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Best Prime Broker: Deutsche Bank |
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Also nominated: Goldman Sachs and Barclays |
Having a prime brokerage relationship is a lot like being married,” says Barry Bausano, head of global prime finance at Deutsche Bank. “It is a very entwined relationship connecting you with the client in reporting, execution, finance, platform – and those interdependent relationships tend to be long lasting.”
That made it difficult for Deutsche Bank to nudge into the top two before the financial crisis in 2007/08. The bank was winning clients based on its international presence and deep product range but Goldman Sachs and Morgan Stanley were firmly entrenched at the top. When confidence in Wall Street firms was shaken in the crisis, that dominance was undermined, with clients looking for multiple prime broker relationships to spread their risk. Deutsche Bank won most of that diversifying business and, while competitors were licking their wounds, the German bank committed itself to ensuring that it would retain its enhanced market share even after the markets had settled.
The strategy of a seamless multi-asset class platform and commitment to start-up funds has resulted in the firm receiving Euromoney’s award for best global prime broker.
It was a brave decision in 2008 to make the call that the hedge fund industry would grow beyond its $2 trillion peak, given the difficult markets and lower performance of many strategies. Bausano says it was a secular bet: “The asset/liability mismatch in pensions was a key indicator that there would be significant demand for alternative investments to compensate for low returns on passive equity index holdings and government bonds. Consequently we were confident that the pressure to find good managers would increase, and institutional asset inflows would return industry AUM to beyond the prior peak.”
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“We have been structurally creative consolidating risk, margins and reporting across all assets”
Barry Bausano, head of global prime finance, Deutsche Bank |
There were far fewer start-ups during and directly following the crisis. However Bausano says those that launched were incrementally more important than ever. And while some competitors turned away from courting start-ups, Deutsche Bank increased its commitment. “For a start, we knew that managers who could launch a fund despite the crisis would be very high calibre and very credible – so we thought start-ups of this vintage were actually very promising,” he says. “Regulation drove talented risk-takers out of bank prop desks, and the economic dynamics of hedge fund high-water marks encouraged many key lieutenants of established funds to strike out on their own.” So while competitors were cutting resources, Deutsche Bank invested in its capital introduction, consulting and start-up service groups.
Of the six largest start-up funds launched by former Goldman Sachs and JPMorgan traders in the past year, four have chosen Deutsche Bank as their prime broker.
Deutsche Bank is also one of the few players that can truly turn its hand to any asset class. Goldman Sachs deserves credit for being the prime broker of choice for equity hedge funds that make up most of the hedge fund industry, but the trend towards multi-strategy has played to Deutsche’s advantage. It has a deep product range across credit, FX and equities and is structured so it can provide financing across assets. “It requires a lot of operational and financial efficiency to finance assets in addition to equity without overburdening your balance sheet,” says Bausano. “We have been structurally creative consolidating risk, margins and reporting across all assets. One of our biggest competitive advantages has always been that we have our synthetic and traditional financing integrated within prime finance.” Many prime brokers have put synthetic financing into their equity derivatives business, so end up competing for the client on two sides.
Deutsche Bank’s emergence as a top-tier electronic execution provider along with its financing expertise has enabled it attract many of the world’s largest high-frequency trading funds as clients over the past two years – the final gap in its offering.
Bausano sees the prime brokerage market as continuing to evolve over the next few years. Those competitors that lack balance sheet and can only focus on equity products, he says, will narrow their client focus.
Those that can service clients across a broad range of products will reap the rewards. Barclays, for example, makes this year’s shortlist because it has ensured it is set up to be product agnostic and has been seeing its client base increase.
Optimal balance-sheet efficiency in a post-Basle III world will be a key to success. Additionally, the trend towards internationalization will continue, and those with a narrow domestic bias will need to expand their geographic presence, says Bausano.
It will be hard to catch up with Deutsche Bank though. Clients are indeed like spouses and are not easily pulled away. Growth might have to come through enticing start-ups away from the German bank. It remains to be seen whether or not competitors have the start-up platform to compete.
