Cap Intro: The New Emphasis for Prime Brokers, But Do Funds Care?

Last fall, after a particularly busy period on the pro-am hedge fund conference circuit, we noted that prime broker salespeople seemed to all be updating their business card to include the title “cap intro”.  Apparently, capital introduction (a.k.a. fund raising assistance) was seen as a great way to differentiate one’s self from the growing throngs of prime brokerages. 

At around the same time, eFinancial News noted…

By strengthening their capital introduction teams – once seen as a glorified dating service – prime brokers hope to secure potentially lucrative start-up funds as clients.

But a recent survey of hedge funds raises some questions about what really attracts and retains prime brokerage clients.  AllAboutAlpha.com media partner FINalternatives just released the results of its 2008 prime brokerage survey.  It concludes that the new focus on cap intro may not be generating a lot of fans:

One in three hedge fund managers considers the capital introduction services they receive from their prime brokerages to be ‘poor’, the survey shows.  In fact, only one in four rate such services as ‘fair’ and just one in six say they are ‘good.’  A minuscule one in nine considers their prime broker’s capital introduction services as ‘excellent.’

Overall, 46% of respondents said their broker’s cap intro was either “fair” or “poor.”  This put cap intro ahead of ”cost” at 44% and well ahead of “personal service” at 32%.  Why?  Survey respondents blamed things like “insufficient activity," “inferiority of investors," and “a tough financial environment” for fund raising.  Also, as funds grow in size their fundraising needs grow and they are more likely to be dissatisfied with existing cap intro services. 

So apparently, prime brokers aren’t hitting the lights out with their cap intro offerings quite yet.  But is cap intro actually that important?  Curious about how cap intro might play into a fund’s decision to bail on its prime broker, we asked out good friends over at FINalternatives for a bit more information.  They graciously agreed to send over the raw data and here’s what we found:

It seems that cap intro may not be a critical factor in retaining a prime broker after all.  While it may be important for winning new business, it doesn’t seem to be a top factor when a fund decides to switch prime brokers.

The chart below, constructed by us from the raw data provided, shows the results for those funds that are on the look-out for a new prime broker.  Like all respondents, these unhappy funds ranked their satisfaction with five different aspects of their prime broker’s offering.  The results are indexed to the levels of satisfaction reported by all respondents (i.e. all respondents include those looking for a new PB together with those who report that they are NOT looking for a new PB).

    

As you can see, the funds with the “wandering eyes” are disproportionately unhappy with the level of “personal service” they get from their prime broker.  Not surprisingly, very few of these unhappy funds rated service as ”good” or “excellent.”

Conversely, unhappy funds weren’t that much more likely to be dissatisfied with “electronic execution.”  In fact, many unhappy funds actually said they were getting “good” electronic execution.

We placed these five dimensions in order from the largest ratio of “fair/poor” to “good/excellent” to get an idea of which dimensions seemed to be important (e.g. service) and which ones weren’t as big a deal (e.g. execution).  As you can see, cap intro came out in the middle.   

In other words, hedge funds that are looking for a new prime broker (formally or informally) were 1.5 times more likely than the overall population to report cap intro was “poor.”  A factor in their decision to look elsewhere for sure - but certainly not the biggest one.

Maybe the new “cap intro” staff at the prime brokerages should have changed their titles to “personal service specialist.”