Barclays and Elkhorn’s partnership: it’s not just about distribution, sources say

By Emma Trincal

New York, July 24 – Barclays Bank plc announced a strategic partnership with wholesaler Elkhorn Capital Group LLC in an effort to boost its distribution in the United States – but sources say the agreement has other benefits too.

A less publicized aspect of the announcement is origination.

By partnering with an exchange-traded fund investment manager, Barclays would be able to re-enter a space that it used to thrive in but where it no longer has a significant presence.

The strategy, among other plans, would be to create structured investments in different 1940 Investment Act wrappers, sources familiar with the deal told Prospect News.

Elkhorn will provide Barclays with more venues to deliver its product by acting as an introducing broker, which is its strength, sources said.

“Barclays wants to establish a franchise in structured investments,” said a market participant.

“Elkhorn in the U.S. has a national footprint.

“The partnership will give Barclays access to Elkhorn’s unique distribution channel.”

Distribution

The primary purpose of the partnership for Barclays is to tap into Elkhorn’s distribution channel.

As a U.S.-registered structured notes issuer, Barclays is on top of the league tables with $4.02 billion issued under its name so far this year in 429 offerings, according to data compiled by Prospect News. The figures, for 2015 through Friday, give it a 15.5% market share.

As an agent, however, the firm is only number 5 behind Bank of America, JP Morgan, UBS and Goldman Sachs.

Its distribution activity represents 7% of the total with $1.82 billion in 321 deals.

“Barclays has established selling agreements in the U.S. with a variety of partners. They have their own distribution channel with multiple firms, including some of the regional broker-dealers, advisers, even some wirehouses,” an industry source said.

“Elkhorn would be acting as an introducing partner to expand their distribution network.”

The distribution effort at least at first will focus on market-linked certificates of deposits.

“Elkhorn has distribution capacities for market-linked CDs, so it will be another strategic partner for Barclays in this area,” the source said.

“What Elkhorn does not have is the capacity to hedge exposure, an expertise that Barclays has and provides to other issuers. They will now be doing that for Elkhorn.”

Content

One of Barclays’ strengths in structured products is its experience in creating innovative underliers, sources said.

The need to deliver sophisticated investments to the right client is all the more important given where the industry is heading, they noted.

“This partnership is very complementary across many aspects of our business in developing product, investment content and also across marketing and education efforts,” Fabien Labouret, global head of equities and funds structured markets at Barclays, told Prospect News.

As stated in its press release, Barclays in the past three years established collaborations with famous economists for new products, for instance with professor Nouriel Roubini of Roubini Global Economics as well as with professor Robert Shiller, the inventor of the so-called “CAPE” price-per-earnings ratio.

It also created innovative indexes to develop theme-based structured products. A year ago, for example, the bank launched its first socially responsible investing strategy based on the Women in Leadership index that it created.

These innovations meet the definition of the so-called “content” investing, a trend in structured products which gives precedence to the underlying rather than the structure.

From notes issued by Bank of Montreal and Scotiabank linked to Raymond James’ equity research to smart beta indexes such as JP Morgan’s Efficiente, these types of structured notes are more geared towards access to a theme than optionality. The payout is often delta-one as the goal is merely to get exposure to a strategy not easily found elsewhere.

Wrappers

A less publicized aspect in the partnership between the bank and Elkhorn is to create structured investments in other wrappers than notes.

Sources familiar with the partnership said that Barclays is looking for a partner in the ETF space, which it exited when it sold Barclays Global Investors to BlackRock in 2009.

Elkhorn, which is a sponsor of exchange-traded funds and UITs, could be a handy partner in that regard, those sources noted.

“Barclays will provide structured notes and market-linked CD solutions, complemented by Elkhorn’s ETF, UIT and separately-managed account capability,” Labouret said.

Asked whether the partnership was about distribution or origination, Labouret said: “It’s both.”

“Barclays has a very strong structured products platform. They’re very innovative in terms of content. They can provide hedging. But they don’t sponsor ETFs and UITs. Elkhorn has this capability,” said the market participant.

“Elkhorn on the other hand possesses this entire platform of wrapping capabilities with ETFs, UITs and separately managed accounts.

“It gives the bank not only a chance to enhance its distribution capabilities but also to re-enter the ETF space.”

“At some point the plan is to leverage Elkhorn’s wrapping capabilities in ETFs and UITs to develop structured products-like strategies using a 1940 Investment Act wrapper.”

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