Bill Gross irresistible to new partner Kapstream Capital's Palghat

A month after checking on his old Pimco colleague last September, the bond manager got an offer he couldn't refuse

Jul 2, 2015 @ 12:22 pm

By Bloomberg News

When Bill Gross left Pacific Investment Management Co. in September last year, his old colleague Kumar Palghat rang him to see how things were going. About a month later he got an offer he couldn't refuse.

The Sydney-based money manager first worked with Mr. Gross nearly 18 years ago and spent about a decade running bond portfolios for Pimco, first in Newport Beach, Calif. and later in Australia. He branched out on his own in 2006 to set up Kapstream Capital, which now manages A$9.2 billion ($7 billion). He's now back working with his old boss after Janus Capital Group Inc. bought into Kapstream and named him co-manager of Mr. Gross's Global Unconstrained Bond Fund.

Janus, led by Chief Executive Officer Dick Weil, announced on Wednesday it was buying a 51% stake in the Australian bond manager with an option to acquire the other 49%. The U.S. company has also tapped 53-year-old Mr. Palghat to help Mr. Gross oversee $1.5 billion in assets and build a team to support the veteran money manager who used to oversee the world's biggest bond fund.

“Right after he left Pimco I made the courtesy call to see how he was doing, and then a month later I got a call from the Janus CEO saying, 'Would you be interested in working with Bill again, or is there a way for the two firms to work together?'” Mr. Palghat said in an interview in Sydney on Thursday. “I couldn't say no.”

PLANS DOVETAILED

Sipping from a can of Diet Coke at Kapstream's offices in Sydney's Martin Place, less than 150 meters (500 feet) from the Reserve Bank of Australia, Mr. Palghat said the approach from Janus dovetailed with his company's plans to increase its presence in America.

“We've always had thoughts of expanding to the U.S. after we built our Australian business,” he said. “We have an office in Newport Beach, California, we are registered with the SEC, we have some clients out of New York now with $600 million that we manage for, so it's a natural progression for us.”

Nick Maroutsos, another former Pimco employee who co-founded Kapstream with Mr. Palghat, moved to the U.S. to expand the company's business about a year and half ago. He and Mr. Palghat retain stakes in the company, along with co-principal Steve Goldman, also a Pimco alumnus.

Mr. Palghat was born in Bangalore, India, and went to the U.S. “with a backpack” at about the age of 20. He studied there and eventually ended up working for the World Bank for about a decade before he was recruited by Pimco.

Mr. Palghat said Pimco only had about $80 billion in assets when he joined in 1997, and he was the first global portfolio manager hired by Mr. Gross, whose firm was largely U.S. focused at the time.

“They were slowly building their global capabilities,” he said. “I remember being on a trading floor with no more than 10 or 12 people, including Bill, and the firm was that small.” Mr. Palghat moved to Australia in 2001 to run the company's Asia-Pacific business and said he left “on good terms” in 2006.

Once he is back working with his former boss, Mr. Palghat plans to build a “small team” to support the 71-year old Gross to trade and produce returns for clients, although he says the American bond veteran will remain the fund's primary manager.

“If we're successful, which I hope we are, in raising assets and putting numbers on the board, then you'll have to think a little bit bigger,” Mr. Palghat said. The deal between Janus and Kapstream “was a simple way of putting people together around Bill. Now we get hopefully to tap into Bill's brain and his trade ideas.”

COMPLEMENTARY OFFERING

Mr. Palghat sees Mr. Gross's fund and Kapstream's main unconstrained strategy, which accounts for about A$7.5 billion in assets, as being complementary offerings for clients.

While Mr. Gross's relatively new fund targets returns of about 4 to 6 percentage points more than the London interbank offered rate, Kapstream's is for less risk-tolerant investors and is premised on achieving returns of 2 to 3 percentage points more than cash.

Janus will make an initial upfront cash payment of about $85 million and the portion of Kapstream it has purchased includes the 25% equity interest that had been held by Challenger Ltd., an initial backer of Mr. Palghat's firm. Kapstream will continue to operate under its own brand.

Mr. Palghat, who is married with two adult daughters, said while the new collaboration will require him to spend more time in the U.S., he plans to remain based in Australia. When asked about whether the deal is a step to making him a successor to Mr. Gross, Mr. Palghat said the issue hasn't been talked about and he envisages some sort of team structure eventually taking over.

“My goal is simply on day one to help Bill manage assets and allow him to trade and produce the returns that he wants to,” he said. “He's said publicly that he wants to manage money and show the world he can do it again and that he's a good portfolio manager, so initially my goal is just simply to support him in building what he needs to build.”

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