Deutsche Bank, BNP Face Reality of $168 Billion Hedge-Fund Deal
(Bloomberg) -- When Deutsche Bank AG said it was exiting the business of servicing hedge funds as part of its historic retreat, French rival BNP Paribas SA seemed poised to benefit. The reality is more complicated.
The two European banking giants are discussing how to transfer 150 billion euros ($168 billion) of balances linked to hedge funds at Deutsche Bank’s so-called prime-brokerage unit along with technology and potentially hundreds of staff, people familiar with the matter said. Yet the German lender’s clients have been pulling about $1 billion of funds per day and going elsewhere as the firms iron out the details, placing pressure on them to complete a deal soon, said the people, who requested anonymity as the talks aren’t public.
Deutsche Bank Chief Executive Officer Christian Sewing is pulling back from catering to risky hedge-fund clients as he attempts to radically overhaul the troubled German lender while BNP counterpart Jean-Laurent Bonnafe wants to expand in the industry. A deal of this magnitude would be a stark example of the German firm’s retreat from global investment banking while potentially transforming its French rival from a small player in the so-called prime-brokerage industry to one of Europe’s biggest.
Rupert Trefgarne, a spokesman for Deutsche Bank, declined to comment. Alexandra Umpleby, a spokeswoman for BNP in London, said the bank “remains committed to growing its institutional client platform globally, including strengthening prime finance and electronic equities capabilities.” She declined elaborate on how much in client balances the French bank wants to acquire.
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BNP is providing “continuity of service” to Deutsche Bank’s prime-brokerage and electronic-equity clients as the two companies discuss transferring over technology and staff, according to a July 7 statement. The ultimate goal of the talks is for BNP to take over the vast majority of client balances, which are slightly less than $200 billion currently, the people said.
The final shape of the deal remains unclear and faces a multitude of complexities, including departing clients. BNP executives are meeting with U.S. hedge-fund clients this week to convince them to stay following similar sit-downs with European funds last week, the people said.
If hedge funds keep moving their business elsewhere, officials at the German bank may just relegate its assets tied to the prime finance division into the newly formed Capital Release Unit, one of the people said. That unit is winding down unwanted assets totaling 288 billion euros ($324 billion) of leverage exposure, and the prime brokerage is responsible for much of the 170 billion euros of leverage exposure that’s coming from the equities division into the division, also known as CRU, a presentation shows.
Prime-brokerage divisions cater specifically to hedge funds, lending them cash and securities and executing their trades, and the relationships can be vital for investment banks. The prime business generated about $18.3 billion in fees in 2018 industrywide, about the same as revenue from trading corporate debt and currencies combined, data from Coalition Development Ltd. show.
Deutsche Bank, which became a force on Wall Street in the wake of the financial crisis, has struggled to keep hedge-fund clients in recent years as it lurched from one problem to another. U.S. rivals JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. are the top three firms in the business, while Deutsche Bank wasn’t among the top seven prime brokers in 2018, Coalition data show.
BNP, based in Paris, has sought to profit from crisis before. The lender bought Bank of America Corp.’s prime-brokerage business in June 2008 as the credit crunch raged, acquiring more than 500 clients and 300 employees. Still, the firm has one of the smallest prime units among global banks, according to Coalition.
Deutsche Bank’s hedge fund balances have been declining throughout the year as speculation swirled around Sewing’s intentions for the prime brokerage. One major client -- Renaissance Technologies -- has been pulling money from the firm for the last few months, people familiar with the matter said earlier this month.
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