In prime brokerage rankings wars, Credit Suisse had long run a distant fourth or lower, behind Goldman Sachs, Morgan Stanley and others.
However, following a strong resurgence over the past 18 months, most industry estimates pitch it at or near the top of the heap even as incumbents have rallied and regained some market share.
The Swiss bank's turning point ironically came amid the depths of the financial crisis when, following Lehman Brothers' collapse in September 2008, hedge funds feared a "bank run" next on Morgan Stanley and Goldman Sachs. A lot was up for grabs. Still, Credit Suisse selectively took in only some 70 additional clients, taking its total tally to 470.
In 2008 and 2009, "the previously sleepy prime brokerage business woke up to some new realities", says Philip Vasan, Credit Suisse's unit head.
Under his stewardship since 2003, Credit Suisse has pursued a "hand-picked client base" that placed a premium on quality and safety, compared with other banks that took a more "mass market" approach, he says.
Deutsche Bank's prime brokerage business has been another beneficiary of the market turmoil. Its hedge fund market share has surged over 18 months, according to its unit co-heads Barry Bausano and Jonathan Hitchon.
Making headway
"The business environment is tremendous. 2009 was our best year ever despite a fall in industry-wide aggregate revenues," says Bausano. Deutsche continues to make headway in 2010.
The ascent of these European banks has rocked the prime brokerage landscape and upended the duopoly of Goldman Sachs and Morgan Stanley that dates back to the early 2000s. But as the markets have stabilised Goldman and Morgan are on the offence again.
For example Morgan's average client balances rose 10 per cent and 14 per cent during the second and third quarters of 2009 respectively. A number of key franchise clients have returned. "This is an environment that plays to our strong heritage and continued clients' rankings as one of the leading global prime brokerage providers," says Alex Ehrlich, Morgan Stanley's global head of prime brokerage.
As unprecedented market forces largely drove the shift in favour of the European banks, it is only logical to question whether the duopoly will reassert itself once the dust settles. Will the change stick?
The expectation is that it will, and here is why: prime brokerage is a relationship business and some new loyalties were forged during the crisis that will not disappear as the financial system recovers.
Over the next few years, look for hedge fund assets to continually be spread out among multiple brokerages and custody banks. "The multi-prime trend is here to stay," says Stu Hendel, head of prime brokerage at UBS. He adds: "There's plenty of business up for grabs as hedge fund clients of large prime brokers diversify their assets."
Research analyst Matt Simon of the Tabb Group says hedge funds with more than $3 billion (Dh11.1 billion) now have 4.8 prime broker relationships apiece, compared with 3.7 in 2008.
While this has opened doors for new entrants to gain market share, there is also more competition to get the business and make money on it, says Simon. Not surprisingly, AllianceBernstein analyst Brad Hintz expects a 52 per cent drop in prime broker earnings. And due to a host of reasons, the cost of running prime brokerage has gone up.
Client loyalty
That means each broker must work harder on building client loyalty and selling enhanced services. All told, prime brokers are expanding their product range, their geographic reach and their sales capability, notably in Asia. Goldman and Morgan are pressing ahead to further solidify their dominance in equities, and both Credit Suisse and Deutsche are touting more diversified platforms.
"With hedge fund investors in mind, we run this place as a conservative investment portfolio," Vasan says. Both Goldman and Morgan have established "bankruptcy remote" group custodian structures for client cash and securities.
Each prime broker is vying for a large piece of the new fund business that is going live by this spring. Vasan says his firm is involved in virtually all of the "major launches" of 2010. Goldman's involvement is on "80-90 per cent of relevant" new funds, says John Willian, who leads the prime brokerage unit with James Paradise.
Separately, Deutsche recently launched its emerging managers platform that allows it to cross-sell various services to start-ups.
Looking forward, Goldman's Willian says: "One of the big changes over the next five years will be towards OTC clearing." Brokers will look for a way to integrate OTC and futures products clearing with the broader prime brokerage business, he adds.
The prime brokerage business remains material and profitable for Goldman, Willian says.
— Financial Times
