21/07/2010 Author: Elana Margulies

The return of cap intro

Bearing the brunt of cut-backs in the capital-starved climate of 2008, prime brokers' cap intro teams have once again swelled, with a recent spate of new hires pointing to the growing importance of winning hedge fund clients, large and small, in a new wide-open marketplace

Dented after the dislocation of 2008, prime brokers have endured a period of reinvention. With the old fee-generating certainties of leverage gone, new custody services and improved consultancy divisions have moved to the fore, helping to win clients and preserve long-standing partnerships. This change has been supported by historical strengths: Technology, securities lending and, in particular, asset-raising ability, in the shape of large and active capital introduction teams.

Last week, HFMWeek exclusively revealed that prime brokers of all stripes – from bulge-bracket firms like Barclays Capital, Deutsche Bank and Goldman Sachs, to so-called mini-primes like Merlin Securities and EFX Prime Services – had embarked on a hiring spree of asset-raising professionals, as they react to hedge fund demands for better investor contact.

The current recruitment drive has reversed a recent decline. With hedge funds persona non grata in 2008, PB cap intro teams fell victim to swingeing cuts. Now, the same departments have boosted headcounts, in some cases exceeding historical highs, as they ramp up existing expertise and explore new regions.

Frank Carr, partner at Amrop Battalia Winston, a New York-based executive search firm, believes banks and prime brokerage divisions will continue to hire more employees for capital introductions roles. Citing increased “competition” among PBs, he argues that it is increasingly important for groups to assist clients in both back-office and front-office operations, such as raising assets.

 “This has always been around, but, in choosing a prime broker, a hedge fund manager is very focused on not only their systems or reporting, but also their capital introduction capability,” he said.

 Emma Sugarman, head of capital introductions-Americas at BNP Paribas, agrees. The French bank has recently enhanced its own capital introductions efforts in London and Asia. “We have gone through one of the worst fund-raising environments in history and today it takes a lot more work to raise capital,” she said. “The investors have emerged much more educated and everyone is open to new capital.”

Rising levels of investor education also means an increased willingness to look at niche strategies and smaller funds, forcing many PBs to reconsider their once-barely hidden reluctance to provide cap intro services for sub-$1bn funds. Sugarman agrees that more institutions are looking at smaller funds than before, expressing interest in those with $500m under management, as well as the traditionally more attractive $1bn players. Family offices, she added, have continued to move faster than larger institutions in making hedge fund allocations, and are also more prone to invest in emerging managers.

Accessing new regions is a major theme for investors. BNP Paribas’s own cap intro expansion into Asia comes on the heels of a major upswing in interest in the space. A recent capital introductions event held by Japanese investment bank Nomura found that allocators in the region were eager to invest in hedge funds, and were even moving away from a historical local chauvinism to consider a global palette of funds.

 This willingness to look beyond state lines was actively demonstrated at a Lighthouse Prime Services event held last month in California, which attracted two family offices from Hong Kong. Steve Simmons, managing director at Lighthouse, said these allocators were looking at managers ranging from start-ups to established ones with between $100m and $800m under management.

“The pattern that we noticed was there was no specific strategy they wanted to see,” he said. “It was more that they wanted to see someone that can demonstrate alpha in a replicable strategy.”

With investor interest returning to the sector, capital introductions teams across the board have launched recruitment drives to lure new hedge fund clients. Kevin Divney, founder of Beaconcrest Capital Management, a Boston-based long/short emerging hedge fund manager, which primes with Merlin Securities and uses its cap intro team, has seen an increase in approaches from competitor brokers – particularly from the some of the niche players.

“The cap-intro landscape has changed and I don’t think necessarily the former big players dominate as much as they used to, because it has become more of an institutionalised sales process,” said Divney, who intends to take on a second prime broker once assets increase.

While junior players create cap intro teams from scratch, larger players are also continuing to build out teams. Among the firms that grew quickly post-Lehman, there is a recognition that client retention now depends on much more than just the promise of secure assets. Chief among the Lehman benefactors was Credit Suisse, now one of the largest prime brokers, which has had success taking on new relationships as it develops its in-house cap intro capabilities.

In fact, as the bank’s Capital Services Investor Update revealed this month, it has recently brought on some big industry names, including Angelo Gordon, Jana Partners and SSARIS Advisors. Proof that reinvented cap intro teams are contributing to prime brokerage business across the sector and demonstrating that the eviscerated cap intro business has returned as a much-needed part of any PB offering.