Mon, 16/10/2006 - 07:00
Colin Bugler and Robert Pitt highlight the strategic focus and thinking that is driving the expansion of Scotia Capital's prime brokerage business.
HW: What are the services offered to hedge funds by Scotia Capital?
CB: Scotia Capital is the wholly-owned investment banking division of The Bank of Nova Scotia. We are a full service prime brokerage and equity finance provider offering flexible solutions to our clients through synthetic and cash prime brokerage. Cash and synthetics are delivered seamlessly off the same trading and reporting platform.
HW: What is the global reach of the business and what are its strengths?
RP: The Bank of Nova Scotia is active in 54 countries around the world so we have a significant global footprint to leverage in prime brokerage. This means some unique financing and securities borrowing opportunities for our clients in markets our competition may find difficult to operate in or are unable to access. Latin America, Mexico, the Caribbean and Canada are particular strengths outside the main financial markets that we service such as the US and UK.
Specifically for prime brokerage we have operations in London, New York, Toronto and Singapore. The business was built on a single platform so we have no issues with a global client service model.
HW: What is the strategic focus for the business?
CB: Our strategic focus is working with a smaller number of clients to deliver a superior service. We add value with smaller or mid-sized hedge funds that our looking for what the larger prime brokers cannot deliver; flexibility and personal service. The large players have built their platforms around one or two 'mega-clients' that use up the bulk of their resources and a lot of funds don't naturally fit on their mould. We take a partnership approach with clients where business goals are clearly defined before we take on a new relationship. That way neither side is disappointed in our product delivery.
HW: How has growth been over the past 12 months?
CB: We have exceeded our growth targets in all regions over the past 12 months. Part of this has been organic as we have helped our clients raise assets but we have taken on a significant number of new relationships in Europe, Asia and Canada.
HW: Where is this growth coming from?
RP: The majority of our growth has come in North America given our heritage as a prime broker in Canada. There has been an explosive growth in new hedge funds there as the Canadian industry catches up to the rest of the world. Going forward though we are anticipating our growth will come in Europe and Asia where we have gained significant traction in 2006.
HW: What is your estimate of the size of the hedge funds industry 1) in Canada 2) Globally?
RP: 1) In Canada as an estimate, about 200 funds. There is in the region of CAD 23.5 bn in the industry across a number of products. 2) Globally, alternative investments are in the region of USD 1.3 trillion
HW: From which region do you expect to see the biggest growth in 2006?
CB: Our focus is not on the number of managers we service but the amount of assets we service and finance. That being said we anticipate that the majority of new relationships we take on this year will be in Europe. Europe is the region in which the large prime brokers seem to have the greatest product gaps so where we can add the most value.
HW: Do you service the private equity and property/real estate funds markets, if so what level of growth do you expect to see in these markets?
CB: Not directly in prime brokerage but other parts of the bank are involved in these market segments. In Prime Brokerage we focus on the areas we do well; equities, fixed income and FX.
HW: Do you have specialized teams to service these markets?
CB: Yes, The Bank of Nova Scotia has specialist teams in a number of specialist sectors.
HW: Do you expect to make any acquisitions in the near future?
CB: We are always evaluating strategic opportunities with technology and service providers but we have no pending acquisitions.
HW: What differentiates you from your competitors?
CB: By entering the prime brokerage business later than some of our competitors we enjoyed a 'second mover' advantage. This means we had the opportunity to ask managers where other larger prime brokers had fallen down in their service delivery. What we came away with is 'stay flexible' as managers and markets change. Gone are the days when one suit fits all and many managers are finding it difficult to trade in 2006 on platforms built in the 1990s.
Therefore we only work with clients where we believe we can add value rather than measuring ourselves by the number of funds we sign up. We have done that by building a platform that fits our clients needs rather than ours. We have also built a team of professionals that have the ability to understand what makes and loses our clients money and can work with them to build their businesses.
HW: What trends are you seeing in prime brokerage?
RP: We are seeing a couple of things: First there is a move among the larger hedge funds to 'in-source' many of the functions they 'out-sourced' to prime brokers in the 80's and 90's. This means they rely less on their prime brokers for settlement services and only need them for financing.
Secondly we are seeing the demand for more flexible collateral requirements where funds will determine how much capital they are willing to employ in a trade and find the bank that will provide leverage at those levels. We have incorporated both trends in our platform.
HW: The hedge funds industry is preparing to go retail in some of the major European markets, what impact will this have on service providers such as Scotia Capital?
RP: I think this will have a bigger impact on the Capital Introduction side to prime brokerage. Obviously in the past there has been a few destinations that people have concentrated on to raise assets, for example Geneva. As markets open up so the potential to raise assets will increase. In terms of the servicing of clients, there is likely to be a greater need for accurate/independent reporting. This is something we pride ourselves on here at Scotia so we are more than prepared.
HW: What were the high points of 2006?
RP: Certainly one of our high points in Europe has been the Capital Introduction events we have hosted. We held three events in, Zurich, London and Milan. These have been well attended and much appreciated by our clients. In terms of the growth of our business the high points have been the growth of our stock lending capabilities, establishing desks in London and New York.
HW: Where would you expect the business to be by the end of 2007?
CB: By the end of 2007 we will be servicing more European-based managers and looking to shift our focus to other growth regions.
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