Lucrative Prime Brokerage Market Adding Services, Talent
JP Morgan may have bought Bear Stearns for the bargain price of just $2/share, but the deal provides the firm with a major entry to the lucrative prime brokerage market. JPMorgan has wanted to build out its prime brokerage in order to compete for a share of that market for quite some time, according to HedgeFund.net. In fact, the report states that the Bear Stearns prime brokerage business is so profitable that it alone will make the deal worthwhile for JPMorgan. Dow Jones also quotes Steve Black, Co-Head of investment banking at J.P. Morgan, as saying the deal provides a compelling “strategic fit,” since it will help the bank fulfill its goal of expanding its equities, prime brokerage and energy businesses and add investment banking clients.
Prime brokerage has become a major source of revenue for many leading firms as hedge funds require more services. Most large hedge funds use multiple prime brokers to assists in trading, lending, and to provide access to high-net worth individuals. Executive search firm, A.E. Feldman, says the growing demands placed on prime brokerage firms may create more opportunities for salespeople, marketing professionals and portfolio risk managers.
Prime brokerage firms were developed in the early ’80s to help fund managers keep track of transactions and positions through a central account. Today, prime brokers have become indispensable partners in hedge funds’ strategy for success, offering a slew of technologies and services.
It is the goal of prime brokerages to offer hedge funds investment strategies and help them maximize their trading performance, build their business, and attract new sources of capital. Brokers collect fees for financing and executing trades, lending stocks, and keeping trading records. And banks that can provide hedge funds with an edge through technology, access to sophisticated financial instruments, and other services are increasingly rewarded with routine prime brokerage business.
Morgan Stanley, Goldman Sachs and Bear Stearns are the three largest prime brokers. Meanwhile, Credit Suisse, Lehman Brothers, UBS, and Merrill Lynch are not only boosting their capital introduction teams but also expanding their services to go head to head with their rivals on a global scale.
The Bear Stearns Global Equities division, which includes both clearing and prime brokerage, generated record revenue of $3.36 billion last year, according to Bloomberg. Unsurprisingly, JP Morgan was reportedly eager to snap this asset up. Motley Fool contends that “if JPMorgan can successfully integrate Bear’s prime brokerage business into its own premier commercial and investment banking units, you might see JPMorgan achieve the ’supermarket’ financial-center status that has eluded Citigroup over the years.”
Goldman Sachs just posted a substantial drop in earnings, but the firm’s Chief Financial Officer, David Viniar, noted that the firm’s prime brokerage business has grown and continues to grow, according to HedgeWorld. The report states that net revenue from securities services (includes prime brokerage, financing and securities lending to institutional clients including hedge funds) for the three months ending Feb. 29 was up 7% from the previous three months. Additionally, HedgeWorld reports that for the past year through February, Goldman boosted prime brokerage revenue by 38% to $722 million.
Lehman Brothers saw similar gains. HedgeWorld quotes Lehman Chief Financial Officer, Erin Callan, as saying Lehman’s overall net income shrank 57% from first quarter 2007, but prime brokerage revenues grew in every region despite deleveraging in the industry and shrinking balances.
