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outsourcing the capital introduction busi-
ness. BNP Paribas was the first to make
this move, opting to outsource capital
raising services to Layton Road.
The move has left hedge fund managers
wondering whether other prime brokers
are likely to follow suit, and what impact
that might have on how capital is raised.
BRETT YARKON, GLOBAL HEAD OF CAPITAL Mahala hopes to persuade other prime
INTRODUCTION, COWEN GROUP brokers to follow BNP Paribas’ example
and outsource to Layton Road.
“One of the primary goals at Layton
Road is to onboard our next prime brokerage relationship. Upon
successfully onboarding a second prime broker, our hedge fund
and institutional investor relationships will begin to see the add-
ed fruits of the multiplier effect that is created because of our
open architecture of shared ‘investor interest’ among the two
distinct cap intro teams,” says Mahala.
“Our model accelerates an investors sourcing activity, whereas
one cap intro call can lead to introductions of hedge funds from
multiple prime brokers.”
Through a ‘hybrid’ cap intro model, Layton Road has a dual
revenue stream whereby it is paid by the prime broker and by
managers that independently sign up for its services.
Mahala says the Layton Road business covers a diverse group
of institutional investors, including fund of hedge funds, family
offices, endowments, foundations, outsourced CIOs, insurance
companies, RIAs and bank platforms. Of this group, fund of
hedge funds and family office allocators are its two largest
investor categories.
The move to an outsourced model would be one that influ-
ences the mid-tier prime brokers the most. The rise of split
prime brokerage mandates could put further pressures on
mid-tiers to outsource, given the fact that the majority of hedge
funds have at least one top-tier prime broker as a provider.
However, Cowen Group’s Yarkon disagrees strongly with the
move to outsourcing, as for many mid-tier prime brokers, they
see capital introduction as an area where they can differ to
the big primes to win clients.
“The cap intro team is too entrenched in the entire process
and if this was outsourced it would be hard to replicate this
relationship. The outsourced capital introduction team
would also will have little incentive to help the prime sales
team win business and they will be too far removed from
the everyday ebb & flow of the prime brokerage business to
properly sell it,” says Yarkon.
“The cap intro team is too
entrenched in the entire
process and if this was
outsourced it would be hard
to replicate this relationship.”
Betting on the start-ups
That is not to say the big prime brokers have turned away
from capital introduction completely. Many have simply re-
branded the service in order to tie in consulting, research and
other services handled by the prime broker.
For example, JP Morgan refers to capital introduction
as capital advisory, Credit Suisse labels it capital services,
while Barclays has renamed the service as capital solutions.
Under these brands, the big prime brokers aim to use
capital introduction as just one of the value-added services
that fall under their umbrella, engaging with the hedge
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Global Custodian
Fall 2018
fund at all stages of the life-cycle rather
than at the launch.
Furthermore, there has been a series of
mega-fund launches that have caught the
eye of the big primes. In 2018 alone, the
four biggest hedge fund launches have
attracted more than $17 billion, in com-
parison to the $13.7 billion investors have
allocated to existing funds, according to
data from eVestment.
In summer of this year, Michael Gel-
brand, the former fixed income trader at
Millennium Management, raised more
than $8 billion for his fund ExodusPoint
Capital Management, making it the larg-
est ever fund launch.
Banks are making bets on what one of
these mega funds will result in long-term
gains for the entire prime brokerage busi-
ness, and are therefore doubling down on
capital introduction.
“The maturity of clients is changing.
Prime brokers have a mix of straight for-
ward client acquisition and start-ups and
smaller funds. With this shift, the capital
introduction and consulting proposition
becomes very important,” says Jonathan
Cossey, global co-head of prime services,
JP Morgan.
“We continue to focus in the start-up
space, and seeing how we can ensure
those day-one funds can become a long-
term franchise partnership.”
Capital introduction will likely remain
a key function within the overall prime
broker business. Changing economics
between the fund manager and the alloca-
tor, combined with the need for tailored
capital raising solutions will make the
business an important one.
However, what is evident is that the
elements within the cap intro landscape
are changing dramatically. The juniori-
sation of cap intro teams at the big banks
coupled with the emergence of outsourc-
ing has caused some commentators to
question whether cap intro will be a
sustainable business.
But many mid-tier prime brokers
will see an opportunity to grow in this
space, providing specialist capital raising
services to niche strategies, as well as
serving the majority of smaller-sized fund
managers. But to succeed, they will have
to adapt to the changing environment
faster and become ever more efficient and
sophisticated to compete.