In much the same way that hedge fund managers need sufficient ‘skin in the game’ to attract investors, capital introduction is a serious financial and reputational commitment for prime brokerage firms.
Some have invested heavily, perhaps too quickly, and fallen by the wayside. At Concept Capital, though, the firm has taken a prudent approach. Although it has been running a third party marketing model for more than a decade, and has raised large sums of institutional capital for selective investment managers, it wasn’t until two years ago that it decided to make an initial foray into cap intro.
“Our rationale has been that our prime brokerage offering had to stand on its own and be anchored to the services that we could control,” explains Jack Seibald (pictured), one of the principals of Concept Capital.
“With cap intro we don’t control the outcome, so up until a couple of years ago, we didn’t devote much time or effort to this side of the business. In our view, it’s the one service where prime brokers are most likely to under-deliver.”
Over that time, the cap intro business has steadily built momentum and grown organically under the leadership of one of the firm’s long-time partners. Structurally, it stands as a completely separate business unit to the prime brokerage business and is never used as part of a sales pitch to win prime brokerage business.
“Our mindset in cap intro has always been one of an investor, and we start by asking the question ‘Is this the kind of manager we would invest our own money with?’ If you start from that perspective, we believe you’re going to be well placed to develop strong relationships and credibility in the market with allocators,” explains Seibald.
Taking a targeted approach to the types of allocators it reaches out to has been a key driver behind the accelerated growth of Concept Capital’s cap intro business.
Large public and corporate pension plans have been passed over as they tend to avoid emerging managers. Rather, the focus is on family offices, FoHFs and smaller endowments. ‘Relevance’ is a word that Seibald often refers to: first, in making an introduction to an allocator it has to be the right kind of manager or strategy they are looking for; second, from the manager’s perspective, the allocator has to be the right fit in terms of allocation style.
“A significant element of our programme is the breakfast seminars we host, during which two managers present to a select audience of 40-50 allocators,” says Seibald. Typically held at one of the university clubs in Manhattan, the number of meetings has risen from just one in 2011 to three in 2012 to four events year-to-date, with three more scheduled this fall.
“Our increased effort seems to be working well. In total we’ve run 8 events and introduced 16 managers, five of which received investments, which we think is a reasonable conversion rate.” Most of these allocations have come in the last nine or 10 events, underscoring the progress Concept Capital has made in this highly competitive area of prime brokerage.
“Our process has gotten better. It’s matured, both in terms of manager selection and in getting the right tailored group of allocators to attend each event,” asserts Seibald.