David Vafai, CEO, and co-founder, of bfinance is looking forward to the ‘galvanising catalyst’ for the team that its latest MBO from Baird Capital represents, which will see around half the employees with equity participation in the firm.
The firm launched in 1999 as a business that worked for CFOs and treasurers of large companies to help them with their bank relationship management. Vafai says: “The genesis was that buyers of financial services seemed to have less information than sellers and there was an asymmetry there that we felt we could address, particularly with the help of technology.”
Very quickly, within a year, the firm realised it could do the same for pension funds and other types of institutional investors who were looking to appoint fund managers.
“So, we built another leg to our business, working for institutional investors and have been doing that for 23 years,” Vafai says.
2015 saw the firm demerge its treasury advisory services division and focus exclusively on being an investment consultant helping investors, not only with fund manager selection but with a range of other services such as asset allocation, ESG advisory, risk advisory, fee benchmarking and operational risk management.
The firm is now an independent, global supplier of assets consultancy services with clients in 43 countries and offices in 10.
“We are the only truly global independent investment consulting firm,” Vafai says. “We are not on the same scale as some of the big global consultants, but we don’t manage money and we don’t do fiduciary management. We are sticking to our knitting, focusing on providing tech-enabled advisory services and helping our clients to get better access to fund managers across all asset classes.”
The client base includes large asset owners, from pension funds to insurance companies to endowments, family offices, central banks and even wealth managers. The smallest client has under USD1 billion while the largest has over USD1 trillion.
“The average client has USD30 billion so they are reasonably large and sophisticated with good in-house capabilities and teams with lots of knowledgeable people,” Vafai says. “They see a firm like us an extension of their team, solving problems or answering questions where they feel they need that extra help or another viewpoint.”
bfinance prides itself on working differently from other consultants, particularly in manager selection where they do a full market review using an RFP process with the client’s mandate, which means that their analysis is customised for the investor’s objectives and based on fresh information.
“Many consultants rate managers to create a buy-list, a one size fits all solution, whereas we have a one size fits one solution which is very bespoke,” Vafai says.
With specialised practitioner teams across all asset classes in public markets, private markets and other alternative investment strategies, the firm is keen to provide clients with high quality expertise as well as a rigorous process.
“What’s interesting is that investors are much more sophisticated than they were 20 to 30 years ago,” Vafai says. “Teams are well-staffed with people who know their stuff inside and out. In the nineties, many corporate pension funds were ticking along, usually invested domestically in balanced mandates and it all changed with a change in the interest rate environment and the explosion in the number of asset managers.
“Being an investment consultant is much more interesting than it was – the big change is diversification, which has meant that returns over different market conditions should have improved on a risk-adjusted basis.”
Being independent has a huge impact for clients, Vafai believes. “You have financial institutions that are offering advisory support to investors but also selling them asset management products, which can be challenging as incentives aren’t aligned. Firms will make a lot more money if they sell clients an asset management service rather than advice, particularly in the case of smaller clients, so there has been a massive shift in the landscape with the major international firms all managing money now. These firms have a lot of great people and offer lots of different solutions, but it’s not as easy to be on the side of the client when the best solution for them might not be the most profitable solution for you.”
Vafai looks back to when Frank Russell became Russell Investments 22 years ago. “They became an investment manager overnight and made that shift pretty clearly and more recently, within the last 10 years, the three largest investment consultants have also made that shift, which has changed the market quite a bit.”
Vafai numbers three to five global investment consultants as competitors and then a large number of local consultants that serve particular markets – around 10 in the UK, perhaps 600 in the US, most of these coming from a pension consulting perspective. These local consultants have good client bases but lack the international orientation which he feels is a differentiator in his business.
“Our positioning is quite different because of the breadth of our reach and the level of our independence,” he says. “We were owned by private equity but we have always been an independent firm and we can be masters of our own destiny with our clients’ best interests at the core of what we do. This is an exciting next phase for us, bringing more of our people into the equity structure and aligning all of our teams for the sustainable growth of our business.”
A megatrend that Vafai observes in institutional investment over the last 25 years is diversification by asset class and region. “There are more and more specialist strategies in private markets and alternative investments as well as within traditional equities and fixed income. It’s a much more interesting and complex landscape that it was 20 years ago” he says.
“Another big trend is the so-called “democratisation” of private markets for clients with smaller investment sizes, such as the wealth market. Private markets managers are seeking to diversify their client bases and Wealth Managers are wanting to offer more of these opportunities to their clients, with lower entry points of say USD50,000 or 100,000. You no longer need multiple tickets of USD5 million+ per manager to have a diversified portfolio of private markets. Of course, it’s quite a complex area from a fund structuring and liquidity perspective so the industry still has a way to go in developing the right solutions there too ”
