Wells Fargo’s buy of Merlin spells entry into prime brokerage biz

Wells Fargo & Co., the most valuable U.S. bank, agreed to buy Merlin Securities LLC, a prime brokerage that serves hedge funds and other clients with as much as $2 billion in assets.

The purchase is Wells Fargo’s first foray into prime brokerage services and the bank will use the business as a foundation to expand, said Christopher Bartlett, head of equity sales and trading at the San Francisco-based lender. Prime brokerage includes services such as lending, clearing trades and record-keeping that help hedge-fund managers run their firms. Bartlett, who spoke in an interview, and a company statement issued today didn’t disclose terms.

“There is a window of opportunity that exists today because of the macro landscape, some of the attrition on the street and some of the regulatory changes that are coming,” Bartlett said. “This is another example of our commitment to the capital-markets business.”

Chief Executive Officer John Stumpf, 58, is expanding Wells Fargo’s offerings for hedge funds and beefing up the equities trading business housed within the securities unit. The moves are part of a plan to bolster the investment bank it acquired when Wells Fargo rescued Wachovia Corp. during the 2008 financial crisis.

The latest deal gives Wells Fargo Merlin’s open- architecture technology, which allows clients to aggregate their prime brokerage accounts in one place, as well as custody and clearing services and operational support, according to the statement. The business will be part of the securities unit, run by John Shrewsberry.

Managing Partners

Merlin has about 500 clients including hedge funds, family offices and registered investment advisers and about 100 employees in offices in New York, San Francisco and Toronto. Managing partners Stephan Vermut and Aaron Vermut will join Wells Fargo, according to the statement.

Merlin clients, who currently have access to the custody services of JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc., now will have Wells Fargo as another option with a strong credit rating, Bartlett said. Wells Fargo is rated A2 by Moody’s Investors Service and AA-minus by Fitch Ratings.

In September, Wells Fargo agreed to purchase LaCrosse Global Fund Services, a hedge-fund administration and service provider. Wells Fargo has been looking to acquire or build a prime brokerage since at least December, Vivek Juneja, a JPMorgan analyst, wrote in a Dec. 14 report. Executives wanted the business to add heft to its cash equities trading operations, Juneja wrote after meeting with management.

Couldn’t ‘Care Less’

Stumpf and his predecessor Dick Kovacevich built Wells Fargo into the fourth-largest U.S. bank by assets focusing on consumers and avoiding riskier trading and underwriting that felled some of the nation’s biggest investment banks. Stumpf told investors in January he couldn’t “care less” how his firm fares in the ranks of investment banking and capital markets, preferring to view such services as just another product to sell to business customers if they need it.

Prime brokerage has been considered attractive for lenders looking to do more for hedge-fund clients. JPMorgan CEO Jamie Dimon said Bear Stearns Cos.’s prime brokerage was one of the biggest attractions leading him to purchase the firm in 2008. Bear Stearns had been offering its custody business to hedge funds since 1997.

Bank of America

BNP Paribas SA, France’s biggest lender, bought Bank of America Corp.’s equity prime brokerage during the depths of the 2008 financial crisis. The Charlotte, North Carolina-based company said in its 2008 annual report that it resulted in a gain of $224 million. Stephan Vermut founded a predecessor to that business, Montgomery Prime Brokerage, according to Merlin’s website.

Global hedge-fund assets climbed to $2.13 trillion in the first quarter, surpassing the previous $2.04 trillion record set in the middle of last year, according to Chicago-based Hedge Fund Research Inc. Merlin, as a so-called mini prime broker, competes with firms such as BTIG LLC rather than the largest prime brokers such as Goldman Sachs or Morgan Stanley, both based in New York.

Wells Fargo’s investment-banking revenue climbed 20 percent in the first quarter from a year earlier, the lender said in a statement this month. U.S. investment-banking market share dropped to 4.8 percent from 5.1 percent, according to a slide presentation. First-quarter trading revenue rose 5 percent from a year earlier to $640 million.

“We don’t expect to become a top-tier prime broker tomorrow,” Bartlett said. “We’ll use a thoughtful, gradual approach.”

–Bloomberg News–

Related Topics: Wells Fargo & Co.