Managing Director and Global Head of Prime Finance • Citi
When Nick Roe first entered the prime brokerage industry in London in 1994, the business was not a complicated one. “The collateralized lending was very basic, but that was the value proposition,” says the man who is now global head of prime finance at Citi in London. It was only the decision of former Magellan Fund superstar Jeff Vinik to set up a hedge fund that prompted Morgan Stanley to develop hedge fund start-up and prime brokerage capabilities in London at all. They were part of the price of winning his business, or so says Nick Roe, and he should know: He was working there at the time.
Once Goldman Sachs entered the business as well, adds Roe, prime brokerage evolved quite quickly into its classic form, in which financing was commoditized and competitive differentiation was sought among so-called “value-added” services offered on a consultancy basis. “That changed last year, when all of sudden balance sheet became available only at a premium again,” explains Roe. “Now we are back to who has the bigger balance sheet, who can cover the most markets, and who can help distribute assets into these funds. Capital introduction has become a capital raising function again. When we talk to hedge funds, the most important thing to them is getting assets in the door-and they are willing to pay for that. The business has gone back, in some respects, to where we were in 1994, when funding and balance sheet and capital raising were the priorities.”
But Roe thinks the business will be different in future in one important respect, stemming from the renewed emphasis on counterparty risk and the security of assets. “The challenge now is to offer other services at the bank across the life cycle of the transaction with the prime brokerage platform,” he explains. “How do you join up the financing with execution services right the way through to custody and fund administration? How do you deliver the firm to institutional investors as well as the hedge funds?”
Finding answers to those questions is exactly what Roe is now working on at Citi. Luckily he understands well the ex-Bisys offering that is at the heart of the Citi hedge fund administration service-because it is based on the platform built by Hemisphere, a firm with which Roe established an alliance when he was in the prime brokerage group at Morgan Stanley in the years before it was sold to Bisys.
Roe is also working with Neeraj Sahai, the head of securities and fund services at Citi in New York. He acknowledges the obstacles that stand in the way of integrating execution, prime brokerage, securities financing, fund administration and custody. “Legacy technology, philosophical differences between institutional client processes and hedge fund client processes, the market is changing so quickly and therefore firms need to adjust more quickly to take advantage,” he says. “Not many firms can bring different businesses together effectively to a market advantage as traditionally banking has always encouraged people to think about their own P & L. At Citi that has changed under the leadership of Vikram and John.”
But Roe is more concerned about ensuring that the costs of offering an integrated service are proportional to the scale of the opportunity. However, he believes that the managerial and organizational mood at Citi is more favorable to creating a unique partnership offering than at any time since he joined the company four years ago. The opportunity that exists at Citi is what keeps Nick Roe motivated. “The skill set I have is process oriented,” he explains. “I like changing things, devising strategies, and executing. My strength is business planning, and executing on the plan, and implementing a sound process. I am happy to make tough decisions, but I am not very good just sitting on top of something that needs no change. If I am sitting on top of something which works well, I start looking for different opportunities.”
That aptitude for getting on with things must owe something to the fact that-unusually in modern financial markets-Nick Roe did not waste three or four years collecting a university degree. After leaving Queen Mary’s College in Basingstoke-he was born and brought up in nearby Winchester-he started work, and helped his brother through the final stages of his physics PhD at Imperial College. This was a major public service, for Shaun Roe is now a senior physicist at the CERN laboratory in Switzerland, writing the software for the Large Hadron Collider. The priorities of Nick Roe at the time are evident in the fact that he picked up the job as an IT expert-cum-controller at Merrill Lynch International in London by walking into the offices of a recruitment consultant.
The City of London labor market was on fire at the time, in the wake of the Big Bang of October 1986, and it is a measure of the quality of the man that Roe landed the job out of field of 120 applicants. The firm put him in charge of foreign exchange and P&L and Bank of England reporting. “I had no maths degree, but a reasonable understanding of maths, and a talent for programming macros into Lotus 1-2-3,” he explains. “That enabled us to automate a lot of the reporting processes.” In a foretaste of his career-long appetite for keeping ahead of the boredom threshold, Roe stayed only six months at Merrill (“The job was done-they should have had a consultant do the work,” he explains) before joining Morgan Stanley.
His first job was to support the traders on the Japanese equity warrant and convertible desk, which were then trading in one of the hottest markets of the 1980s. Roe found the investment bank had built an in-house trade and processing system (TAPS) for their capital markets activities, but it had not eliminated the need to write physical tickets. This created an unexpected problem when he was asked to oversee and automate the position-keeping on TAPS. “When we tried to automate the physical trading books, we discovered that a number of discrepancies in the manual process would have been open to abuse, so we made sure we reconciled every position back to the custodians and every mark back to the leading market participants,” recalls Roe.
