The Interview - Giovanni Pennetta, KPR Capital: "During financial crises, investors prefer things that they can easily understand"
Giovanni Pennetta, chief executive of Goldwinds Asset Management, investment adviser to the KPR Diamond Fund, says that in times of market turbulence, investors are drawn to diamonds as an investment because of their ability to withstand economic uncertainty and financial turmoil and to act a hedge against falling stock prices and inflation.
HW: What is the background to your company and fund?
GP: KPR Capital is an alternative investment manager based in the Cayman Islands that offers alternative investments to institutional investors and elective professional investors. The firm is not affiliated to any banking group and prides itself on its independence, which allows KPR Capital to create bespoke funds with no commercial or marketing restrictions.
The business currently involves management of the KPR Diamond Fund, which invests in physical diamonds, the KPR Hermitage Property Fund, which invests in residential redevelopment of prime properties in Monaco, and the KPR Global Macro Fund.
The KPR Diamond Fund, advised by London-based Goldwinds Asset Management, employs a buy and hold strategy that invests in only the highest quality certified colourless diamonds, ranging from 5 to 10 carats, acquired at competitive wholesale prices. By holding them until high demand commands a premium price, the fund aims to provide steady, consistent returns for investors who are looking for real diversification.
HW: Who are your key service providers?
GP: Apex Fund Services (Ireland) is the fund's independent administrator, while JEMS (Jewelry Evaluation & Mediation Services) is the fund's independent valuer, providing valuations when the diamonds are acquired and at any valuation date. Regency Shipping is the fund's principal custodian for the diamond assets, providing custody, shipping and safekeeping services. Lloyds of London will insure the diamonds whilst in transit, during the valuation process and when in secure storage custody.
HW: What is the profile of your current and targeted client base? How and where do you distribute the funds?
GP: We have seen great interest from high net worth individuals, funds of hedge funds, family offices and private banks. There have also been inquiries from pension funds and a government agency in the Middle East.
The Diamond Segregated Portfolio is open to investment by non-US taxpayers and US tax-exempt investors, while US taxpayers may invest in interests of the limited partnership KPR Diamond Fund.
HW: What is your investment process?
GP: We conduct a thorough analysis of the diamond marketplace. Categories of stones that are deemed to outperform relative to the market are identified. Diamonds that meet the investment criteria are then identified from sources including trade dealers, auction houses, private individuals and diamond cutters.
The diamonds are acquired following consultation with the independent experts on each stone and investigation into the authenticity of the certificate. Continuous monitoring of the marketplace and weekly wholesale prices is carried out, and the diamonds are disposed of at premium prices to buyers such as trade dealers, jewellery manufacturers, auction houses and private individuals.
HW: What differentiates you from other managers in your sector?
GP: The KPR Diamond Fund gives investors direct access to highest-quality physical diamonds in the 'important' category of stones, purchased from dealers in London, New York, Geneva, Milan, Antwerp, Amsterdam, Tel Aviv and Singapore. Investors in the fund may also opt to purchase stones in selected diamond sales by the fund at a wholesale price, an option not often offered to investors in other diamond funds.
Currently only three other funds invest in diamonds. Two invest in all carats and all colours, while the third offers indirect access to the assets through investment in diamond mining companies.
HW: Do you foresee problems in raising mandates from investors through 2009?
GP: We don't foresee any real problems in raising assets. Often during financial crises, investors prefer things that they can easily understand and relate to, like diamonds, art, wine or antiques. There is currently consistent demand for investments in tangible assets.
With diamonds, investors can see the inventory in safe custody. Diamonds tend to withstand economic uncertainty and financial turmoil, and can be used as a hedge against falling stock prices and inflation. And because there has been a very significant decline in liquidity provided by banks to diamond dealers, many of them are being forced to liquidate their inventory. These market conditions have created a tremendous opportunity to capitalise on discounts of 25 per cent or more.
HW: Do you have any plans for other product launches in the near future?
GP: We are planning to launch the KPR Hermitage Property Fund, which will buy, renovate and sell residential properties in Monaco. The fund will buy up discounted and distressed properties, with the aim of reselling the homes six to eight months later following refurbishment.
In addition, we have decided to open our global macro segregated strategy, which invests in liquid positions across asset classes, countries and financial instruments, to all our investors in pooled format. We believe the current market conditions offer interesting opportunities that we want our investors to take full advantage of.
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