As it turns out, in 2009 Craig Starble exited State Street Corp after a four-year stint as the firm’s executive vice president and global head of securities finance, then made plans to launch his own third-party start-up, Premier Global Securities Lending LLC (PGSL). The move didn’t sit well with Starble’s former employer, however, and in 2010 State Street filed suit alleging that Starble, along with ex-State Street sec-lending confederates Peter Economou and Paul Lynch, had violated the firm’s confidentiality protocol. Though the case was eventually settled, PGSL never made it out of the box, and by 2012 both Lynch and Economou had joined forces with none other than eSecLending (Lynch as chief operating officer, Economou as chief risk officer).
Undeterred, Starble signed on as advisor to private equity firm Parthenon Capital Partners (with whom Starble had become affiliated during the PGSL period), and was instrumental in handling the due diligence duties that eventually led to Parthenon’s acquisition of eSecLending this past August. In doing so, Parthenon replaces former eSecLending backers TA Associates, the private equity firm that had acquired the company in 2006. With Starble assuming the role of chief executive (and co-investor), Chris Jaynes, the company’s founder and co-CEO since its inception, moves into the president’s chair; co-CEO Karen O’Connor has retired from the firm.
This month eSecLending—the industry’s largest independent securities-lending agency—turns thirteen, having auctioned some $3trn in assets along the way. As an alternative to traditional custody style lending, eSecLending has sought to bring added transparency and customisation to its institutional client base comprising asset managers, pension funds, insurance companies and others. While the company’s basic operating principles have remained consistent throughout, its menu of services has become more diverse, expanding from an almost entirely agency exclusive-based program to include the likes of discretionary trading, treasury and financing, risk management and other solutions.
Starble believes that eSecLending is poised to capitalise on and adapt to changes affecting the securities lending industry, and has already made plain his intentions to further develop the company’s list of client-facing capabilities. The question is whether he can diversify both the firm’s client base and its service set over the all-important short term (this is, after all a private equity play, which trends towards the short side rather than the long). As well, the current climate continues to be challenge for all participants in securities lending, which is now a business marked by lower turnover and more restrictive global regulatory oversight. Five years on from the fall of some high profile institutions on Wall Street, many beneficial owners remain at best neutral over the service, in part due to lingering questions over the state of collateral arrangements, in part due to diminished demand for borrowed securities, in part a result of some questionable risk-management practices by some agency providers.
In such a risk-averse environment, there’s often a flight to safety that overrides normal market openness to alternative ideas. A recent London-based webinar (that included eSecLending’s participation) found that many of those who are lending out their assets look to be seeking conventional routes to market, despite evidence that alternative approaches can yield positive results. What strategies might eSecLending undertake in order to meet these challenges over the near term? Is the ability to offer customisation of service—including the likes of open architecture and similar bespoke programs—one provider of future success?
A stake in the firm
It’s a complex question that few firms are giving simple answers to. Starble’s gut is in play in this instance and you have the sense he is banking on a wholesale pick up of the business per se. It’s an expert’s play, evinced by his putting his own investment dollars in together with the investment stake taken up by Parthenon. “It’s basically been steady as she goes these last few years,” he acknowledges, “nevertheless, I believe there’s plenty of reason to be positive—and a good part of that is having the wherewithal to adapt to investor needs.”
Despite the difficulties that have beset the global lending industry in general, Starble says that the forward-thinking strategies and lean organisational structures of third-party providers that give companies such as eSecLending a distinct advantage over larger custody based players. Additionally, beneficial owners often give boutique-type firms higher marks for their operational transparency as well as quality of client service. “In that respect, I think that eSecLending’s historical approach to working in partnership with clients will become even more attractive as we move forward,” says Starble.
When the talk turns to regulatory rulings in the making, Starble prefers to take the high road. He believes that such changes can often lead to opportunity, as providers respond in kind through the formulation of new products and services. To that end, the nimbleness of eSecLending’s boutique-style management and business culture will allow the firm to make the necessary adjustments as these changes begin to take shape. “It is difficult to say exactly how the new regulations will shake out,” says Starble, “however, I feel that ultimately it’s up to the agent-lenders to come up with workable solutions for helping clients navigate the markets once these rulings are in place. From our perspective, there is a lot of excitement around resolving issues that clients may have as a result of regulatory change,” offers Starble, “as well as seeking different methods for accessing the market in order to meet the demands of these rulings.”
The need for lenders to augment their product offering has become even more important in light of the persistently low-volume lending environment. To that end, eSecLending is prepared to diversify in order to accommodate client needs. For instance, as a smaller, independent firm, eSecLending is well positioned to take on the expected ramp-up in collateral optimisation activity, says Starble.
“At one point or another virtually all of our clients will require some form of collateral optimisation, and therefore everyone wants to know what it is and how it can work for them,” says Starble. “Because we have no conflicts of interest, I believe we fit really well inside that niche,” he says. “If a client requires a collateral upgrade or downgrade, for instance, we can perform that transaction, while at the same time help them build an internal system that they can use to track all of the information.”
Such services also require a fair amount of individualised discussion, says Starble. “When you’re talking about collateral optimisation and transformation, every client has a different need and, therefore will likely require a very specific type of solution to address their agenda. As such, it’s really impossible to roll out a standardised product and hope that it will suit everyone involved. So while it’s always been our goal to build a core solution for any particular product, ultimately we want to be able to customise that solution on a case-by-case basis.”
Starble believes that the auction technology developed for eSecLending’s core operations could be applied to other aspects of the financial business. “Regardless of what happens with regulation, a greater number of entities will want to have some form of master compliance-reconciliation covering the entirety of their ongoing business activities,” says Starble. “I believe that the transparency of our auction process really fits well with that trend. So I feel we have the capacity and the know-how to handle many of these client requests as they come forth.”
State of Independents
Even as eSecLending enters its next year of operations, the market for independent lending is anything but a sure bet. A recent poll of institutional investors conducted by networking group myInvestorCircle found that more than half were not currently lending. Of the firms who are still lending many continued to favour the perceived safety and familiarity of the large traditional lender. Starble fully understands this rationale.
“Custodians are very good at what they do, and I think it’s perfectly reasonable for clients to want to maintain those conventional routes to market,” he states. “That said there is evidence that both large, sophisticated players as well as their smaller counterparts are interested in redirecting some of their custody based exposures towards alternative channels. Using eSecLending’s auction process, clients can achieve real performance diversification, particularly those with higher-value portfolios.” Particularly as regulation continues to alter the lending business, beneficial owners who incorporate a broader range of lending agents will be in a better position to reduce their risk exposures, says Starble.
With the general markets trending higher and the economy beginning to stabilise, looking ahead there is plenty of cause for optimism, as Starble suggests. Even so, all agents will have to work that much harder in order to prove themselves to their clients, concurs Starble.
“Having top-shelf services and solutions is one thing,” he says, “but when all is said and done, it’s performance and value that matters most—after all, clients have to go back to their management and show that this is a viable business that is capable of generating a meaningful amount of revenue within their defined risk parameters. So from an agent-lender perspective, going forward I think the real winners will be those who can adjust the fastest to the changing lending environment. While I don’t feel that the influx of new rules will be nearly as restrictive as some have suggested, one way or another they will affect how the industry operates, and as such we will be required to find alternative solutions and strategies in order to adapt. Because of our independence, I believe that we have the capacity to properly respond to these changes as they occur—and therefore be able to keep our clients out of harm’s way in the long run.”