But his efforts caught the attention of Sky Lucas-now a well-known Boston hedge fund manager-though better known as the man who paid $165,010 for the line-up card in the deciding game of the Red Sox World Series win in 2004-but then the head trader at Morgan Stanley in London. He asked Roe to help support him in his trading activities. Later, Roe assumed responsibility for creating a system to record, reconcile and report sales, credits and commissions. So when a team arrived at Morgan Stanley from Smith New Court to launch a contracts for differences (CFD) offering, and racked up a slew of unsigned trade confirmations, Roe was the natural choice to clean up the mess.
That assignment was the beginning of his career in prime brokerage. CFDs, coupled with the growth of the swaps markets, prompted Morgan Stanley in 1994 to merge synthetic businesses and the securities lending group into the nascent prime brokerage group established in London to service the likes of Jeff Vinik. “I was asked to come over and help,” says Roe. “There were six of us in London at that point, servicing three US-based funds that required an international prime brokerage service.”
At the time, Morgan Stanley was one of only three investment banks-the others were Lehman Brothers and Merrill Lynch-offering prime brokerage in London at all. One idea, subsequently ditched, was to add a correspondent clearing service. Having joined the group to help develop the prime brokerage service in London, it was not long before Mike Armstrong, the then-head of the group, recognized that the natural affability of Nick Roe made him well-suited to lead sales into the local hedge fund industry. He stayed in that role for two years, during which time Morgan Stanley became the clear market leader in London.
In theory, that provided ample reason to stay. But in 1998, 150 equity derivatives specialists decamped from Morgan Stanley to NatWest. They did not stay long at their new employer, because it was sold the same year to Bankers Trust, which was in turn acquired a year after that by Deutsche Bank. One of the equity derivatives specialists that made this circuitous journey to Deutsche Bank was Mark Harrison, originally global chief operating officer for equity derivatives and European head of securities lending at Morgan Stanley, and in 1998 was international head of prime brokerage and securities lending. He invited Roe to join him, in order to develop the cash prime brokerage platform of the German investment bank.
“I was a jack of all trades initially,” recalls Roe. “I ran sales and then, as prime brokerage became prime finance, I took additional responsibility for all the synthetic and Delta One sales. Then I ran European Prime Finance for Jim Rowen and global sales for prime finance.” When Jim Rowen quit as global head of prime finance in 2004 to join SAC Capital as CFO-he is now COO at Renaissance Technologies-Roe succeeded him. He stayed 12 months before Citi invited him in July 2005 to establish an international prime brokerage platform for the bank.
It is not difficult to see why Roe seized the opportunity to move to Citi, which was then effectively a non-starter in the international prime brokerage business. Deutsche was undergoing a merger of the equities and fixed income businesses and prime brokerage was under the microscope in terms of its profitability, especially as it appeared to eat balance sheet. Colleagues Roe valued on the equity side of the business, such as Global Head of Cash Equities Chief Ralph Reynolds and Global Head of Sales Rick Goldsmith had left the bank too.
The people that Nick had joined to work with had all left capital markets. But there were attractions as well as open concerns at work in the mind of Nick Roe in July 2005. Citi prime brokerage was a greenfield site, especially in London. In fact, in his first year at Citi, says Roe, the international prime brokerage business was non-existent in revenue terms. The bank had a size- able fixed income franchise inherited from Salomon Brothers, answerable to New York, but no equity finance business to speak of. The swap platform was manual, and the securities lending platform almost completely lacking in automation. There are 120 people representing Citi prime brokerage internationally now, but there were only 50 then. Roe hired aggressively. An entire securities lending trading team joined from Goldman Sachs. There are now more than 70 people working in prime brokerage at Citi in London. A focus on building service capabilities and processing power, rather than simply distributing what Citi could do already, meant that Roe built Citi Prime Finance more slowly than other investment banks in the same position.
Within two years he had lifted European prime brokerage revenues to over $200 million, sources close to Citi say. The latest Global Custodian prime brokerage survey confirms that Citi has arrived as major force in the industry. Does that mean-awkward question, this-that Nick Roe is sitting on top of something that works? Of course, but luckily there is still something left to do at Citi Prime Finance: building a product on top of the unique structure Citi was able to deliver to ATP (The Danish State Pension Fund) to offer prime services plus fund administration and custody to traditional as well as hedge fund managers.
“The reason I am here is the unique and palpable opportunity of helping bring all these businesses together,” says Roe. “Citi has an enormous opportunity, which they are realizing. We have unequivocal, complete and utter support for our product-far beyond anything I saw at any other prime brokerage firm I have worked at. There has been absolute consistency in senior management backing for what we are doing.” It is precisely because he has built something which works that, when Roe reaches the stage where he hands over the reins, there will be a ready-made successor in place. His friend and colleague Alan Pace, a fellow Legend, former head of international prime brokerage at Lehman Brothers in London and cur- rent head of prime brokerage in the Americas, would provide a completely seamless transition.
Nick Roe, meanwhile, would be free to move on to the next challenge. –Dominic Hobson