Asia prime services – A battle worth fighting?

Key dynamics at play within the Asian prime services landscape.

The traditional differentiators within the Asian prime services are slowly vanishing with the build out of new market entrants and enhanced play by commercial banks

Demand Landscape
The Asian hedge fund industry in 2011 posted (on average) negative results, however, the overall industry experienced net positive asset flows. There were approximately 1,300 funds managing close to USD 124 billion at end of last year.

Given that many of the small and mid – sized investment funds are starting to move back to a single prime service provider relationship model, the landscape for prime service providers will become more challenging. With less than 2% of the regional funds holding USD 1 billion in assets.

The battleground for small – mid-sized hedge fund mandates will intensify and require the players to build strategic plays rather than pure relationship driven plays.

The demands of hedge funds are evolving as Asian fund managers’ move away from just long/short equity to employing more comprehensive and complex strategies. The market is no longer a segment of one driven by large, medium and small size funds!

Supply Landscape
The industry is becoming overcrowded as global investment banks expand their prime coverage in Asia, Multinational commercial banks are starting to shift away from just offering custody services to offering across the board prime services solutions. Asian commercial banks are also aggressively building their prime capabilities on the back of a strong balance sheet.

Lastly, the fund administrators are actively building new capabilities to offer certain components of the prime services core value chain.

The Asian prime brokerage league tables have also undergone a lot of changes within the past years due to the changing landscape. The evolving landscape has provided an opportunity for certain firms to move up.

However, there is still a lot of ground to be covered in order to take the share away from the top two prime service providers which jointly hold a majority of the market share.

Given the current play in the market, there is not a lot of differentiation from a client acquisition and client service model perspective. The play of differentiating on the back of value added services like consulting, capital introduction has ceased to be unique as the model is not completely scale able and most of the providers in the market have these mapped out.

Threats & Opportunities
With sizable capital investments to build a prime platform, and an increasing number of players vying for the same piece of the pie leading to price pressures, the battle for running a profitable business is becoming intense for the incumbents.

The imminent threats faced by incumbents largely are driven by the fading out of product specific niches and the “commoditized” spins by prime service providers – speed and cost of execution. The industry still holds opportunities for providers that can differentiate on the back of segment specific acquisition/ service models, e.g. Outsourced coverage model for simpler solutions such as cash securities, etc.

Moving forward, it would be critical for the prime service providers in Asia to create a focused play through a segment specific approach in order to maintain a positive ROI, and also to create a sustainable case to fight the battle for a larger share of the Asian prime services market.