After another storming year, prime brokers of the world seem on for track for lavish bonuses. But there are warnings that these may be their last for a while.
Brad Hintz, a banking analyst at Sanford C. Bernstein & Co. in New York, says the writing is on the wall for generous and ever-increasing bonuses in the prime brokerage sector. "If you're a prime brokerage guy this year, you should lock your bonus in right now," he says. "Going forward, the pricing of prime brokerage is going to narrow substantially and competitive pressure will limit bottom line profitability growth."
Hintz's forecast flies in the face of recent indicators of the sector's health. Prime brokerage divisions, through which investment banks offer back office services and sales, marketing and trading assistance to hedge funds, have done well in 2005. Estimates suggest they account for around one third of earnings at the largest investment banks, and firms such as Goldman Sachs and UBS have a seen a significant rise in prime brokers' contribution to their revenues.
Big bonuses should follow. Alan Johnson, a Wall Street compensation expert, says pay at prime brokers should rise 20% this year: "Prime brokerage has become a huge profit area for Wall Street. I don't see pay rising in the foreseeable future, it's too good a business and there's a lot of room for incremental growth."
A recent salary survey by recruitment firm Options Group suggested a vice president in prime brokerage sales can earn a base salary of 75,000 in London, plus a bonus of 150,000. On Wall Street, Mary O'Gorman at recruiter Snelling Search says director level employees in prime brokerage sales can earn $500,000 or more.
In continental Europe, where prime brokerage is a nascent industry, pay is considerably lower: base pay for someone working in a sales and marketing role in Paris is around €70,000 to €80,000, says Guy De Bravois, a consultant at Robert Walters in Paris. Bonuses vary widely.
Basel II to spoil the party?
Hintz predicts Basel II will stimulate growth further in prime brokerage, to the detriment of the bottom line and ultimately, pay.
The capital adequacy standards are set to come into force in January 2007 and will make it easier for commercial banks to lend to hedge funds. "By allowing banks to offset margin loans against equities, Basel II will reduce the capital charges for commercial banks that lend to hedge funds," says Hintz.
He forecasts the entry of commercial banks with huge processing power and a low cost base: "The most logical new player would be Bank of New York."
Who's hiring and where
If you want to work in prime brokerage, London and New York are the places to do it. But recruiters say continental Europe is set to become a bigger base in future.
"Most European prime brokerage activity is currently based in London," says David Korn, managing partner for Europe at Options Group. "This is unlikely to change, but as hedge funds grow in Italy, France, Spain and Holland, prime brokers will hire locally-focused sales and marketing teams."
Prime brokerage globally is dominated by three firms: Goldman Sachs, Morgan Stanley and Bear Stearns. Deutsche Bank and Credit Suisse First Boston have a strong presence in Europe.
De Bravois says the French market for prime brokerage professionals is currently small: "There are no more than 20 people working in prime broking in Paris. But there will be more development on the ground as the French hedge fund industry matures."
In the short term, however, recruitment in the sector is likely to remain focused on London and New York. UBS, Lehman Brothers and Merrill Lynch are growing their presence globally. Bear Stearns and Citigroup are building in Europe, as are Fimat, part of French bank Société Générale, and Calyon, a rival French bank. Banc of America Securities is building in the US.
Fixed income prime brokerage is likely to be an area of expansion, with firms such as Banc of America Securities, JP Morgan, Merrill Lynch and Royal Bank of Scotland, expected to hire. "Fixed income prime brokerage is the next big thing," says Ben Dear, a director at recruitment firm Mantis Partners.
The head of prime broking at one European bank says growth in fixed income-related prime broking services is creating a need for execution people who can work across products: "A hedge fund might be long on a company's equity and short on that company's bonds. They want us to be able to cross-margin that trade, taking into account the hedging involved."
As competition between prime brokers intensifies, robust demand is also likely for sales and marketing professionals who can sell the virtues of one prime broker over another. "Heads of prime brokerage sales and marketing can earn seven figure packages," says Dear. "Banks will typically consider people with experience selling cash equities or derivatives to hedge funds."