By Justin Hibbard
Gordon P. Getty describes himself as a man from another era. "I am two-thirds a 19th-century composer," says the 72-year-old son of oil tycoon J. Paul Getty. He idolizes Schubert, Beethoven, and Wagner and composes waltzes, chamber works, and oratorios in his ample spare time.
But the other third of the shag-topped billionaire appears to be something else altogether: a 21st-century entrepreneur. In 1997 -- around the time he wrote the verse for Young America, a piece for chorus and orchestra -- Getty went on safari in Africa and had a revelation about how to provide mutual-fund managers ready cash when shareholders stampede out of a fund.
"It just sort of came to me," he says. By the end of 2001 -- after working nights to compose the music for Young America and days turning his mutual-fund idea into a startup called ReFlow Management -- Getty was ready to roll out both productions (see BW Online, 9/29/05, "The Hardest-Working Heir in Business?")
Since then, ReFlow has been much slower to catch on than Young America, which was released on CD in July and has been performed by the San Francisco Symphony. The notoriously cautious mutual-fund industry has been reluctant to embrace ReFlow's service.
Nevertheless, Getty remains committed to it. This fall, the company, which is based in San Francisco's financial district and counts about 30 employees, will attempt to raise its first pool of capital from outside investors -- so far, it has been financed with $10 million from his own pocket. The new money, which might total $250 million, would be tapped by mutual funds that need quick cash when shareholders bail out.
Getty aims to help mutual funds with a perennial problem: how to cover redemptions without borrowing from a bank or selling off assets and paying the commissions and capital-gains taxes -- both costly solutions that erode returns.
Roger M. Edelen, a former Wharton School professor and a consultant to ReFlow, estimates that Wall Street pockets $30 billion a year in commissions from mutual funds that need to sell assets to pay departing investors. "ReFlow comes along and says: 'We'll do that for $5 billion a year' -- an 80% reduction because you don't have to trade the underlying assets," he says.
ReFlow's solution is to buy shares in the mutual fund so the fund can raise money, charging 0.15% of each transaction and sparing the fund the taxes and commissions. When the fund receives buy orders, it repurchases shares from ReFlow. After 28 days, it buys back any shares ReFlow still holds. The company makes its money on the fees and plans to make average market returns on the shares. But this model has yet to be tested in a broad market plunge.
For all this to work, the company needs lots of customers, but so far business has been scarce. ReFlow's largest client is Forward Funds, a San Francisco firm with $1.1 billion under management that Getty started in 1998 -- he's still the largest shareholder. A handful of other mutual-fund companies have signed up, but they have only nibbled at the service, says ReFlow.
Finding the kinds of funds that need ReFlow the most is one of the startup's biggest challenges. Likely beneficiaries include small stock funds with out-of-favor investment styles. These smaller outfits tend to keep a limited reserve of cash and are prone to big sell-offs by shareholders. But no matter what a fund's profile, it's likely to resist change -- at least until it sees other mutual funds using ReFlow.
Taking a chance with ReFlow may require an open and inquisitive mind -- much like Getty's. Colleagues marvel at his curiosity and penchant for self-instruction. When Getty first got interested in mutual funds in the early 1990s, he wrote a paper for the Brookings Institution in which he argued that inflation could be licked by replacing national currencies with mutual funds. The idea drew interest from several academics, including Nobel economics laureate Franco Modigliani.
A more recent example: When he was setting up ReFlow, Getty couldn't find a computer programmer to write a program he wanted in Java. So he taught himself the language over the weekend and showed up on Monday with a rudimentary version of the program.
Getty has often been described as an absent-minded professor. Asked if his wide-ranging skills stem from a common personality trait, he says: "I can't find a connection" among them. As a young man, his business acumen was sometimes in question -- until he oversaw the 1986 sale of Getty Oil.
As the largest shareholder, he agreed to sell the company to Pennzoil. But before the documents were signed, Texaco made a better offer of $10.1 billion, which Getty took, showing he could be as nimble-minded as he was contemplative. "When a crisis happens in business, it gets my attention," he says. Today his net worth is put at $2.2 billion.
Getty's personal life has been marked by unconventionality, too. In 1999 he publicly acknowledged that for more than a decade he had secretly kept a second family in Los Angeles consisting of three daughters and their mother. The Getty family appeared to take the incident in stride, and Getty remains married to his wife of 41 years, Ann.
Getty's ideas are interesting, but whether they work in practice is far from guaranteed, especially when changes in human behavior are required. Compelling as ReFlow may be, it could take years for it to catch on -- if it ever does. But the same was true of mutual funds, index funds, and money-market funds when they were introduced. The more novel the idea, the harder it is to sell.
Hibbard is a correspondent in BusinessWeek's Silicon Valley bureau