Excerpted from Risk.net, Third-party cap intro opportunity as prime brokers scale back, Luke Clancy, March 17, 2015
Andrew Saunders, founder and senior managing director, Castle Hill Capital Partners
In a more profitable, clubby pre-2008 world, cap intro desks were once the sole source of investor intelligence and access to capital. But the cap intro function sits within prime brokerage out of evolutionary convenience, rather than business logic. Following the crash, major prime brokers have shed vast numbers of unprofitable clients, leaving managers to navigate on their own.
Fortunately, this is an entrepreneurial space and a range of solutions to raising money have sprung up. There are now numerous conferences, well-established databases and a raft of financial technology platforms emerging that promise to disintermediate the allocation process.
Mass cap intro offerings are simply untenable in a revenue-constrained environment, as prime brokerage firms will either make explicit their focus on their largest clients, or develop domain expertise in a specific strategy or asset class. Managers that do not meet their threshold will be politely ignored or abruptly cut, as happened to one of my clients who received the ‘it’s not you it’s me’ notification from their cap intro coverage of 10 years by text message!
As a former head of a cap intro desk, I am intimately familiar with both the opportunities and limitations placed on the business, which is not an outsourced sales force. Cap intro desks, generally, are too few, tend to too many, and in a fee-inhibited world are going to prioritise top revenue producers regardless of their investment attractions.
The future of cap intro no longer sits on the prime brokerage desk. It will be an unbundled approach led by an independent seasoned adviser working for and compensated by hedge fund clients to develop a customised marketing strategy. It should employ all tools available, including traditional and social media, and target investors for whom the client can provide differentiated solutions.
Managers need help with a whole host of issues, such as filling out requests for proposals, writing letters and engaging their limited partners. Prime brokerage cap intro desks are not only unfit for such work, in many cases they are restricted by compliance for even putting ideas in writing. In the future cap intro desks will be one tile in a mosaic of service providers, rather than the entire picture.