Prime Brokers Overview

   Last November, Morgan Stanley promoted Richard Portogallo to global head of equity financing services, with joint responsibilities for prime brokerage and U.S. equities. Portogallo has spent 20 years with Morgan Stanley, most of it serving hedge funds as head of the firm’s market-leading prime brokerage unit in New York. His ascent within the firm signifies how important this onetime backwater business has become for investment banking firms like Morgan Stanley.

   “Prime brokerage is not just about equities anymore,” says Portogallo, who was one of the very first employees hired into Morgan Stanley’s prime brokerage group. “Our fixed-income division benefits. Equities benefits. The firm and our clients all benefit from having a strong prime brokerage franchise.”

   The strength of Morgan Stanley’s prime brokerage franchise is evident in the 2006 Alpha Awards™. For a second year in a row, Portogallo’s firm takes the overall top prize. This time, however, the voting was very close. Morgan Stanley narrowly beats out second-place finisher — and longtime rival — Goldman, Sachs & Co. The competition was especially intense among the top five firms. Goldman moves up one spot from last year’s finish, while Credit Suisse, No. 2 in 2005, falls to fifth place, right behind Banc of America Securities and UBS.

   Morgan Stanley and Goldman have long dominated prime brokerage. Between them they accounted for about half the securities industry’s $5.5 billion in prime brokerage and related net revenue in 2005, according to estimates by Sanford C. Bernstein & Co. senior analyst Brad Hintz. Their ability to retain market share despite an onslaught from increasingly hungry competitors keen to lure away clients and talent is a reflection of the depth of their benches and the power of their brands. For a new manager starting a hedge fund, having the imprimatur of Goldman Sachs or Morgan Stanley as prime broker can help attract assets.

   At Morgan Stanley management responsibility for prime brokerage is split among regional business heads: Patrick Mortimer in the U.S.; Warren Holmes and Jack Inglis in Europe and Kurt Baker in Asia. All four report directly to Portogallo and are part of an 11-person operating committee that holds weekly conference calls and meets more formally once a quarter to discuss strategy.

   Clients like the results. Morgan Stanley ranks first in four of the eight different aspects of service categories used to determine the overall prime brokerage winner — business consulting, capital introduction, client service and financing. (Algorithmic trading was not used in the calculation because it is already included as part of the trade execution and trading technology scoring category.)

   Morgan Stanley shines in client service — not surprising since that’s what nearly half of the 500 or so people in prime brokerage were hired exclusively to do. Even Portogallo and the regional heads get in on the act. “I’ve been dealing with clients for 20 years,” says Mortimer, who still personally handles some key accounts.

   Goldman receives praise for its client service too, finishing third in that scoring category behind Morgan Stanley and BofA Securities. Goldman relies on two global heads, Mitchell Lieberman and Ravi Singh, and regional executives to keep the business tapped into the bank’s central nervous system.