Money managers dipping their toes into banks' pond

While banks have a long history in money management, few money managers have encroached on investment banking territory. But as new regulations globally attempt to rein in the banks' financial reach, money managers might be in a natural position to fill in some of the gaps - and then some, sources said.

Underwriting and M&A activities are still out of reach for money managers, but managers are expanding in other banking-related services such as securities trading, direct loans and related advisory services as the banks themselves retreat.

"Individually and collectively, managers are more meaningful buyers of securities in capital markets," said Salim Ramji, director at McKinsey & Co. New York.

"We now have asset managers of meaningful size and scale relative to what they might have been 10 or 15 years ago," said Mr. Ramji, who also is co-leader of wealth management, asset management and retirement practice in the Americas. "Twenty years ago, a top-five asset manager managed $100 billion in assets; breaking into the top five today would require 15 times that amount."

BlackRock (BLK) Inc. (BLK), New York, the largest money manager in the world with $3.68 trillion in assets under management, is among the most recent to add services that traditionally belonged in the domain of banks. BlackRock plans to launch a bond-matching trading platform available to about 50 institutional investors and clients of the BlackRock Solutions risk management unit. The firm is working with the U.S. Securities and Exchange Commission to build the platform.

BlackRock is also adding global capital markets capabilities. In London, BlackRock appointed Rob Leach in the new position as head of capital markets in the Europe, Middle East and Africa region.

"We've always been seeking efficiencies for clients," said Richard Prager, managing director and head of global trading within BlackRock's portfolio management group, New York. "We're now doing so on a more robust basis. There just wasn't the same need before because we weren't living in a liquidity-challenged world. ... We're not looking to disintermediate (Wall Street)."

Separately, BlackRock is enhancing its trading infrastructure and an emerging brokers program, which so far has included about 50 emerging brokers.

"Each of these initiatives adds a little bit of liquidity, but none is a silver bullet," Mr. Prager said. "It has been a journey."

'Unlocking value'

Benjamin Phillips, a partner with Casey, Quirk & Associates LLC in Darien, Conn., declined to talk about specific firms but said certain managers might see an expansion into investment banking activities as another way of "unlocking value."

Regulatory uncertainty will likely result in more opportunities for money managers, said Sang Lee, managing partner at Aite Group, a financial research and advisory company based in Boston. "We're in the early stages in terms of the new changes that we may see," Mr. Lee said. "The market never stays the same. As a result, market participants never stay the same."

Advancements in electronic trading and global regulations that impact trading activities have resulted in "a series of exogenous factors impacting the marketplace," Mr. Prager said. "All the important actors in the buy side and the sell side will continue to co-exist in the same ecosystem. But our roles are changing and revenue pools are shifting to some degree."

In Europe, where the separation between investment banks and commercial banks is not required, some investment banks also have a commercial banking division, including direct commercial loans - another area attracting money managers not owned by banks. As banks are lending less, others are stepping into the direct loans sector and reaping the relatively higher yield in a low interest rate environment. For example, direct loans on commercial real estate can yield twice the amount expected from investment-grade corporate bonds with the additional security of the property itself, sources said.

Prudential Mortgage Capital Co. (known in Europe as Pricoa Mortgage Capital Co.), which is Prudential Financial Inc.'s mortgage finance division with $69.5 billion in assets under management and administration, closed its first major direct financing deal in the U.K. in June.

Shamez Alibhai, partner at hedge fund Cheyne Capital based in London, said his firm will complete two direct commercial loan transactions within the next quarter. Cheyne Capital manages a real estate debt strategy with about $1 billion in AUM.

"If you just focus on the commercial real estate market, it is estimated that between e400 to e700 billion of financing are needed over the next three to four years" as a result of banks looking to reduce lending, Mr. Alibhai said.

Separately, BlackRock (BLK) is also planning to launch a fund that makes direct commercial loans in Europe. Metlife Investments Ltd and M&G Investments are also expanding European capabilities in the sector.

Direct commercial lending "certainly adds risk, but also opportunity to make more money," said Peter Hahn, full-time lecturer within the faculty of finance at Cass Business School, London. One of Mr. Hahn's specialist areas is banking strategy and management.

Mr. Hahn added money managers have stepped in where banks have retreated before, for example, following the high-yield boom-and-bust cycle in the 1980s. In addition, investment managers - mostly in the retail sector - have been running trading platforms for years, he added. FMR LLC, the parent company of Fidelity Investments, runs one of the largest discount brokerages in the U.S., sources said.

Citadel Securities, Citadel LLC's sales and trading platform, now accounts for up to 22% of U.S. options volume and 13% of U.S. equity volume, according to data provided by the firm. However, Citadel's separate effort to launch an investment bank in 2008 disbanded after three years when Wells Fargo & Co. agreed to buy the business for an undisclosed sum.

While it's true that adding investment banking services has the potential to dilute revenues and create conflicts, it could also unlock opportunities, Mr. Phillips of Casey Quirk said. The challenge will be to balance regulatory considerations.

"The closer (money managers) move toward investment banks, the more layers of regulation they add," he said.

"In addition, they need to be very clear where their fiduciary duties are."

If successful, however, investment banking capabilities could be a major stepping stone toward a global, diversified financial services company, "which continues to be the holy grail" of the financial sector, Mr. Phillips added.

Find out more about Cheyne Capital

Related Articles - Cheyne, investment, finance,

Email this Article to a Friend! Receive Articles like this one direct to your email box! Subscribe for free today!