Steven R. Samson had his work cut out for him when he quit Chase Manhattan Corp. last July to run a mutual fund company that had become the latest overnight sensation.
Even as Kinetics Asset Management was enjoying the extraordinary success and growth of its Internet Fund, it was reeling from a double whammy. Kinetics had just scrapped a plan to sell itself to the New York investment firm of Lepercq, de Neuflize & Co. Within weeks its star portfolio manager, Ryan Jacob, had bolted to launch his own fund.
Mr. Samson, who arrived as the firm's president and chief executive officer the very week Mr. Jacob departed, set about mapping a new course. While Kinetics founder and chairman Peter B. Doyle tended to investment strategy, the 46-year-old Mr. Samson concentrated on business strategy.
Within months the company had expanded its roster of mutual funds from one to nine, begun distributing its funds through Schwab OneSource, boosted its marketing budget to $4 million, and overhauled its corporate structure to maximize its flexibility.
That was a start, but Mr. Samson felt more was required. Kinetics, which manages $1.5 billion of assets, needed a helping hand to thrive, grow, and shed its one-hit-wonder image. The flagging performance of its core investments - cutting-edge technology stocks - did not help.
In May, the White Plains, N.Y., firm retained Chase H&Q, the investment banking arm of Mr. Samson's alma mater, as financial adviser. For an up-front fee and transaction costs, Chase H&Q is providing Kinetics with a raft of ongoing services - setting up a credit facility, giving the company greater access to allocations in initial public offerings, prowling for distribution partners and even potential acquisitions.
By teaming up with a financial adviser that has global reach, Kinetics hopes to leap over hurdles that confront many small fund companies. If the firm succeeds, it could find itself competing for distribution and investments alongside much biggest rivals.
"The Chase alliance gives Kinetics credibility they wouldn't have on their own," said Burton Greenwalt, a Philadelphia financial services consultant who is familiar with Kinetics. "They went through a period when they were the hottest thing around. They had no organization and no structure - just great numbers and a lot of people throwing money at them."
The company's strategy, he said, is to build distribution through strategic alliances in the United States and abroad before its momentum stalls. At the same time the company is broadening its product line and capitalizing on its reputation as a savvy Internet investor.
"The Chase relationship is important to getting us over the finish line," Mr. Samson said. "Our whole business is built on being there first," but a small fund company like Kinetics lacks the heft to demand a place at the table in many deals and IPOs.
While fund companies routinely turn to investment banks for help in raising capital, finding buyers, or making acquisitions, it is rare for them to enlist strategic advisers to provide ongoing service, said Richard H. Klein, managing director of Chase Securities Inc., which encompasses Chase H&Q. He said Chase H&Q currently has only one other such relationship, with a fund company he declined to name.
"We'd like to do more of this type of business," Mr. Klein said. "I would rather solidify a relationship with a firm at this stage than when there are seven investment banks knocking at their door."
Not that Kinetics lacked options. Mr. Samson said the company had been sought out by three or four of the biggest financial advisers on Wall Street.
The reason for this interest was its Internet Fund, which was launched in a Long Island bungalow in 1996 by an eclectic group that included a former school administrator and a Russian immigrant. In 1998, as interest in technology investment was intensifying, the fund racked up a 196.1% return, the best showing for any fund that year.
Bruised by the recent downturn in tech stocks, the fund was off by more than 28% in the first half of this year, and assets are off approximately 25% from their high. The fund now stresses its long-term track record, with market-beating annualized returns of 99.25% since inception.
Mr. Samson said a 10-year-old friendship with Mr. Klein was a big factor - though not the only one - in his decision to go with Chase H&Q. The subsidiary, known as Hambrecht & Quist before Chase bought it last year, offered "a strong new-economy focus," coupled with the traditional investment bank focus of Chase Securities, Mr. Samson said.
One of the first services Kinetics sought from Chase was a $100 million line of credit to protect its funds in the event of unusually high redemptions. Mutual funds, particularly those that focus on volatile sectors such as technology, try to have backup funding available so that they do not have to liquidate holdings to handle surges in redemptions during periods of market upheaval.
Chase is lining up loan participants and is on track to issue the credit soon, Mr. Klein said.
Mr. Samson said he anticipates more results shortly. "There is interest in marketing ventures and joint alliances from much bigger companies," he said. "Chase's global wholesale banking activities can support Kinetics' discussions with potential partners and raise Kinetics' profile." He recently visited Hong Kong and Singapore with Chase executives.
Observers say the skills Mr. Samson cultivated at Chase, where he was managing director of Chase Global Asset Management and Mutual Funds, should serve him well at Kinetics.
"If you go back a long time, Chase was perhaps the first mutual fund company sponsored by a bank that was able to sell its funds outside the bank system. Steve was part of that team," said Avi Nachmany, director of research at Strategic Insight, a New York mutual fund research firm.
Mr. Samson is not trying to transform Kinetics into a fully diversified mutual fund company. "You have to have an angle," Mr. Nachmany said. "There has to be distinctive promise in what you offer as a small company. Another growth and income fund won't do it."
The company has built on its Internet offerings while moving slowly into new areas of investing. Last fall it launched four additional Internet portfolios, focusing on subsectors such as infrastructure and global growth. However, they have yet to attract substantial assets.
Beyond Internet investing, the lineup now includes a Medical Fund, Middle East Growth Fund, Small Cap Opportunities Fund, and Government Money Market Fund.
And the firm, which started out by selling its 100% no-load funds directly to investors, is adding institutional clients, a change that makes it necessary to offer other pricing structures. Kinetics' offerings are now sold through more than 100 discount brokerages, electronic brokerages, and wrap account providers. The funds are also part of Federated Investors' Trust Connect program, which reaches 100 banks, Mr. Samson said.
In the next few years "we will have much greater penetration into the institutional and retirement market," which currently accounts for less than $100 million of Kinetics' assets under management, he said. "We're seeing two to three requests for proposals a week."
The company has also dealt with some housekeeping items that should help it operate more smoothly and facilitate expansion.
For instance, last year it swapped its New York corporation charter for a Maryland charter. The move streamlines the process by which a fast-growing mutual fund can issue shares - a theoretical problem for most fund companies, but one that became real for Kinetics. For several weeks last year, after hundreds of millions of dollars of new investments poured into the Internet Fund, the company had to shut the door while it went through legal steps for issuing new shares under New York law.
Kinetics also reorganized its funds into a master-feeder structure, a move that gives it the flexibility to manage domestic and offshore versions of a single fund as one portfolio. The alternative - creating separate but nearly identical funds for U.S. and foreign investors - is costlier.
The master-feeder structure could become important to Kinetics if, as Mr. Samson hopes, Chase H&Q helps it to form strategic alliances with fund companies overseas. Mr. Samson said he sees opportunity to expand distribution to institutional, high-net-worth, and retail customers in Australia, New Zealand, and Southeast Asia, and to institutional and high-net-worth customers in selected markets in Europe and Latin America.
One thing the relationship with Chase H&Q is emphatically not about is finding a buyer for Kinetics, Mr. Samson said.
"We're growing so fast that the last thing we want to think about is going public or putting ourselves up for sale," Mr. Samson said. "We're just too early - it would be insane."
