Global Wealth Management Division of Large Asset Management and Brokerage

Prime Brokerage Business Case

Client Challenge

  • Due to the global credit crisis and systemic changes in the financial services industry, the client believed there was an opportunity to become a prime broker.
  • The client wanted to develop a business plan to include the detailed business case, impact on its current business, resource requirements, financials including income statement, balance sheet, cash and regulatory capital impact, cash and collateral dynamics and market positioning.

Approach

  • Financial analysis, including pro forma income statements and balance sheets, was performed to show possible revenues, expenses, net income, net interest, regulatory capital, and earnings 5 years out from inception.
  • Sensitivity analysis was performed to show how potential scenarios (modest or aggressive) can affect the financial outcome.
  • Research was done to determine how the client compared qualitatively and quantitatively to its competitors.
  • Research was done to determine what technology platforms would be needed, whether the platforms would be an internal development or an external vendor purchase, and the cost associated with each option.
  • Issues and risks were identified that would need to be addressed and mitigated in order to enter the industry.
  • A future-state operating model was proposed to show how the client will run its business if it entered the prime brokerage industry.
  • A high-level implementation timeline and approach were created to show how much time would be needed to successfully implement the strategy and enter the prime brokerage industry. An implementation team was also proposed.

Solution/Client Benefit

  • GMG showed that entering the prime brokerage industry would be a viable business decision. The strategy would be to add “pure vanilla” Prime Brokerage services for existing clients and smaller hedge funds to complement the client’s premier research and execution services.
  • The client would focus on long/short equity hedge funds with AUMs of $50 – $500 million and avoid directly competing with bulge bracket firms that target large multi-asset class funds.
  • The services that the client would offer are access to research, trade execution, trade capture and processing, custody services, portfolio valuation (unaudited), financing, and client reporting.
  • The client had several competitive advantages over its competitors, including a strong balance sheet, reputation, ranked execution, ranked research, and a strong operations infrastructure.
  • A dynamic model was developed to compute cash and collateral flows, financing requirements, regulatory and cash capital usage, income statement and balance sheet.
  • GMG determined the business start-up expense and key staff that would need to be hired at start-up.
  • The implementation timeline would be 12 months and calculated the amount needed in professional service fees.
  • The business strategy would generate significant revenues and profits generating a payback period of less than 5 years.

Gartland & Mellina Group — A Management Consulting Company