The incubators are at it again

Six months of rising markets have finally done it. They’ve restarted the boutique incubation industry, which has seen more deals get done in the past few weeks than it has in the few months preceding them. One really knew it was ‘game on’ when a pioneer of incubation in Australia, Treasury Group, announced its first deal in almost two years. A related party deal at that with Mike Fitzpatrick, a living reminder of private equity’s good times, who’s been back with a vengeance lately. The former investment bankers at AR Capital, whom Treasury paid $1.1 million for a 30 per cent piece of, had a four year track record on their Australian equity long/short fund.

Yet it seems they thought they needed an institutional brand name to help them past $80 million under management. The entrepreneurial spirits are back, but with more understanding of counterparty risk perceptions than they used to have. Interestingly though, the incubation deals getting done certainly haven’t been for bland, traditional styles of funds management pandering to the most risk-averse trustee. NabInvest plunked for 33 per cent of Lodestar, an Aussie equity manager not afraid of shorting, leverage and derivatives, while Ascalon has backed, of all things, a Sydney-based quantitative global hedge fund, made up of Macquarie Funds Group’s old team.

Westpac is liking the incubation story so much it bought an incubator, in the form of the 50 per cent of Ascalon it didn’t already own. Although maybe that reflects what Treasury Group CEO Mark Burgess admits is “less frothy”pricing in the incubation space overall. Once a bit of a cottage industry, incubation is going global too. Another Treasury Group deal will see it own up to 30 per cent of an Edinburgh-based global thematic value manager, (although negotiations had to be helped by one of the portfolio managers moving to Geelong a few months back).

Treasury Group also maintains a UCITS vehicle in Luxembourg, administered by RBC Dexia, for which it has defrayed the considerable cost by continuing to integrate with products from its local stable of managers – providing them with instant Europewide distribution. TG has also helped RARE Infrastructure negotiate the ERISA rules to land it some healthy mandates with US corporate funds. Still, there’s at least one deal the incubators won’t be doing. Steve Giubin and his five Australian equity teammates from Credit Suisse Asset Management, reborn as Sigma Funds Management, will be financing themselves, thanks.

Perhaps Sigma is not the typical start-up. It’s an almost complete team, for one, with a track record that anybody with a Mercer survey from 2008 or earlier can look up. Its youngest member is 35, and presumably none of them are in a desperate hurry for an incubator to pay them a wage. But a line from Giubin deserves consideration from any would-be incubatee. “When you sell your equity early, you sell it cheap,” he declared last month.