I’ve never met a kid who says, ‘When I grow up, I want to be a prime broker.’ As far as financial services broadly are concerned, when did you know you’d be involved?
My entry into financial services began on the investment side of the business and was far removed from my youthful ambitions.
I grew up on Curaçao, a small island in the Caribbean, in my family’s fabric business and to this day I could probably still measure and cut a yard of fabric by eye. I came to college in US, where I studied economics and also met my wife. After I graduated and we got engaged, the plan was to get married and move back home where I was going to run the business my family had established.
My father-in-law, who was a well-known research analyst back in the ’60s and ’70s had other designs and talked to me about the investment business and the opportunities I could pursue. He also suggested that if I applied myself, I could earn a good living. I asked him what that meant; he threw some numbers out at me, and I said, “Where do I sign up?” And that was it.
So, instead of going back to Curaçao, I convinced my family that I needed to further my education. I enrolled in an MBA programme in finance and investments. As I approached graduation, I interviewed with some investment firms and ultimately got an offer to be an assistant to a senior analyst at Oppenheimer and Company, at that time a brokerage house with one of the foremost research departments.
That’s where I cut my teeth in the investment business. From there I moved to Salomon Brothers, and subsequently had the opportunity to establish my own independent research firm, which I ran for a few years before being recruited to join Morgan Stanley in a similar research capacity.
My first exposure to prime brokerage came in ’97 when I launched a hedge fund firm with Mike Rosen, also a former analyst, who is my long-term business partner and also global co-head, prime brokerage & outsourced trading at Cowen. We ran our hedge fund firm, which focused on the consumer sector, from ’97 through to the end of ‘05.
While we primed with a large bank, we also utilised the services of a small boutique firm that we were affiliated with to provide a bunch of the ancillary services on an outsourced basis, including trading, operations support, and portfolio reconciliation. This allowed us to focus on portfolio management and research, and gave us the opportunity to dedicate our resources to hiring other analysts to work with us.
So it was really meeting your own needs that was the initial spark then?
Exactly. We figured out a solution that suited us as fund managers, and then the demand drove the creation of what became the precursor to Cowen’s prime services business.
In 2004-5, it seemed like the pick-up in demand for prime brokerage services from new launches by emerging managers wasn’t being met by the traditional big banks and prime brokers. That proved to be the principal driver in our decision to pursue the prime brokerage opportunity.
As we concluded that the idea had legs, the realisation also set in that we couldn’t continue to run a portfolio and fulfil our fiduciary responsibilities to clients while also building and managing a prime brokerage business. So, we shut down the hedge fund business at the end of ’05 and turned our full attention to further developing our prime brokerage capabilities and a growth strategy. The experience we had as users of these services ourselves has informed all of our decisions along the way.
The original brokerage business had been sold to a small merchant bank and being part of that firm allowed us to survive the financial crisis and gruelling markets in 2008-09. A lot of other smaller boutique or mini prime brokers faded away. They either didn’t have the proper capital, the proper risk management tools, or the proper compliance tools to sustain their business or the relationships they had with the banks that provided custody and clearing services.
We were the beneficiaries of that fallout because of the relationships we had developed with some of the big clearing firms and the capabilities we had built, particularly in compliance, AML and risk management. In the span of three years, we ended up absorbing five of these ”mini-primes”, took in their clients and their personnel, and leveraged the capabilities we had in place. The team, and the varied backgrounds they brought with them, allowed us to broaden our reach, strengthen our relationships with our clearing firms, and accelerate our growth. That got us noticed in the marketplace, and ultimately led Cowen to acquire us back in the early part of 2015.
How has being part of Cowen changed your business?
Being part of Cowen has allowed us to greatly expand our capabilities and the size and scope of the business. Today we have a global footprint with operations across the US, UK and Hong Kong that service clients that span across the US, Canada, the UK, EU, the Middle East, and Asia. The firm’s diversified capital markets and investment banking platform, and quite frankly its financial resources, have provided the support that was required to take what was essentially a very insular business with very limited capabilities, to one that now very much rivals what the large, traditional prime brokers can offer their clients.
Perhaps the most important development from our perspective is that we’ve been able to elevate the outsourced trading solution to a level that has become very attractive and compelling to a broader audience of fund managers than those who have historically selected us for prime brokerage services. We’ve done this by staying true to our original construct that’s centred on the concept that the service needs to look, feel, and operate just like a buy-side trading desk would, and by expanding our coverage to additional asset classes, including FX and credit.
But at the moment there isn’t a huge overlap in the client base of your PB business and your outsourced trading business?
That’s absolutely correct. It’s less than 5%.
Looking ahead over the next year or two, what’s the thing that most excites you as an opportunity for your existing business?
We’re excited by the pending acquisition of Cowen by TD Bank Group. While the transaction isn’t expected to close until sometime in the spring, we believe significant opportunities to enhance our client offering in prime brokerage will become evident. Needless to say, we’ve very proud of what we’ve been able to accomplish thus far, but it shouldn’t be hard to imagine how marrying our respective capabilities and capitalising on the financial strength and cost of capital of a venerable financial institution like TD could put us in an interesting position to be able to compete for PB services amongst a whole set of investment managers that previously wouldn’t consider us in that role.
We also see reason to be optimistic in the wake of the turmoil in the prime brokerage space over the past couple of years. So far, we’ve witnessed the demise of a few former heavyweights of the industry, and we wouldn’t be surprised to see others pull back their commitment to hedge funds. As the number of participants continues to shrink, those of us who’ve demonstrated a consistent commitment to serving hedge funds should have a continuing opportunity to pick up business from managers who were previously provided those services by some of these large banks.
I think a lot of smaller to mid-sized firms that have been long-time clients of some of these banks are likely to end up looking for and needing alternative service providers. We’re not the only ones out there looking to capitalise on this opportunity, but given our track record and areas of expertise, we believe we’ll be able gain more than our fair share of new clients. The solutions we offer are comparable to – and often come with a greater level of service – than what they have been getting from their existing service provider.