Southport Enthusiastically Jumps on DealVector’s Business Model

Author: Jake Thomases

Source: Buy-Side Technology | 16 Aug 2013

Calling DealVector “the answer to my prayers,” the chairman of Southport Asset Management believes the fixed income communication platform could soon save one of his bank clients in the neighborhood of $6 million. David DeLo was one of DealVector’s earliest customers and has become one of its biggest cheerleaders, even encouraging ownership to charge more for the service.

DealVector is essentially a social media site for alternative asset professionals, although which site it’s emulating is up for debate. It advertises itself as “LinkedIn for the buy side.” In a way it’s more like “Off Topic”-a message board site where like-minded people find one another. The CEO analogized it to “It’s Just Lunch,” the matchmaking site built around blind dates. One of the fundamental ideas behind those sites, and all social media, is to get people talking. In this case, DealVector wants to connect the beneficial owners of financial assets to each other and to market participants who may be interested in what they’re holding.

Social
Holders of the same paper could want to connect for a number of reasons: to address governance issues, voting events, restructurings and recapitalizations, asset sourcing, price benchmarking. Many actions require a plurality of note holders to move forward. But there is currently no easy way for them to find each other, and the actions often cannot take place as a result.

“When you want to do something like distribute a proxy vote for a stock, the company that wants to run the proxy statement goes to Broadridge and Broadridge manages the whole thing on behalf of the company, typically at quite a cost,” says CEO Michael Manning. “So they’ll go to the custodial banks and say, ‘how many holders do you have?’ and they’ll say ‘here are the proxy votes, please distribute them.’ That’s a very time-consuming and clunky process that raises a significant barrier to communication. It should be the press of a button on an email. But instead you have to go through this multi-step process. And it’s typically only open to the issuer. So I as the holder have a much harder time going to the Depository Trust Company (DTC), telling them to produce the securities positions report, then going to the banks and asking the banks to pass it along. The communication pathways are like seriously clogged arteries that are very difficult to get any information through.”

Mortgage-backed security (MBS) holders can force an underwriter to buy it back at par, if they can get 25 percent of the holders to agree that the underwriter abandoned its standards. Recently, one or more investors in a residential MBS published an ad in a copy of an industry magazine asking owners of certain tranches to call a phone number. Below the announcement were listed 125 CUSIPS. It felt as archaic as placing a personals ad in the newspaper.

Anonymity and Verification
DealVector connects people electronically based on the deals they’re interested in. Members load their affiliated deal list and are alerted to matches, whereupon they can communicate through anonymous numerical IDs. Slowly they reveal their objective and may discuss parameters of buying and selling notes. If they’re comfortable enough, they reveal their identity and talk serious business.

The platform operators verify member identity through corporate email addresses and verify deal affiliation through observation of an account statement.

Southport Asset Management is a bank restructuring advisor that had been looking for such a tool for years, even attempting to offer one itself three years ago. “When we’re restructuring a bank, we have to get rid of these trust preferred securities, because in reality it’s senior debt,” says Southport chairman DeLo. “The new investors don’t like coming in with five million, 10 million, 20 million ahead of them. The banks, as issuers, are trying to buy back those trust preferreds. Of course the problem is, as a bank, you don’t even know who your note holders are. You’ve issued a trust and that trust got acquired by another trust, and that trust was sold off. The trustee won’t even tell you who the holders are. Trustees are totally uncooperative. Trying to find the bondholders as a trust preferred issuer, you can’t find the decision maker.”

Through DealVector he’s connected with the holders of three trusts so far on behalf of his clients, and is in the process of negotiating price for a buyback. He believes his clients would be willing to pay a broker-dealer fee to DealVector for successful deals, if the platform chose to register as a B-D.

Chance Encounter
Manning is sticking with a low subscription fee model until the network builds critical mass. Since launching in March it’s acquired 25 named customers, including asset managers Cairn Capital and Pine River Capital and advisors Perella Weinberg and Guggenheim Securities. He would like to see 150 total institutional customers within six months.

Most of the focus thus far has been on structured credit like collateralized debt obligations (CDOs), which are thinly traded with a high incidence of governance events. Whether this platform can service that community remains to be seen. But the idea behind it is overdue.

“I have not felt any competitors breathing down my neck just yet,” says Manning, a Silicon Valley entrepreneur whose chance chairlift encounter with a college classmate 27 years later-Dave Jefferds, a former structured credit dealer at Lehman Brothers-produced the idea for DealVector. “I fully expect I will.”

About Buy-Side Technology

Buy-Side Technology delivers current news and analysis on business and technology trends, drivers and processes shaping the hedge fund and investment management industries.  The magazine focuses on business and technology issues facing buy-side executives, and its experienced, global editorial team brings extensive market access and knowledge.  It’s parent publication, Waters Technology, has a monthly circulation of 10,000.

This is article was originally published in Buy Side Technology on August 16, 2013.