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The long haul

River and Mercantile is a business with roots stretching back to the 1800s, founded to finance the growth of Argentina. Since its birth in 1881, the company slowly developed into an investment specialist, running five closed-ended funds with £400m under management by the 1990s.

Property tycoon Sir John Beckwith bought R&M in the mid-1990s to build a long-only fund company and a team from James Capel effectively backed into the business.

When it floated a few years later, this firm changed its name to Liontrust, leaving the River and Mercantile brand as a holding company for several years.

Moving forward to 2005, Beckwith wanted to build a new long-only business and approached former Liontrust institutional head James Barham to resurrect the R&M name.

Barham believes such a backer can be critical in the boutique world and cites three key attributes – liquidity, industry knowledge and patience. He also has a long-term relationship with Beckwith, stretching back to the mid-1990s.

They established the business with a 51 per cent/49 per cent equity split in favour of Beckwith and launched as a limited liability partnership.

Barham says equity can create problems if not used wisely. In a limited company, for example, it has no value until people sell and, when sold, the incentivisation benefits are gone.

As an LLP cannot keep cash on its balance sheet, all distributable profits have to go out to equity holders, which means these shares have a cashflow linked rather than just terminal value.

Under the structure, no individual can own more than 6 per cent of the equity and two-thirds is with the fund managers.

Many boutiques focus entirely on fund managers but R&M also highlights its well funded and serviced distribution and operations.

Credit Suisse veteran Mark Thomas joined in 2006 to head retail distribution, focusing his effort at the top end of the adviser and discretionary space. Barham looks after institutional distribution and the firm already runs money for three of the UK’s top pension funds.

Key to winning such business is robust operations and compliance and Barham says there is more equity spread around individuals in these parts of the business than in many competitors.

The aim was to set up R&M as a diversified boutique with different revenue streams based on three investment divisions – UK equities, global equities and special products.

UK was first off the blocks, with Hugh Sergeant and Richard Staveley joining from SG and Dan Hanbury from Investec. Charles Bennett also came on board as a quantitative analyst to build their proprietary screening system called Moneypenny.

This team runs a suite of six UK equity products across core and more aggressive mandates using an approach known as PVT (potential, valuation and timing).

They analyse various screens before moving into fundamental stock analysis and company meetings. The potential element involves different types of company depending on market cycles and could cover high return on capital-type stocks or distressed special situations.

When identified, the managers ideally want to buy this potential cheaply and at the right time.

Now this team is fully bedded in, the group has started the second leg of its business, bringing in Alex Stanic and Alex O’Reilly from Newton to run global equities.

Like the UK team, they will design and implement their own investment process, with core and unconstrained funds planned. To avoid diluting equity when new teams join, the firm warehoused chunks for these future divisions, with a further part left for eventual special product hires.

This last arm of the business was left open as the aim was always to establish the UK and global divisions first and launch special products appropriate at that stage in the cycle.

Barham says there are clear ideas in place but it would have been inappropriate to plan a property or credit fund at outset, for example, as any launch would be several years in the future. Long term, the desired revenue split is 60 per cent institutional and 40 per cent retail and the business is moving in that direction.

Since starting business in December 2006, R&M has raised just over £1.1bn. However, with the all-share down by almost 30 per cent since, its current AUM sits at £700m.

Staff numbers remain small at 15, although Barham expects this to grow to 22 as the global managers and analysts join and the group boosts operations to cope with an extra division.

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