A New Era of Preserving Assets and Managing Risk

The basic tenets remain the same, but the current transition management landscape is a more fragmented and competitive space. Penserra Managing Director Keith Wilson discusses what institutional investors should look for in a provider—and why experience matters. Q: What is the story behind Penserra and its entry into the transition management business? Penserra has always had transition management in its DNA and including that service was part of the business plan from inception. The idea for Penserra was borne from the experience of founder and CEO George Madrigal during his early years at Barclays Global Investors (BGI). While at BGI, he saw an enormous amount of innovation along with a very collaborative culture based squarely on objective reasoning. George wanted to recreate that same BGI environment and for the most part I think he has accomplished that. George was a portfolio manager who later ran a team of transition managers at BGI while another founding partner was a senior trader from Russell’s transition team. The addition of industry veterans over the years from BlackRock and BNY Mellon has continued to expand our transition capabilities. Q: Given the turnover in the industry, what makes Penserra unique and a compelling provider of transition management services? First and foremost is experience. Everyone on the sales and implementation side at Penserra Transition Management has 18-plus years of industry experience. Many of those years were on transition teams at BGI, BlackRock, Russell, and BNY Mellon. Second, we created our own in-house reporting package by taking the best from our aggregate experience and condensing the information to a useful, accessible overview of transition events. Third, in conjunction with managing the various elements of cost and risk, we are mindful that delivering exceptional client service is key to the overall transition experience. In addition, we are also a certified MWBE (Minority/Women-Owned Business Enterprise) organization, which is important to some of our clients. CIO: “Transparency” has been a consistent topic in recent years in the transition space. What does it mean to Penserra in terms of client relationships? Wilson: Headline risk in the transition management industry has driven recent conversations about transparency. At Penserra, our view is that transparency and an understandable process help create long-term relationships. Our approach is holistic in an attempt to create relationships free from conflict of interest. We contract as a fiduciary and execute as agent on behalf of customers. We do not have proprietary trading desks, do not receive rebates for order flow, do not cross between internal clients, and we do not advertise our order flow. Neither our infrastructure nor practices support generating revenue or benefit in any other manner than the commissions on trades or fees expressly stated. Industry history compels us to be aggressive in stating that we are fully transparent and can attest in writing that the only sources of revenue earned are the explicit commissions and fees highlighted in our pre-trades. The nature of the transition business means that we often compete for business on the basis of pre-trade proposals. Inherent in that process are model-driven quantitative estimates. There is a natural inclination from clients towards proposals with lower estimated costs and risks—often modeled with an eye towards competing on the basis of estimated shortfall. We want clients to understand how we create realistic cost estimates and trade strategies and have confidence in our model assumptions and interpretations. To that end, we share all analytic tools and outputs and want clients on board with the how and why, as well as the overall estimate of cost. Q: You mentioned crossing earlier, which seems to have multiple definitions and applications. How does it factor into your transition trade strategies? Crossing has received more than its share of attention over the years—for a period of time, it was the star of many transition management strategies. As bid/offer spreads contracted and the number of crossing venues expanded, more focus was placed on the opportunity costs associated with waiting to cross. With the advent of high-frequency trading, there were new concerns that dark pools and crossing venues were becoming more the domain of “shady” characters looking to pick the pockets of institutional order flow as opposed to providing sources of additional liquidity. Crossing is still a valuable tool to manage trading costs—any security crossed at the bid/offer midpoint or better theoretically incurs zero impact cost. When combined with the reality that it is rarely, if ever, prudent to wait to cross, or incur opportunity cost in hopes of saving a portion of the bid/offer spread later, crossing becomes an integral part of the quantitative framework for creating a transition strategy. All crossing is not created equal, and clients should really aim to understand the type being used by any transition provider.