Albert Cobetto and Brian Lippey both started on the sell side in investment banking but now run businesses on the investor buy side. Both have résumés that take in some of the finest names on Wall Street.
Brian Lippey started in the business in 1979 and built Goldman Sach’s Eurobond salesforce in New York. He joined Merrill Lynch in London in 1989 to head global foreign exchange sales. He sat on Merrill’s European executive committee. He moved to Asia in 1994 and ran international private banking for the region for Bankers Trust. After 18 years on the sell side, he took up Tokai Bank’s offer last year to refashion Tokai Asia from a sleepy entity in Hong Kong into one of the most dynamic investors in Asia, utilizing the bank’s $288 billion balance sheet. He recruited 10 non-Japanese traders to actively take positions in fixed income, forex, and equities, principally in the Asia-Pacific region. He is currently setting up a fund-management arm.
Albert Cobetto is at an earlier stage of a similar process, launching and running Prudential Investments’ Asian fixed-income group. Prudential Investments manages $200 million of assets and Cobetto is responsible for investing a portfolio of its funds in Asian bonds. He has been in Asia for 13 years, joining Lehman Brothers in 1984 as a corporate financier – his most high-profile transaction having been the restructuring in the mid-1980s of the then troubled businesses of CH Tung, now Hong Kong’ chief executive. By the end of the 1980s he had become one of the region’s pre-eminent mandate winners. He headed Lehman’s origination effort and spearheaded its drive into the nascent Asian bond market. He then built Salomon Brothers’ Asian fixed-income presence between February 1994 and March 1997. By the time he left it had a commanding position in yankee bonds.
Euromoney invited Cobetto and Lippey to dinner at the end of October amid some of the most turbulent markets either had ever seen. Lippey, one of Hong Kong’s most accomplished blues guitarists, was in sports jacket and slacks. Conversation immediately turned to Tokai Asia’s dress-down policy which he instigated at the beginning of the summer:
Lippey: It was like magic the way performance improved. The minute we took off the ties. I hope it continues.
Cobetto: A lot of places in the US are the same. They started going casual in the summer then went all year round. Sometimes you go back wearing a coat and tie and you’re the only one.
Lippey: We have a wardrobe full of suits, shirts and ties so if ever someone comes from Tokyo we can put them on.
Cobetto: I guess Japan is bit more formal.
Lippey: I think it was Greenwich Capital that started this whole thing. Ironically they were part of LTCB [Long Term Credit Bank of Japan] for a long time.
Cobetto: It started to really spread when they came out with that study that said there was less stress if you’re wearing casual clothes. And obviously in Hong Kong, it gets very hot.
Lippey: I think it’s a balance. Some people get carried away and come in wearing shorts and T-shirts. You have to draw the line.
You’re both building businesses. What are the basic difficulties of doing this in Asia?
Lippey: The basic problem is the ability to attract the right quality of people. That was probably the key issue for us. The reality is it’s a very thin market. It’s very shallow. Depending on what you want to be and how many people you need for a critical mass it’s very difficult to attract the right calibre of guys.
Cobetto: I think having said that there are good people who want to move from the sell side to the buy side. I’ve been happy to see really high quality people being interested. But you’re right, the market is very thin.
Lippey: Don’t you feel there’s been a convergence between the sell side and buy side? I think there’s a lot more crossover now.
Why is that?
Lippey: Because the compensation horizons have merged and because the business has changed. The whole nature of sales has changed and technology has changed the business – it’s now dominated by risk management and trading. Whether you’re on the buy or the sell-side is becoming less and less significant. What counts is how you view the markets.
Cobetto: I agree. The sell side became more like the buy side because your firm was increasingly relying on proprietary trading. The roles became very similar, except you were doing it within a Goldman or a Salomon. The other change was when firms got really big and began changing in character. A lot of people got disillusioned. You no longer had partnerships, and with firms becoming huge global players you didn’t have the same latitude and freedom you had 10 years ago.
Lippey: It’s a cultural shift. We’ve both been in the business over 18 years. When we started there was a pretty wide variety of firms. They were small, collegial. You felt like the culture celebrated the individual, and without sounding corny about it, it was more like a family organization. Today it’s very different because you need to have huge capital resources to compete globally and obviously huge scale. And and through technology everyone’s pretty much got the same information. In this environment it was easy to get disillusioned.
Cobetto: You hear the same comments: “It’s not as much fun any more.” “It’s a different type of business.”
