It has been a phenomenal 12 months for Incapital. After distributing more than US$1 billion of structured products in 2007, the US distributor acquired its closest rival, LaSalle, consolidating its position as the biggest player in the aggregated dealer space. However, it is not size alone that impresses. The distributor has also distinguished itself from its peers through a determined effort to educate advisers about the benefits of structured products - a crucial requirement for the development of a market that constantly needs to challenge the dominance of mutual funds.
The cornerstone of Incapital's educational campaign has been the structuredinvestments.com website, an information resource for advisers that features explanations of structures, a series of online tests, and listings of new issues. First launched in 2006, the site went live with an extensive redesign in the middle of last year. It counted 58,000 unique visitors in 2007, and generated 12,000 tests for advisers from 65 different broker dealer firms - an impressive level of penetration in one year. Far from being heavily branded, the information on the website is mostly neutral, and focuses on information rather than plugs for Incapital's own offerings.
In tandem with the website, Incapital has launched a ground offensive. "We have spent a lot of time on the road going to individual firms, explaining each of the investment options and what the structured product market offers," says Tom Ricketts, the firm's Chicago-based chief executive. "There is really no substitute for that kind of boots-on-the-ground marketing."
Such sustained efforts have helped develop the market for everyone, and have not gone unnoticed among the major issuers. "Incapital uses a variety of media in a very dynamic manner," says one US investment bank.
After laying the foundations, the distributor rolled out a genuinely wide range of products this year, encouraging advisers to diversify away from the main staple of reverse convertible notes. These notes represent around 85% of the US market, but only half of the products that Incapital distributes. As one issuer puts it, Incapital is no one-trick pony.
One notable issue was the JP Morgan Contingent Asset Allocation Range Structure, a form of capital-guaranteed corridor note that offered a fixed coupon if a specific stock stayed within an allocated range. An example was a two-year note linked to Microsoft stock - provided that it does not move more than 11% in either direction, investors receive a coupon of at least 26.5%. This product, the first of its kind in the US market, deals with single stocks in a way that investors are used to with reverse convertible notes, but introduces more structured elements like a capital guarantee. "These securities have become extraordinarily popular in recent months as market conditions have raised the usefulness of barrier structures," says Ricketts.
Issuers usually provide their own secondary market for products, but Incapital also developed its own platform for this past year, including six issuers out of the 25 it has worked with. Liquidity is a major concern for advisers and investors in this market, and the rollout of an electronic point-and-click trading system on Bloomberg will tackle those anxieties. "We act as a conduit from the issuer who has the bid to the customer who has the security," says Ricketts.
This is the only area in which Incapital can be labelled a mere intermediary, as it works hard to maintain strong relationships on both sides of the distribution chain. Five new product specialists from varying backgrounds have been added to the team this year, including Glenn Lotenberg, concluding six years at CIBC, and Adam Friedman from Bank of Montreal, who has previously worked for Lehman Brothers.
One top-tier bank noted the diversity of the new additions. "The team is very versatile and knowledgeable. Some of them are from the issuer side and some from the broker side, so they are very well connected in the industry."
Incapital's broker partners have been equally impressed by the quality of the team following the new additions. "I think that it has a leg-up from the competition because the quality of the individuals that I work with is excellent," says Chad Pilarski of Ziegler Asset Management. "It is very good at our one-off deals," says another broker. "It always takes care of us and takes an extra effort to make sure that we have everything we need."
This year, Incapital's labours have certainly paid off, not just for the distributor's own growth but for the market as a whole, which benefits from the progress that it has made in awareness and education. As one major issuer remarked of Incapital's position in the distributor space: "It is head and shoulders above everyone else. No-one even comes close."