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Why Patronus Partners' founder left the only job he ever knew

January 12, 2017


Picking the right moment to strike out on one’s own is daunting for anyone, but for Patronus Partners’ chief executive officer (CEO) Paul Kavanagh that time came two years ago when he decided to leave Killik & Co – the only firm he had ever known – to set up the boutique.


‘You recognise your moment,’ says Kavanagh. ‘You have to continue to be entrepreneurial. I was of an age where if I was ever going to do this I would have to do it now.’


In his mid-40s, Kavanagh thought he still had the energy to take on a new challenge, especially at a time when he had come to know the industry well enough to identify its many gaps.


‘To be rather morbid about it, I was thinking ahead to that day when you are on your deathbed, looking back. Would I regret not having made a move to do something myself? I think I would have done. And that’s part of the reason I said let’s go and do it.’


In January 2014, Kavanagh – who was then chief investment officer – left Killik after 21 years, with partners John Prior and Kareem Khouri.


The trio had worked closely together for a number of years establishing Killik’s derivatives division and running a managed futures strategy for the firm, both of which they transferred to Patronus when it opened its doors in June 2015.


A year and a half later, the company took its first steps to expand the fledgling proposition with the introduction of an investment management arm. Patronus Investment Management launched with six managed portfolios across three mandates: global multi-asset, large cap and small-mid cap.  


This division is the future of the firm, Kavanagh says, as he expects further disruption in the industry to change the investment landscape and throw up opportunities, albeit alongside significant challenges.


‘I’m not suggesting necessarily that you’ve got a point in the sand where it all changes. But it feels that over the next five to 10 years you cannot expect tailwinds to be with you – and I think the chances of headwinds coming along are significant from here on,’ he says.


The last 30 years have been an incredibly attractive period for investment management, Kavanagh suggests, due to the positive performance of long duration assets, helped along by falling interest rates and inflation.


‘Those assets [long duration] have really trumped short duration and real assets over that period of time and so portfolio construction – which is made up of very traditional asset classes of bonds and equities – has produced very real returns to investors over that time. This has lifted asset prices way beyond their long-term track record and there is going to be a lot of disruption to the investment management industry as a result of that.’


Kavanagh believes the problem the industry faces, caused by asset price inflation, will manifest itself primarily in how investors balance their long-term expectations of returns against the cost of investing.


‘Going back to periods like the 2000s when companies such as Morgan Stanley would interview their clients and say “what is your anticipated rate of return going forward for the next 10 years?” The number was always 10%.’


Even in 2015, a study asking investors what they needed to achieve in regards to their portfolio the answer was still north of 9%, Kavanagh points out. ‘Yet if you ask investors what their priority is, they say it’s the security and safety of their assets.

‘So if you actually look at where risk-free assets are at the moment you can with some degree of confidence talk about investors having to estimate future returns being significantly lower than they have been over the last 30 years,’ he says.


With account custody fees and management fees, the cost of managing money in a great number of investment management products is north of 2% – and sometimes as high as 3% – and with returns likely to be somewhat more conservative in the long-term, Kavanagh feels investors will start to wonder what they are paying the 3% for.


‘Those are the sorts of costs that are ill-equipped to deal with what I believe is the growth expectation for asset classes over the next 10 years.’


He says the industry is beginning to slowly wake up to the cost of managing money and therefore will start adapting.


‘This is the reason why we felt that we wanted to get ourselves into a position with a fully authorised regulated company that could provide the full investment management suite and that had a clean piece of paper, so we could look at the market with no legacy issues and really try to be as economical as possible with the cost.’


‘We want to find ourselves in a position where over the next five to 10 years this disruption in the market would provide us with an opportunity to compete and build ourselves an investment management company. When you take into account all of the costs of managing money it goes as high as 3.2% in places. We wanted to half that and have the total costs of managing a portfolio come in at around the 1.2%-1.3% area.’


Throughout 2016, Kavanagh says the firm’s main focus has been on stockbroking, which it migrated across from Killik, as well as building the foundation for its investment management offering. The firm will also now focus on growing the assets in its discretionary investment management offering.


For Kavanagh, the discretionary arm needs to build between £70 million and £100 million of assets to ‘get into the game’ as a legitimate competitor.


He remains confident: ‘We are on our way to that, we have got a pipeline of investors that have started to come through – so I’m hopeful that we are going to get to that number over the course of 2017.’


Across the whole business, the firm currently has circa £100 million in assets under management which generated profits of £500,000 as at 30 September 2016.


Despite Kavanagh’s zeal and certainty that he timed his exit right, there is still a lot of uncertainty as he no longer has the security of being part of a larger established business.


‘Certainly, when you’re bringing up a young family, it is so attractive to have that security around you, especially when you look back at the ups and downs of markets and what stresses that puts on you. There is no question that a large firm is a secure place,’ he says.


‘So when you look at the challenges and stresses to come out of [starting a new business], I always put them into this box labelled “this is good because this is what we did it for.”


‘My favourite time with Killik & Co was those early years where you felt that you had that young company, everybody-mucks-in mentality, whereas once it becomes institutionalised and you end up with proper departments handling things, it’s great because that’s what you set out to achieve – but it also becomes a little bit less exciting.’


He says starting Patronus has helped him to recapture that early career start-up feeling again.


However, Kavanagh admits that he had largely overestimated the speed of growth for new companies.


‘When we set up the business there was a definite idea of well this is how it will work out over the next 12 months. When we look back over that 12 month period we go “well that was inaccurate”.’


Joshua Thurston

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