On Friday, Wells Fargo & Company (NYSE:WFC) finally took its inaugural step into prime brokerage land with an agreement to buy Merlin Securities.
For the profitable prime brokerage field, it accommodates hedge fund and alternative asset managements firms. It helps them to manage cash, execute trades and lend securities for short sales. With the Wells Fargo’s deal, the bank will finally join its rival big banks in this arena.
As the hedge fund industry has grown, quadrupling assets under management in the 10 years according to The New York Times, Wall Street has been interested in the prime brokerage business as the banks such as Goldman Sachs, JPMorgan and Morgan Stanley now all operate their own. Merlin clients, who currently have access to the custody services of JPMorgan Chase & Co. (NYSE:JPM)
The timing may be a little off for the bank to enter prime brokerage. It has focused more on making itself as a leader in home mortgage lending. Wells Fargo’s investment bank is smaller than its rivals and it usually works more with consumers as opposed to corporations and hedge funds.
But this will change with its Merlin acquisition.
Expanding Business through Merlin
In a statement by John Shrewsberry, head of Wells Fargo Securities, the firm’s investment banking arm, he said, “This transaction enhances our ability to meet customer needs and generate earnings for our shareholders, all while adhering to our disciplines of prudent risk management and controlled growth.”
The details of the deal have not been disclosed and it is subject to regulatory approval. Wells Fargo believes the transaction will close in third quarter.
So who is Merlin? It will bring 500 clients–namely hedge funds. The San Francisco and New York-based company is a “midprime broker; ” it doesn’t cater to the biggest name hedge funds but instead works with the equity markets.
Wells Fargo & Company (NYSE:WFC) is looking to expand to fixed income and commodities trading and will gain Merlin’s 100 employees for its capital markets and investment banking arm. Stephan Vermut and Aaron Vermut, Merlin’s managing partners, will continue leading the business.
Vermut said, “Together, our clients will have access to a greater range of products and financial resources that will augment the open architecture solutions that Merlin currently provides. Wells Fargo is the perfect partner for Merlin and its clients.”
Friday’s transaction joins Wells Fargo’s growing list of acquisitions. In the last few months, it has purchased European bank loan portfolios as a way to build capital. Just this past week on Tuesday, Wells finalized its transaction to buy the North American energy-lending business of BNP Paribas SA (BNPP.PA).