Lippey: A lot of the businesses have become commodity-like. First it was foreign exchange, and then it spilled over to government bonds, swaps and vanilla, over-the-counter options, etc. They all became commodity markets. So the role of a salesperson diminished.
I won’t say this in a condescending way, but you became more and more of an order taker. What’s emerged is a supernova of people who started in the sales role, have been in the business a long, long time, have contacts and access to information and can really add value. And then there’s the rest of the business which is driven by the people who commit capital, and also by the technicians.
Cobetto: There’s much more specialization. A guy is trading the treasury curve from one to five years. There’s so much specialization some people got bored. You didn’t have a broad brief any more. The firms were becoming increasingly similar and so were the frustrations. The firms were all so big you had the same problems but in slightly different forms. I wanted to make a change and build a business.
Lippey: These are rare opportunities, particularly when you have a substantial sponsor behind you that gives you capital and the room to build. It’s relatively rare, but we’re starting to see more and more of this happening. I think this is because of the way the business has changed. You have the big global players, and after that you have smaller more opportunistic operators. The hedge funds were the early manifestation of this. It’s no accident we’ve seen their proliferation.
The trend is for bigger institutions to sponsor these smaller, more entrepreneurial individuals. Eventually there will be the two extremes. You will have fewer but larger players – a trend driven by competition for capital, efficiencies of scale and the ability to leverage technology. And then you will have the smaller, nimbler players that can identify opportunities and don’t have a large bureaucratic infrastructure.
Having spent so much time on the sell side, do you find it amusing being the customer now?
Lippey: I don’t know about you Albert, but it’s amazing to see the whole street. From this perspective – as a customer – you see both the strengths and weaknesses of the whole street. I was on the sell side for 16 years.
Cobetto: It’s fascinating, because for so long you were selling, pitching, marketing the virtues and strengths of your particular firm. Now all of a sudden you step back and say, well, yes they are very good at this, but that other firm, boy, they’re very good at servicing us. This other firm – which we didn’t even count as a mainstream competitor – you realize you get very good service from.
Lippey: Typically you have three points of contact out here: Singapore, Tokyo and Hong Kong. Invariably you deal with a firm’s people in all three in different products. And it’s amazing the differences in approach. For example, nuts-and-bolts stuff like follow-up – and classic things like salesman A in Tokyo not talking to salesman B in Singapore. People in the same firm don’t talk to each other.
Cobetto: We’ve actually seen a situation where we’ve got both sides of the transaction from the same firm. Someone’s sent something to our risk manager which was one side, and someone’s sent something to the trader that was the other. You start to think: are these guys even remotely talking to one another?
Lippey: There’s also a big divide between market posturing and reality. Without naming any names, it’s well known that many of the European banks have been investing heavily in people in an effort to reposition themselves and become global players. But with maybe one exception, there’s such a big competitive gap between where they are now – at least in Asia – and with the US investment banks.
What is that gap?
Lippey: It’s almost an intangible cultural thing. I don’t know if it’s a function of organizations repositioning themselves and bringing in a lot of new people from different cultures and it taking time for the culture to crystallize into a coherent operating strategy. I would say two or three of the US investment banks – guys like JP Morgan, Bankers Trust – they’re consistent, they’re very good. They follow up. When they say they’re going to do something they come back. If they say they’re going to get an economist or a risk manager to follow up they do. You don’t see that from the non-US players.
Cobetto: Some of the European banks have got some good people and are really trying. But it’s going to take them a little while.
Do you still have a bias to your old firms?
Cobetto: I guess you have a greater depth of contacts within your former firms. So if you receive something that doesn’t quite sound right, you can call four or five other people and say what’s going on here. There’s a big contact base. But in terms of preferential treatment – not really. Maybe you know a few of the skeletons and you know where they should be strong, and you know they did this deal so they should know everything about it.
Lippey: If you know the firm well and you know where the resources are you don’t have to rely on one single point of entry. Typically a salesman is your window to the firm. But if you’ve spent six or seven years there and you know who’s who in the economics department or in trading, it can save a lot of time.
If you were to work out how much business you’ve done over the past two months would it show a bias to your old firms?
Lippey: I think it’s a very efficient market out here. So no, I don’t think so. I’m sure it’s the same with you Albert.
