Managing Director ● Mitsubishi UFJ Securities (USA) ● New York ●
Joe Weinhoffer is that rare thing: the outsider who always manages to stay long enough to make a real difference before the conventional wisdom catches up with him and he realizes it is time to move on and seek new challenges. It probably helps that his original training was in the destruction of apparently solid objects. Weinhoffer spent five years as an artilleryman in the US Army before he was hired to the Bank of New York (BNY) by Tom Perna, then head of the custody business at BNY and now his successor as CEO at Quadriserv.
After an MBA at Columbia, and a spell in the securities lending department at BNY, Weinhoffer saw an opportunity to persuade beneficial owners to lend their securities other than via their custodian. In 1992, David Komansky-later CEO of Merrill Lynch-backed him to start what was almost certainly the first third-party securities lending business. Merrill Lynch portfolio Services (MLPS), which did its first trade in 1993, was eventually acquired by BNY, but its alumni are still evident throughout the securities lending industry.
It was the founders of MLPS who went on to set up the independent third-party lending business of Metropolitan West Securities, now the Wells Fargo-owned Wachovia Global Securities Lending Group, rated for the first time in the Global Custodian survey this year. Weinhoffer took a different route out of Merrill Lynch, going to Morgan Stanley Trust Company to set up another third-party lending group in 1995. When the investment bank sold its custody business to Chase in 1998, Weinhoffer stayed on for a year in the prime brokerage group at Morgan Stanley, reporting to Rich Portogallo.
Restless, he quit at the height of the dot com boom to start a Web-based B2B marketplace for the construction industry called VendQuest. “We raised $15 million in no time, on a $90 million pre-money valuation, with no business,” he recalls. It was not a success (“I wish I was back there now,” Weinhoffer says. “I would know how to do it better”) but its failure did lead to the foundation of Quadriserv in September 2001. It began by supplying stock loan transaction data from broker-dealers and lenders to hedge funds. “We were a little bit ahead of Data Explorers and a little bit behind Astec,” Weinhoffer recalls. “But we never intended it to be our primary business. We always wanted to be a marketplace, but we knew we could not just go out there without any credibility and expect to become one.”
The data business did provide both the means and the opportunity to acquire a broker-dealing license in 2004, form a partnership with the Bank of New York and start helping hedge funds source collateral and cover shorts. in 2005 Quadriserv raised equity capital from Bessemer Venture Partners and became what Weinhoffer calls “a proper company.” In February last year, Quadriserv finally achieved its ambition of becoming a marketplace with the launch of Aquas, a Web-based market for stock loan. By adding a CCP, which Quadriserv is building in conjunction with the options clearing corporation, Aquas has now become a vertically integrated stock loan trading and clearing platform called AQS. The company recently announced a second partnership with SunGard, by which the SunGard securities lending application Loanet will provide its users with ready access to AQS. In January this year a deal with Eurex clearing added a trans-Atlantic component to the CCP offering.
In March, Quadriserv became more than a “proper company.” The equity options marketplace, the International Securities Exchange (ISE), led a $34 million injection of capital into AQS, alongside interactive Brokers Group, SunGard, Bessemer Venture Partners, Renaissance Technologies, Round Table Investment Management, Susquehanna, Merrill Lynch and Citi. Inevitably, the idea of a securities lending CCP is anathema to the broker-dealers that continue to intermediate loans to hedge funds by beneficial owners and their custodians.
So why did Weinhoffer leave, just as things were getting institutionally interesting enough to provoke a further clash with the prime brokers? Because Weinhoffer knows better than most the difference between an entrepreneur and a manager. “If you are CEO of a start-up like that, you are under a lot of pressure from the various constituents, and there is a lot going on that you have to deal with. After seven years,” he says, “it was time to move on.”
Besides, while he was recruited in Fall 2008 by Mitsubishi UFJ securities to head their global securities lending business, Weinhoffer retains his seat on the board of Quadriserv and remains a substantial individual shareholder.
With AQS now going head to head with the NYSE Euronext-owned SecFinex and the prime broker-controlled EquiLend, Weinhoffer can still enjoy his favorite sport-questioning the conventional wisdom and overturning incumbents-as a spectator. At Mitsubishi UFJ securities, the investment bank that is trying to take advantage of difficult market conditions, he is getting the opportunity to overturn the conventional wisdom that Japanese banks and investment banking do not mix well, and he can carry on doing what he does best-helping to build viable businesses. “I have always fought the establishment-first the custodians with the first third-party lender at MLPS and then next fighting the prime brokers with Quadriserv,” Weinhoffer says. “I have never been loved by ‘the industry.'”
Loved or not, he should be treasured by anybody in the industry who believes in the things on which progress in business always depends: that appetite for risk, lack of respect for incumbency and love of innovation that turn the idea of competition into compelling reality.