Revenues set to double
Prime brokerage revenues could more than double over the next five years to $11.5 billion, according to financial services technology consultancy Celent.
Prime broker revenues will be driven mainly by strong growth in hedge fund assets, which are predicted to increase at an average annual rate of 16.5% over the next five years, more than doubling to $2.1 trillion by 2009.
Although Morgan Stanley, Goldman Sachs and Bear Stearns currently enjoy a combined market share of between 55% and 65%, Celent believes that second-tier firms will be well positioned to capitalize on changing dynamics in the industry and win market share.
"There is unprecedented change in the market," says Denise Valentine, an analyst at Celent. "Technological developments from new trading networks and systems and a growth in the sophistication of services from fund administrators and technology providers are reducing the absolute dependency of hedge funds on vanilla prime brokerage and on the top three."
Prime brokerage has been a key part of the strategies of many investment banks, nearly all of which now have a business in place. They are attracted by profit margins estimated to be in the range of 15% to 25% and the prospect of volume growth.