During the third and fourth quarter of 2008, many investors were in shell shock as they watched the implosion of the financial markets and the subsequent collapse of the stock market.
At first glance, it seemed like that period would have been a terrible time to open a new financial firm. However, 1492 Capital Management, a Milwaukee-based small cap investment firm, has found great growth opportunity as a new firm throughout 2009.
The firm was organized in September of 2008 and opened its doors last December. The market hit bottom just a few months after that and has been climbing steadily most of this year, giving 1492 a chance to grow its clients’ portfolios right away.
“Money is always made in the periods of greatest stress,” said Joe Frohna, one of the founding principals of 1492 and its portfolio manager. “On the business side of things, we didn’t plan to start up in the bottom of the market. But there is a huge opportunity that is still in front of us.”
1492 Capital has more than $50 million in assets under management with more than 30 clients – who are institutional and private investors such as pension funds, foundations, endowments, and high net worth individuals. The firm’s minimum investment is currently $1 million.
1492 Capital’s business model is focused entirely on small cap investing in two areas – the growth and value markets. Frohna runs the firm’s small cap growth investments, while D. Rodney Hathaway runs its small cap value strategy investments.
“That’s what we’re known for and where we will focus,” Frohna said. “We don’t want to get distracted by drifting out of that.”
Frohna’s career has been spent in small cap investing. Before he helped found 1492, Frohna was the chief executive officer of Cortina Asset Management and lead portfolio manager of the Cortina Small Cap Growth strategy in Milwaukee, which grew to nearly $2 billion in small cap assets under management in less than three years.
He founded 1492 with Tim Stracka, the firm’s director of institutional sales. The pair has known each other since the early 1990s.
“Tim was at Morgan Stanley early in his career and he covered Firstar, and I was an analyst there,” Frohna said. “We were business associates and became friends.”
“Joe and I had talked for many years about doing something like this, but it never worked out before,” Stracka said.
However, last year, the pair learned that Hathaway, who had worked previously at Heartland Advisors Inc., was available.
“Everybody sort of ended up looking to do something entrepreneurial,” said Brian Andrew, the firm’s chief operating officer and chief compliance officer.
1492 Capital was able to tap into the Hawthorne Group, a family investment office in Pittsburgh, and one of Frohna’s long-term clients, as its equity backer.
“They’ve been a client since 1997, when I was still at Firstar,” Frohna said. “I think it says a lot about a business when a long-term client becomes a business partner. They’re long-term players. Our operating agreement dictates that. There’s no explicit out date.”
1492 currently has nine employees. It hired a senior research analyst in September and expects to add another research analyst in the first half of 2010.
“The amount of available talent now is just great,” Stracka said.
The firm expects to grow its assets under management to up to $2.5 billion to $3 billion with minimal staff increases.
“The focus is getting these products up to scale, which we think will be a three- to four-year build-out,” Andrew said.
While the founding principals of 1492 did not plan to start their business in the middle of a recession, the timing has given it solid growth prospects.
“To be successful in this business, you need to generate a financial return for your clients,” Andrew said. “Starting this year has been an advantage for us. We’ve taken advantage of the conditions and produced some huge returns.”
Since the beginning of 2009, 1492’s small cap value strategy investments are about 29 percent ahead of the firm’s target for the year. Its small cap growth strategy investments are about 17 percent above benchmarks.
“We’re having a good year,” he said. “We’re off to a great start.”
