Incapital will be sold, just not now, says CEO John DesPrez

By Emma Trincal

New York, Jan. 9 – Incapital is not for sale – yet. “But ultimately it will be,” said its chief executive officer, John DesPrez, who during an interview with Prospect News dispelled some rumors following the hiring of a well-known former Incapital senior executive by a rival distribution firm, as previously reported.

That move reactivated old talk about the brokerage firm being for sale. It is far from being the first time an Incapital senior trader left to work for a competitor.

“Maybe five years ago we would have been looking at it, but I was brought in two years ago to rebuild the company and I can tell you we haven’t been for sale for the last couple of years. In fact we turned down a couple of offers in the last two years,” DesPrez told Prospect News, declining to be more specific about the two bids.

“Ultimately, we will sell. It could be real, perhaps in the next three or four years... For now we’re upgrading the personnel. We’re rebuilding the team and we’re bringing the structured products franchise to the next level,” he said.

Brain drain

Sources said they have heard about the “sale of Incapital rumor” for years without knowing for sure if it was based on the drastic staff cuts that followed the management shake-up that took place after DesPrez became the new CEO in January 2015.

“I’ve heard it so many times, I wonder if it’s ever going to happen,” a bond trader at another firm said.

But more signs indicate that, if not imminent, the sale is likely to happen.

The most obvious one is the turnover at the firm, which DesPrez quantified.

“Since I joined Incapital about 60% of the executive committee and senior management has been replaced,” he said.

The last departure, announced Thursday by Advisors Asset Management (AAM), a key competitor, was the hiring of Glenn Lotenberg who left Incapital in June. At Incapital, Lotenberg ran the structured products trading and sales business.

Lotenberg is part of a large group of senior executives who have made the same move. Approximately 12 former Incapital brokers, traders and salespeople have landed a new job at AAM in the past two years, a source said.

DesPrez, an insurance industry veteran, joined Incapital to replace its former CEO John Radtke. Radtke, who had held the title for 10 years, left Incapital in 2014 and joined AAM in March 2015.

DesPrez comes from a very different background. He was the CEO of John Hancock Financial Services, as well as chief operating officer of Manulife Financial Corp.

“After Radtke left they didn’t have a CEO for almost a year until Tom [Ricketts, Incapital’s chairman] figured out what he wanted to do,” said DesPrez.

Tom Ricketts co-founded Incapital. He also is the executive chairman of the Chicago Cubs, the baseball team that won the 2016 World Series.

Goodbye traders

Desprez said his main focus remains structured products, which represent 40% of the firm’s business.

The platform of products will remain the same. But the “approach” has changed. The CEO said he wants to expand the retail distribution through the financial adviser, banking and broker-dealer communities.

“We’re growing a lot. We’re taking the business into a whole new direction, which is why we had to rebuild the team,” he said.

Desprez said his strategy is to change the business model from a traditional third-party bond platform into a wholesaler.

“I brought new people because I want professionals who know how to run wholesale distribution. It’s not about having a bunch of people sitting on the trading desk calling directly their institutional clients,” he said.

“We’re trying to build something different. We want people visiting broker-dealers, calling retail brokers and convincing them to sell products. It’s educating people about the products themselves. Structured products are not really available to mainstream. We want to change that. It’s all about building a retail distribution network.”

The “old” distribution model, defined as the independent, institutional, broker-dealer and wirehouse investment advisory space “still exists,” he said, pointing to Derek Rhodes, who heads up trading of structured products.

“Derek is our No. 2.”

The “No. 1”, he added, is Hugh McHaffie who heads up wealth management and is in charge of distribution of structured products and annuities. McHaffie comes from the same background, as he is the former president of John Hancock Wealth Management.

Retail distribution

DesPrez’ vision is to create a “dedicated” wholesale distribution machine within the firm.

“It’s a whole new approach to the structured products business. We are creating a dedicated wholesale distribution system. We’re trying to make the products more standardized, more mass-market-oriented. We want to simplify distribution, improve compliance and to get away from one-offs.”

In the restructuring effort, DesPrez said he wants to get the “two sides” of the business – wholesale and trading – working closely together. In the structured products space, for instance, this means a closer relationship between Rhodes, the head trader, and Christopher Mee who heads up the wholesale distribution, he explained.

Sources outside of Incapital were skeptical.

“They brought these guys from John Hancock, who know about annuities and mutual funds,” said one source. “But they don’t really have any background in structured products. And they pushed out very experienced guys like John [Radtke] and Glenn [Lotenberg]. What they’re trying to do is sell the company and make it look good from the outside.”

