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Financiers of new frontiers

Financial Times
March 29, 2011

Old-fashioned operators: Jonathan Auerbach
(left) and David Grayson, co-founders of
Auerbach Grayson, have targeted markets
that were initially overlooked by bigger banks
Emerging markets now sit squarely in the centre of the investment universe. Even the most humdrum pension plan will have money riding on the Brics (Brazil, Russia, India and China) and, if they are feeling frisky, maybe Mexico or Indonesia. But how about Rwanda? Or the Democratic Republic of Congo? Or Iraq? Where would you even begin to find equity investments in these still nascent capital markets?

A good start might be a call to a loft-like office in midtown Manhattan, where two American entrepreneurs have built a global network of brokerage and research partners that now reaches 127 countries. In a city where financial innovation has come to be defined by hedge funds and ever faster trading platforms, Jonathan Auerbach, 68, and David Grayson, 57, are a throwback to a time when banking meant boots-on-the-ground relationship building and fact-finding missions.

When in New York, they start the day facing each other at a partner's desk in their shared office with brick walls covered with contemporary art and industrial pipes snaking across the ceiling. Mr Grayson looks very much the international banker, 6ft 6in tall in a navy blue suit and monogrammed shirt, and sporting a rich tan even at the end of a bleak New York winter. Mr Auerbach resembles a retired humanities professor, slightly dishevelled, with a wrestler's build, a gaudy gold and red plastic digital watch on his wrist, and seemingly perpetually amused by life's absurdity.

For much of the year, though, Mr Grayson is on the road, while Mr Auerbach sits at the trading desk with most of the company's 70 employees, pitching research and ideas to clients and executing trades.

The idea for the company came to Mr Auerbach while working in London for Dillon Read, the US bank. His job was to find Europeans to invest in the bank's domestic market. The cold war had yet to thaw. It was, as Mr Auerbach describes it, as if "America [was] the lifeboat and [the Europeans were] just hanging on to the side". But rather than finding Europeans to invest in the US, he kept finding opportunities for Americans willing to invest in Europe.

The harder he looked at the world, the more he became convinced there would be a great levelling of the global economic playing field. "This was long before Tom Friedman," Mr Auerbach points out, referring to the journalist who popularised the phrase "the world is flat".

Mr Auerbach envisaged capital flowing into every corner of the planet, a massive rise in living standards and, with that, greater political freedoms. But how could a US investor take advantage?

Dillon Read did not share his hunch, so Mr Auerbach quit to set up his own firm to trade in European securities for US investors. "It took me a week to get my licence and set up in an office on the corner of Old Bond Street and Piccadilly," he says.

Working alone, he began building a network of European brokerage and research partners who could provide ideas and execution services for Americans with an appetite for European markets.

Tips for start-ups

● Have a clear purpose

Auerbach and Grayson say their firm came together almost exactly as they envisaged in their original plan. They did not load the plan with mission statements. It was based on the simple idea that capital markets would expand around the world and American investors would want brokers who could access them.

● 50/50 can work

Many investors prefer to see a single person in charge of a start-up venture. But Auerbach and Grayson have always shared the responsibilities and financial rewards of the firm.

● Do not confuse your clients

Auerbach Grayson does not engage in proprietary trading or pursue investment banking deals. From their clients' perspective, its motives are clear.

After several profitable years in London, he returned to New York. But, after a brief break, Mr Auerbach rented a small office near Wall Street to see if he could replicate his experience in London on a larger scale.

Serving on the New York Stock Exchange's Specialty Firms Advisory Committee, he met David Grayson, a capital markets banker at ABN Amro, who offered to clear his trades. Mr Grayson began taking refuge in Mr Auerbach's office to escape the office politics. There, the two men would discuss the changes in brokerage, trading and capital markets and, after Mr Auerbach returned from one of his overseas trips, Mr Grayson suggested he needed a partner.

"He was right," says Mr Auerbach. "I was trying to do everything — get clients, run operations, develop research." They drew up a five-page business plan and went 50/50 in the company. Their employees consisted of a salesman, a secretary and someone to handle settlements. When asked how they funded their early operations, both men reach for their back pockets — each put in several hundred thousand dollars.

Today, Auerbach Grayson executes $100m-$150m of trades a day, taking anywhere between a few basis points to several per cent on each trade. By the standards of many modern financial institutions, Auerbach Grayson's activities are simple. It has exclusive relationships with partner brokerages in 127 countries, one per country. These provide English-language research into local equities that Auerbach Grayson then pitches to US clients, institutions such as mutual funds and hedge funds with over $100m in assets under management. When those clients make trades based on that research, they do so through Auerbach Grayson, which can then execute through its local partner brokers.

Their selling point is local expertise. While a global investment bank might parachute an analyst into a smaller market — say, Cambodia — Auerbach Grayson can tap research assembled by locals.

Mr Grayson notes: "We were initially concerned this might be an easy model to copy. But, having been around the word, we realised how difficult this is."

The company's first successes came in South Africa, after the release of Nelson Mandela, and in post-communist Russia. They were also quick to establish partnerships in countries overlooked by the larger banks, such as Slovakia, Slovenia, Croatia and Montenegro. They had a partnership in Sri Lanka during the country's civil war. Now the war is over, investors are pouring in. They are all over Africa, with partners from Rwanda and the Democratic Republic of Congo to Egypt. In 2009, they became the first non-Iraqi firm since the toppling of Saddam Hussein to offer research and delivery in Iraq.

The brokerage business has been transformed in recent years by new electronic and high-frequency trading platforms. Maintaining commission levels, Mr Auerbach concedes, is a constant battle. But, after a week in which clients were requesting specialised information on the situation in Japan, Mr Auerbach says his business provides an edge.

"Also, we're discreet. We're never seen in the marketplace," he says. "When we buy, it's through our local partner, under the radar."

In a business where stealth, as well as knowledge and timing, matters, it helps keep this most old-fashioned of modern financial firms in business.