Mercantile Bankshares Corp. of Baltimore has decided that selling hedge funds both to its customers and through other banks in the eastern United States could key expansion beyond its tristate operating area.
"We want to deliberately and intelligently extend our footprint," said John Pileggi, a hedge fund veteran who was hired last week to be president and chief executive officer of two Mercantile investment units Mercantile Capital Advisors and Hopkins Plaza Securities.
One analyst says Mercantile should go slow in any such expansion, but a second said he sees a good opportunity for the Maryland company to leverage relationships it has with community banks east of the Mississippi in small-business and middle-market lending.
Pileggi said that there is an outcry for alternative investment products from banks and other financial services companies. He plans to create products that can be sold through third-party channels, including banks, he said, adding that Mercantile already has relationships with its 21 affiliated banks.
"We are not naïve. We are talking about looking for selected [sales] relationships with banks and financial services companies outside of Maryland, Virginia, and Delaware," Pileggi said. "We are not taking this nationally, but we see a real opportunity to develop products that will help us grow and expand."
Mercantile faces a crowd of competitors for investment management and product sales in the Baltimore market. Banking heavyweights in the region such as Bank of America Corp. and SunTrust Banks and strong local players like Allfirst Financial are formidable rivals, as are financial services firms like Legg Mason, T. Rowe Price, and Deutsche Banc Alex. Brown.
Analysts said the hiring of Pileggi is part of a Mercantile initiative to focus on investment management and look for its own niche in the crowded market. Pileggis hiring last week for a newly created post was the second this month by Mercantiles investment management business. On Feb. 5, Wallace Mathai-Davis was named chairman of the companys investment and wealth management unit, also a newly created post. Pileggi will report to him.
Pileggi, who has worked with alternative investment products for 22 years, said he was approached by Mathai-Davis two months ago.
"Wallace said he needed a partner to work with him to help him look for opportunities to take alternative investment products through third-party channels," he said.
Mercantile Capital Advisors is the banking companys investment advisory unit; it runs 14 proprietary mutual funds. Hopkins Plaza Securities is the parents broker-dealer unit, marketing and selling the companys funds to investors in its three-state region.
Gerard Cassidy, a banking analyst at RBC Capital Markets, covers Mercantile and said the $9.9 billion-asset company has built its reputation on the commercial side. While focusing on that, he said, it let the investment management side tread water. The recent hirings illustrate that Mercantile not only plans to run a commercial bank but also is "turbo-charging their investment management area," he said.
Cassidy warned, though, that Mercantile must go slowly.
"I think there is quite a bit of low hanging fruit for the company to grab through just their own banking franchise," he said. "Then as their track record builds up, they can take it through other channels. Right now they have a large enough footprint without having to go outside immediately and grow."
Gary Townsend, a banking analyst at Friedman Billings Ramsey & Co. who covers Mercantile, said it is well-positioned now to grow beyond its own banking channel.
"Mercantile has developed key relationships with a lot of banks east of the Mississippi that are outside of their footprint through its small-business banking and mid-market lending units," Townsend said. "They are going to leverage those relationships to give any new alternative investment products a jump-start."
Townsend said that, more than traditional mutual funds or index funds, hedge funds and alternative investment products require hands-on management. "This is a product that you really have to work at; you really have to manage it," he said. "Not just anyone can launch one of these. You need experience."
Pileggi brings that experience. Most recently, he was president and chief executive officer of PlusFunds, a New York online hedge funds platform. Before that, he was president and chief executive officer of ING Funds, a unit of the giant Dutch banking company, where he helped develop alternative investment products.
"There is a need for more hedge funds and greater distribution, especially from someone who knows how to evaluate and diversify through the world of alternative investment products," Pileggi said. "We have the experience to take a business model to other financial institutions of a like mind."