Cobetto: Yes. It’s surprising in many ways because in some cases they had the advantages, but in practice we’ve done much more business with other people who’ve maybe given us better service. It astounds you sometimes too. For example, from your own time in the firm, you know they should be able to deliver on something where they’re traditionally strong, and when they can’t you think, oh god, if they can’t deliver on this…
Lippey: The worst thing to do is overpromise.
Did you ever do that when you were selling?
Lippey: Never!
Cobetto: I tried not to, that’s for sure.
Lippey: To be honest, I think it’s a very efficient market and people have lots of choices. If you bullshit people, promise and don’t deliver, you’re not going to be on the short list very long. The best coverage we get is from guys who are very up front with you and say: “Look, we’re not good at convertible bonds, we’re terrible at corporate bonds but we’re a very, very good government bond house, and we’re great at structured deals.” I appreciate that. It doesn’t waste anyone’s time. I mean our shop, like yours Albert, has very experienced guys. All my guys have at least 12 years in the market. So don’t waste our time.
But as firms get bigger and bigger, doesn’t the bullshit get bigger because of the pressure to cross-sell the ever-increasing portfolio of products?
Lippey: It’s a question of being honest with yourself and coming up with your own business identity. With smart money you don’t get away with that bullshit for very long.
Cobetto: If Goldman or Lehman come to me or Brian they know we’ve been in the business a long time. If it’s senior people coming over they know they don’t have to go through with that bs. I think they appreciate that and they know they can get an answer from us quickly.
Lippey: When I was on the sales side the best type of customers were hedge funds because they were smart guys who understood the business. It’s a two-way thing. You understand that in order to keep the idea flow coming and in order to get good service you’ve got to leave something on the table. The relationship’s got to be mutually interesting for both parties. I’m trying to get my counterparty list down to six. At the moment we probably do 80% of our business with six to eight firms. Going forward we want really good service. That means you want your counterparties to help you with a broad range of issues – raising money, dealing with systems and infrastructural issues – and not just selling you bonds.
What do you say when someone less senior comes in and starts going into the “we’re the best firm because we’re globally focused” routine?
Cobetto: You hope you don’t get too many of those.
Lippey: Recently a couple of guys came and gave me probably the worst sales call I’ve ever experienced. I was shocked – they were senior guys with 15-plus years in the business who’d made their names at bulge-bracket firms.
They’d been recruited by a universal bank – and to be fair they were quite new to the organization. But one: they didn’t know what Tokai’s business was about – for example, what the areas of emphasis were and our product lines. Two: they didn’t know their own firm, meaning who was doing what, how they were organized or where the resources were. Three: they spent most of their time talking about their strengths in an area that was completely irrelevant to what we were doing. And worst of all they didn’t ask questions.
It was classic. It was complete disconnect – something you don’t expect from people of that calibre and experience. I’m sure they were paid very well too. They work for a European universal bank.
Cobetto: Amazing.
Lippey: Yes. For example, they spent 90% of the meeting talking about their strength in European fixed income. Yes, it’s important, but it’s a relatively small part of what we do. My conclusion is the buy side’s going to become a lot more selective in who they speak to and who they’re going to have time for.
Cobetto: On the sell side you’re putting out a lot of information and trying to make it salient. On the buy side you just get so much information – so much crap. You’re just barraged with research, information – tons and tons – and you have to be selective in what you’re going to read, who you talk to.
Lippey: This may have just been a bad day for these two guys. It may have been an aberration, but I feel the demands on individuals to distinguish themselves and really deliver value are increasing dramatically. I think there will be fewer and fewer people who do extremely well in the business and they will have to be really exceptional.
Albert, are your judgements harsher because you’ve been there or does it make you more sympathetic?
Cobetto: You can read through what the situation is a lot of times. So you may have sympathy for the salesperson who’s trying to do something because he got bad information from the trader and his rear is on the front line. A lot of people are put in tough situations.
Lippey: Sometime having been there in a similar situation gives you a sense of empathy. On the other hand, it can be exactly the opposite – the guy should have known better.
Are people less talented in Asia than in London and New York, but overpaid nonetheless?
Lippey: My own observation is there’s a lot of mediocrity out here. Not everyone is ready, willing or able to spend an extended period of time in Asia. The exceptional people out here would be exceptional in any of the centres. There’s just fewer of them.
Cobetto: The US has had a very long bull market, which has meant a lot of people in New York can earn a lot more than their counterparties out here. This is simply because the markets aren’t as big in Asia so people can’t produce as much revenue. I know a lot of people who feel by coming to Asia they might hurt their career.
