Seed Capital Structures

[BG2008]

Found the following interesting regarding Michael Burry's arrangement with Greenblatt and White Mountain Insurance.  Anyone here aware of other seeding arrangements with start up fund managers? 

 

Just prior to the opening of the Fund, I was approached by two interested parties – neither

of whom I solicited – who separately expressed an interest in owning a part of Scion Capital, LLC.

The first party, Gotham Capital V, LLC, is run by Joel Greenblatt, who has been involved in money

management for the better part of two decades. An author, professor and portfolio manager, Mr.

Greenblatt is an extraordinary special situations investor with whom any professional value investor

should be proud to be associated.

 

The second party is White Mountains Management Company, a subsidiary of White

Mountains Insurance Group, Ltd (symbol WTM on the New York Stock Exchange). Led by Warren

Buffett associate and insurance guru Jack Byrne, White Mountains is an extraordinary company

managed in a manner to warm a shareholder’s heart. Once called the “Babe Ruth of insurance” by

Mr. Buffett, Mr. Byrne himself is legendary among value investors as the man who turned around

GEICO for Mr. Buffett and subsequently turned around Fireman’s Fund. White Mountains is his

latest venture, and Mr. Buffett himself recently stepped in to acquire nearly 20% of White

Mountains.

 

After some discussion, separate agreements were made with both parties whereby a family

trust and I would option portions of our interests in the management company to these parties. The

option agreements, now consummated by premiums paid, give Gotham Capital V, LLC the 5-year

option to acquire 22.50% of the management company and give White Mountains the option to

acquire up to 15.44% of the management company. The agreement with White Mountains is

structured such that 5% of the interest would be acquired upon investment of a substantial amount

of capital in the Fund for a little over three years. In this manner, I have given up a portion of my

own future profits in an effort to jump-start assets under management and hence reduce the expense

ratio experienced by investors in the Fund.

[Tim Eriksen]

The Big Short p. 40-41 says that Burry received $1 million after tax for 25% from Greenblatt and $600,000 from White Mountains for a smaller piece plus a promise to invest $10 million in the fund.  It is unclear if the ownership percentage was a straight revenue royalty, which is what I suspect it was based on my experience, or just % ownership of the management company. 

 

Every seed deal is different depending on where the manager is starting from.  Some are unknown and managing less than a million.  Others have some popularity and a much higher AUM.  It also depends on how scalable the manager's investing talents are.  Can the approach handle $100 million, what about $1 billion or $5 billion? 

 

In addition there are a lot of moving parts.  Is there a revenue hurdle before the royalty or is it on the first dollar?  Are the seed investors also investing in the fund?  Are they paying full fees or just management fees? 

 

I am aware of other deals, including my own, but I am not going to discuss specific people or amounts.

[SharperDingaan]

Just to broaden the discussion a bit ....

 

It is fairly common for the women of wealthy European families to set up corporate trusts where a godmother seeds, a parental age advisor trains the family girls - & works for equity in the trust, and the advisors daughter(s) manage the day-to-day affairs of the trust. Participants may borrow against the trust assets (buy a hotel, estate, house, business, school, etc.) but withdrawals are extremely restricted (re-seeding, death, near death, etc.)

 

Training focuses on the various life-stage financial risks relative to women, is culturally specific, & is very open minded. Arrangements often go back many generations, & former madams/trophy wives in the chain are nothing unusual. These are the female consigliere, very little phases them, & they find you - you don't find them.

 

SD

[Parsad]

Also, don't forget as mentioned in the Big Short, Greenblatt's desire to withdraw his capital when Burry was making his CDS bet, almost had catastrophic consequences for Burry.  Make sure your seed partner is one who is going to be there with you in the long haul!  Cheers!

[peter1234]

Just to broaden the discussion a bit ....

 

It is fairly common for the women of wealthy European families to set up corporate trusts where a godmother seeds, a parental age advisor trains the family girls - & works for equity in the trust, and the advisors daughter(s) manage the day-to-day affairs of the trust. Participants may borrow against the trust assets (buy a hotel, estate, house, business, school, etc.) but withdrawals are extremely restricted (re-seeding, death, near death, etc.)

 

Training focuses on the various life-stage financial risks relative to women, is culturally specific, & is very open minded. Arrangements often go back many generations, & former madams/trophy wives in the chain are nothing unusual. These are the female consigliere, very little phases them, & they find you - you don't find them.

 

SD

 

Thanks for a great perspective.

 

Is there a similar setup on the male side or they are (over) confident enough to do it themselves?

  ;)

[SharperDingaan]

Is there a similar setup on the male side

 

... the Sicilian relatives  ;)

 

SD

[netnet]

Just to broaden the discussion a bit ....

 

It is fairly common for the women of wealthy European families to set up corporate trusts where a godmother seeds, a parental age advisor trains the family girls - & works for equity in the trust, and the advisors daughter(s) manage the day-to-day affairs of the trust. Participants may borrow against the trust assets (buy a hotel, estate, house, business, school, etc.) but withdrawals are extremely restricted (re-seeding, death, near death, etc.)

 

Training focuses on the various life-stage financial risks relative to women, is culturally specific, & is very open minded. Arrangements often go back many generations, & former madams/trophy wives in the chain are nothing unusual. These are the female consigliere, very little phases them, & they find you - you don't find them.

 

SD

 

That is totally a new one to me. And I've seen a lot.

 

I love this board.