a doctor’s Hippocratic oath of ‘first do no harm’.

In assisting firms with curing harmful market symptoms, Kudu looks for successful management teams with a track record demonstrated through a profitable business. But there is more to it. “We are in it for the very long run,” says Ruffel. “Therefore, we need to be increasingly diligent about investees’ operations, their regulatory and compliance functions.”

On the other side of the negotiation table, firms’ reasons for taking on an investment from Kudu are varied. “Every deal is a fingerprint,” says Ruffel. “Reasons for a partnership vary from management to management and often go beyond access to capital. Succession is a big topic and so is distribution.”

LP-backed bids on the future
While possible investees may look for more than fresh funds, in a tight fundraising environment, Kudu provides an additional advantage. It is backed by large institutional investors, including White Mountains Insurance Group and Massachusetts Mutual Life Insurance Company, which provide permanent capital to Kudu. This strategy means the firm is largely unaffected by the fundraising environment and its investments benefit from these solid LP relationships.

Ultimately however, it is not about the money. “We’re making a bet on the next generation,” comments Ruffel. Kudu’s investments go to the investee’s firm’s GP commit and Ruffel stresses: “Our stake should never change the dynamics of the management team. They need to believe the opportunity with our investment lies ahead.”