Lippey: But frankly having worked in all three centres, there’s no place I’d rather be right now than here.
What is your take, Brian, on what Albert is trying to do with his business, and vice-versa for you Albert?
Lippey: I know Albert has a long, distinguished background in fixed income and Prudential is one of the pre-eminent fixed-income investors. It has always had an international presence but has recently been expanding it. In Asia I think it wants the ability to build a portfolio of high-grade fixed-income instruments here with a local currency overlay and manage it actively in the time zone.
Cobetto: In London Tokai took a lot of very talented traders out of the market and became a major force in the fixed-income area. I feel they’re trying to do a similar thing in Asia and that’s why they’ve brought Brian on board. He was also able to bring a lot of high-calibre people on board.
Lippey: I spent my whole career at US investment banks. And when I was approached by this Japanese house I said: “Um, I don’t think so.” I was hesitant because of the cultural role models, for example, decision-making inabilities. But they had done this before. They had successfully built a team in London around people from Salomon and that group has been intact almost seven years. I came to the conclusion these guys were committed and I thought we’d have a fair chance of success.
First, we had access to large amounts of internal capital. Secondly, we’d been given the resources to recruit and bring in quality people. Thirdly, we’d been promised broad autonomy. And I’ve got to say – we’re only 18 months into this – but they have certainly delivered in all three areas.
How are Tokai Asia and Prudential Asia different?
Cobetto: The one difference is we’re a little more on the conservative side. We don’t have a hedge-fund mentality. We’re managing money for Prudential, so – I wouldn’t call them constraints – there are parameters on how we can do that. We can’t go short and there’s little leverage. I’d think Brian has more latitude.
Lippey: I’d say that’s fair. We have a pretty broad approach to the instruments we trade. In addition to fixed income – which is very important – we’re very active in forex, and we’re getting geared up for equities. We also do volatility trading. We can go long and short and we use derivatives – opportunistically and defensively. We have an Asian focus, but we can and do get involved in global markets too.
Would it be difficult to pitch Albert?
Lippey: I’m kind of biased. I used to cover the Pru when I was at Goldman. It’s one of the most sophisticated fixed-income accounts in the world. It has huge capital resources, great research, and when they make a commitment to an area they’re always one of the top players.
How has the Asian crisis affected the information and service you get from local intermediaries?
Cobetto: The late-October meltdown was the low point in the period. There’s been a major deterioration in accurate pricing, relativity, and, in addition, bid-offer spreads gapped out totally. You don’t know what’s real and you don’t know if people have bonds to sell or are just putting numbers on screen because they don’t want to take positions.
Lippey: The dilettantes and newcomers to the market have been shaken out very quickly in the past three months. There’s a smaller group of guys that have been here a while. They’ve got the global resources and the capital and have seen good markets and bad. They are the ones who are there on the bid.
Cobetto: There are people putting big numbers on screen, and you call them back and say OK, we’ll lift your offer, and you get a dithering reply and are told they’ll call you back.
How many firms have emerged from this experience looking good?
Lippey: I’d want to temper this answer by saying our experience has been largely in equity volatility. But I’d say five or six houses. The usual guys.
How many of those are American?
Cobetto: Two-thirds, maybe.
Lippey: I would say five of the six.
Cobetto: A couple of Europeans are trying.
Lippey: The firms that I feel have consistently been very good are SBC Warburg, Goldman Sachs, JP Morgan, Morgan Stanley – and Lehman in fixed income. No surprises. CSFB have been good in structured products.
Cobetto: HSBC is good in local product. Those are the names. I guess Merrill has put out a lot of research.
Lippey: Merrill can be very good in some areas. In other areas they’re a little patchy. They can be surprisingly good in areas you wouldn’t expect. For example, forex in Singapore. Whereas in other areas, such as fixed income, you expect them to be a key player and it hasn’t been the case. They’re a great firm. I spent six years there.
Were you shocked by how big this crisis was?
Cobetto: I thought there was going to be a lot of volatility. I didn’t expect it to be where we are today. But the signs were there. A lot of deals didn’t make sense – like in 1993.
Lippey: We expected some contagion from Thailand, but just looking at how the thing has spread – it’s had a global impact. I don’t think anyone expected Thailand would have had a contagion effect of that magnitude.
