To illustrate how difficult it is for entrepreneurs
in their country, Germans
sometimes tell a joke: If Steve Jobs had
tried to found the Apple computer company
in a German garage, he would have
been arrested for not having the proper
While the joke rightly suggests that Germany
is a bit too over-regulated and
bureaucratic, it is not true that entrepreneurs
do not thrive there. Just consider
the example of Lupus alpha, an asset
management boutique geared toward
institutional investors.
Lupus alpha was the brainwave of four
fund managers who worked with each
other at Invesco’s Frankfurt office in the
1990s. During that decade’s equity boom,
the managers saw at first hand how
eagerly German institutional investors
bought not only blue chip stocks but also
those with smaller market capitalisations.
Creating an asset manager specialising
in small and mid cap stocks seemed a
bright idea, but by the time the four managers
got around to it, the odds had been
stacked against them. The first problem
was the timing of the launch: Lupus alpha
opened its doors in October 2000, seven
months into the equity crash.
The boutique was also entering a market
which, until then, was largely the domain
of German banks. The reason for this was
that institutional clients had traditionally
relied on their Hausbank (house bank) for
all financial services, including asset management.
Giving one’s money to a start-up
boutique was simply not done. At most
you did business with a well-established
foreign asset manager.
Ralf Lochmüller, founding partner and
chief executive, recalls: “When we
launched Lupus alpha, many in the market
were sceptical. They said: ‘You have a
good idea, but let’s see if you’ll still be in
business two to three years from now.’”
Five years on, Lupus alpha is not only still
in business, but has emerged as one of the
best-known houses for European small
and mid cap mandates in the institutional
market. It has taken in €1.9bn for this
asset class – a significant volume considering
German institutional investors are still
very cautious of investing in equities, particularly
small and mid caps.
But these stocks are only half the success
story at Lupus alpha. In April 2003, it
began offering absolute return funds, and
a year later, single hedge funds. These
products, which aim to deliver a target
return irrespective of market movements,
have generated another €2.5bn for Lupus
alpha, bringing total assets under management
to €4.4bn. Such a volume puts it
ahead of several big-name foreign
houses, for example Merrill Lynch.
Investment consultants in Germany -
which help generate 20% of Lupus alpha’s
business - say the boutique’s track record
in small to mid-cap and absolute return
has made it a strong contender in manager
selections. They add, however, that
the performance of its hedge funds -
which have taken in just €200m - has
been underwhelming.
In any event, Lupus alpha has been
doing especially well among institutional
clients known for their conservatism: German
pension funds. Just in the last year,
the boutique won 10 investment mandates
from these clients, seven of which
were small and mid-cap and three of
which were absolute return. Indeed,
assets from big and small pension funds
account for 40% of the €4.1bn in total
Lochmüller says that while these clients
were formerly among the biggest adherents
to the house bank principle, they
have changed their minds this century
because of an “urge” to find better performance
and value than they can get at their
“By the end of 2001, regulatory changes
flanked this urge by permitting the separation
of fund transaction services and portfolio
management as is done with master
funds (Master KAG),” he says, adding that
outright outsourcing of asset management
was also permitted for the first time
back then.
Expounding on the “urge” theme,
Christoph Braun, another founding partner
who is the institutional sales head,
observes that because German pension
funds cannot achieve the returns they
need with bonds alone, they have been
forced to diversify.
“Many German pension funds have a
bond exposure of at least 70% if not 90%.
With this kind of exposure, they can get at
best 3%,” Braun says. “Yet because they
need enough return to meet their liabilities
and remain attractive for their members,
they know they must reduce their bond
exposure by 10-20%, and at the same
time raise investment in equities and alternative
asset classes like private equity,
hedge funds or absolute return funds.”
“As long as we perform well, we should
benefit from this growing trend to diversify,”
Braun says, adding that Lupus alpha
is optimistic about continuing its corporate
growth of the last four years. This
means that the boutique aims to take in
between €800m and €1bn in new money
Unlike other big German asset managers
that have plenty of seed money,
Lupus alpha will have to generate every bit
of that from scratch. Lochmüller says the
boutique broke even in 2003 and has been
profitable since. Whether it stays that way
depends, it seems, entirely on its own
entrepreneurial spirit.