Growth

DesPrez defended his strategy. He said the changes he has implemented improved the balance sheet.

“We’re a private company, so I can’t disclose figures. However I can tell you that the company lost money in 2014 and in 2015 but made money in 2016. In fact, last year was our most successful year for structured products,” he said.

For DesPrez, many of the former traders and salespeople left because they “couldn’t deal with the new paradigm.”

Notional sales of structured products went from $400 million in 2014 to $1.2 billion in 2015. Last year, sales doubled to $2.15 billion, he said.

“The company was not performing well. We’re now doing way better financially. It’s working very well for us. Our shareholders are happy.”

This begs the question: what stops Incapital now from attracting a good bid for the firm itself?

The answer to this question may have to do with who the potential bidders are.

Goldman’s penetration

Among bond traders, some complain about the dominant presence of Godman Sachs’ products.

“Goldman is their favorite partner. They own a piece of the company. It affects us in the distribution. Goldman is tied to Incapital and Incapital does more business with them than with anybody else,” a structured product and bond trader at another firm said.

Another source agreed.

“Goldman Sachs has kept stepping up its equity stake over time. JP Morgan scaled back and Goldman kept stepping it up. They did billion-dollar plus with this MOBU thing,” this source said.

He was referring to the GS Momentum Builder Multi-Asset 5 ER index, a Goldman Sachs proprietary index, which the firm has successfully employed as an underlying index for notes and certificates of deposits alike.

Goldman Sachs last year issued $325 million in “MOBU”-based note offerings, according to data compiled by Prospect News. The index was also used in products packaged as certificates of deposit.

Sources have long speculated that the most “logical” buyer of Incapital would be Goldman Sachs, given its solid implantation.

But DesPrez refuted the argument.

“Goldman is not necessarily the likely buyer. Goldman Sachs doesn’t want to be in the distribution business,” he said.

“We have a very close relationship with Goldman, but we deal with a variety of other issuers.”

Those include Bank of America, JP Morgan, HSBC and Credit Suisse.

Welcome to the Cubs

Some argued that the ownership of the firm – the Ricketts family is known in politics, sports and finance – could have an impact on the timing and conditions of an eventual sale.

“Tom Ricketts has a controlling interest in the Cubs. The cocktail talks is now that the Cubs have won the World Series, they’ve got bigger fish to fry. Incapital may be a distraction. They want to be the first family of baseball. I can easily see that. But again, it’s cocktail talk,” a source said.

DesPrez was amused.

“The Ricketts have a vast array of financial interests. Yes, I think it’s cocktail talk,” he said.

“Tom was not very involved in Incapital. I’ve been trying to get him more involved. We have a very good relationship. But he is busy. He has a lot of other stuff going on with the family.”

Prior to co-founding Incapital, Ricketts was an investment banker for the brokerage division of ABN AMRO Inc. and a market maker on the Chicago Board Options Exchange.

Ricketts’ brother, Pete, is the Republican governor of Nebraska.

His father, Joe Ricketts, founded TD Ameritrade and was its chairman and CEO.

Next

Another factor making the sale of the business lengthier than many would expect is the growing pain of transforming a company’s culture, a problem that applies whether the change is organic or, as it is in this case, brought by outsiders.

One of the changes that have yet to take place is the development of an asset management platform.

Some sources believe that without it, a sale is unlikely.

“Changing the culture takes time. The Rickettses are very savvy. They sold Ameritrade to TD. Eventually Incapital will be sold. It’s more likely to be sold than not but it’s not imminent and it might not be inevitable. What’s missing here is the asset management arm,” a source said.

“If they want to sell they have to go into that direction. Asset management can give you a steady source of revenues, something that trading can’t really offer.”

This source in particular said he had been puzzled when Incapital in April announced the sale of its unit investment trust platform to Nuveen Investments. Such a move did not bode well for building up an asset management platform.

But for DesPrez it made sense.

“We sold the UIT business because it was underscaled and was losing money,” he said.

“People talk about UITs as a new wrapper for structured investments. I don’t think they’re the right vehicle for it. There’s not much demand for it.”

This is probably not the vision held at AAM. This brokerage firm runs nearly half of its $18.5 billion in assets in UITs, according to its website.

But DesPrez made his point clearly: he is not looking to transform the company into an asset management franchise.

Instead, the firm is based on three major businesses: capital markets, bond trading and structured products wholesale.

“These are the three pillars of Incapital,” he said.

“My job is to come in and fix up the business, make it more profitable. After that, all options are available.”

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.