Putnam fund pushes edge on high risk

Got an extra $25,000 kicking around?

If so, Putnam Investments wants to be your friend. The Boston fund company, in conjunction with buyout company Thomas H. Lee Partners LP, was slated to close last week on an unusual fund that will invest as much as 50% of its assets in high-risk private deals.

The $250 million closed-end fund, the TH Lee Putnam Emerging Opportunities Portfolio, will also invest up to 5% of its assets in private-equity funds. In addition, it may put money in publicly traded growth stocks.

Some see the creation of Putnam’s new portfolio as a natural step in the evolution of a maturing industry. Others, however, worry that Putnam, and its many rivals also chasing millionaires, are taking a chance by exposing investors to too much risk.

Those coming out with exotic offerings aimed at the rich “risk the reputation of the fund industry for having broad diversification and spreading risk,” says Burton Greenwald, a mutual fund consultant in Philadelphia.

“As the industry begins to cultivate high-net-worth clients with what are essentially alternative-investment products, it is important that these products are clearly labeled with respect to their volatility and liquidity.”

Important market

The fund is managed by TH Lee Putnam Capital Management LLC, a newly formed joint venture that is owned by Putnam and TH Lee Putnam Capital LLC. The latter is 75% owned by Lee and 25% owned by Putnam. It is the first of its kind for Putnam.

The move marks a deliberate step for Putnam into the business of catering to the rich.

An executive said Thursday the company hopes to begin offering tailored accounts for wealthy investors in the fall. It is also considering plans to begin selling hedge funds – lightly regulated investments available only to rich investors.

“A lot of our brokers and intermediaries are focused on high-net-worth clients,” says Gordon Forrester, director of marketing for Putnam retail management. “It’s a very important market for us.”

He declined to talk specifically about the new venture, citing regulations prohibiting him from talking about it while it is still in registration.

With a minimum initial investment of $25,000 and a mandate that would-be investors be worth at least $1.5 million, the new fund isn’t targeting the masses. But it is clearly going after thousands of investors, not just the few hundred whom most venture capital funds attract.

Like most venture capital funds, the new fund isn’t for the faint of heart. Not only does it invest in startup companies, it allows investors to redeem shares only on a quarterly basis – and even then it will repurchase only 5% of its outstanding shares at net asset value.

Even more frightening are the track records – or more specifically, the lack thereof – of those running the fund. Putnam’s specialty growth group manages the fund, with Roland Gillis and Michael Mufson in charge day-to-day.

While the unit, which oversaw $25.72 billion for Putnam on June 30, has been picking growth stocks for years, it has been investing in private companies only since early last year.

In a filing last week with the Securities and Exchange Commission, the companies conceded that the “limited experience” of the team “could adversely affect the ability of the manager both to select appropriate venture capital transactions for the fund and to manage the investments, and impair the ability of the fund to meet its investment objectives.”

costly purchase

The new fund isn’t cheap. TH Lee Putnam Capital Management will collect an annual fee equal to 1.2% of the fund’s average daily net assets. It will also collect an annual incentive fee of 20% of the gains on stocks of companies that were purchased as private-equity investments and sold after the companies went public, according to the SEC filing.

Putnam, a subsidiary of New York’s Marsh & McLennan Cos. Inc., is hardly the only fund company pursuing rich investors.

As the number of wealthy Americans grows, fund companies are tripping over themselves to manage their money.

Fidelity Investments, the world’s biggest fund company, is also adding more services for wealthy clients, including dedicated teams of telephone representatives, private offices and separately managed bond accounts for customers with accounts of $1 million or more.

Boston’s Fidelity already caters to the rich. About 50% of the company’s retail asset base is held by 5% of its customers, specifically those with a minimum of $500,000 invested through the company. That means some $250 billion is owned by 240,000 of its 4.8 million customers.