(Bloomberg) -- In Barclays Plc’s bid to grow its global investment bank, its business of servicing hedge funds is an increasingly important calling card.

While several of the firm’s rivals have exited prime brokerage after being felled by extreme risk-taking or a broader need to cut costs, Barclays has doubled down. The British bank has grown its prime business into a critical cog of its financing business, which generates £2.9 billion ($3.6 billion) a year, up more than 50% from four years ago.

The increase — which includes equity and fixed income financing alike — has propelled Barclays up the league tables, where it now ranks among the world’s five largest prime brokerage firms, the only non-US lender to occupy such a high spot, Barclays says, citing Coalition data. The moves — along with a push to capture more of the business trading securitized credit products — helped Barclays’s traders hand in their best year ever in 2022.

The plan is to gain “market share consistently so we can compete with the top US banks,” said Adeel Khan, co-head of Barclays’s broader global markets business.

Banks’ prime-brokerage businesses largely cater to hedge funds, lending them cash and securities to help execute their trades. Because hedge funds trade much more actively than mutual or pension funds, the relationships are especially lucrative. 

The business comes with risks. Barclays’s push into prime comes as Credit Suisse Group AG shuttered most of its prime brokerage business after the spectacular implosion of Archegos Capital Management cost it billions of dollars and plunged the bank into a crisis that ultimately helped lead to its rescue by UBS Group AG this month. Deutsche Bank AG, too, has exited the business in recent years after a series of separate scandals caused an exodus of clients. 

It underlines the British bank’s determination to back its global investment banking operation, despite the unit’s intrinsic risks and propensity for expensive and high-profile setbacks.

“It’s a critical front door: if you’re running an investment bank you need a proper front door to service hedge funds and other financial institutions,” said Sudeepto Mukherjee, executive vice president for the international financial services practice at the consultancy Publicis Sapient. “But the downside of this business is if you get the financing wrong or if you get the risk wrong, you could end up with a big liability.”

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In 2017, Stephen Dainton and Khan were overseeing Barclays’s equities and credit businesses, respectively. Back then, the firm’s prime division was floundering in ninth place among major Wall Street rivals and the bank wanted to make a fresh push into the business, which has steadier revenue than the volatile business of traditional trading.

It started with a meeting with Barclays’s top executives, where they asked for more resources to expand the financing part of its prime business and to beef up the underlying technology of the broader markets business. The goal: attracting more of the quantitative hedge funds that were growing increasingly popular with investors. 

“We didn’t ask for more capital, we asked for a little more leverage and additional technology investment,” said Dainton, now Khan’s co-head atop the markets business. “The business really needed technology upgrades and balance sheet, something it hadn’t had for a number of years.”

Within a year, Barclays was touting an 11% gain in equity prime brokerage balances. In 2019, the company added billions in prime balances from Deutsche Bank as the German lender pulled back on the business. 

By 2021, the firm said equity prime balances were touching record levels quarter after quarter. Then came Archegos. As Credit Suisse moved to discontinue most prime-brokerage operations, Barclays hired 18 people from the Swiss bank to continue its own push. 

“We stepped into that vacuum,” Dainton said. “With a concrete strategy, we were ready and able to take substantial advantage of the dislocations to help our clients adapt and transform amidst disruption.”

The number of funds registered with the Securities and Exchange Commission that Barclays provides prime brokerage for has soared 39% in the last two years, outpacing the 11% growth for the broader industry, according to financial data provider Convergence. The bank has seen the most growth among funds with more than $5 billion in assets, Convergence estimates, with the number of its relationships in that category more than doubling. 

In January, Barclays promoted David Lohuis, who was previously global head of prime financing, to chairman of the financing business. Mike Webb, who was most recently head of prime equities, was named head of liquid financing that same month. 

“They’ve had — compared to a lot of primes — a decent amount of continuity,” George Evans, president of Convergence, said in an interview. “They have an aggressive sales team, an aggressive business development team and their customers are happy. We don’t see much exodus from Barclays once they’re named.”

By the end of last year, financing revenues made up roughly a third of the firm’s markets revenues. 

It’s not just prime: the company is looking to take advantage of Credit Suisse’s step back from other areas across markets too. Within securitized products — which includes asset-backed securities, commercial mortgage backed securities and agency and non-agency residential mortgage backed securities products — the firm has been looking to expand into new products that trade in secondary markets. 

“We feel confident in our risk management across our lending portfolios and trading businesses and remain very focused in readiness for potential deterioration in the macroeconomic environment,” Anna Cross, Barclays’s group finance director, told investors last month.

The firm scooped up a trio of traders — Dan Brand, Brandon Porter and Ilya Feldman — from Credit Suisse for high yield and securitized products trading last year while Rob Zahra joined as head of asset-backed securities and non-agency trading in the US. Mike Young also joined the bank’s agency pass-through trading desk.  

“Once you cement your leading position in financing, there’s a multiplier effect into other businesses,” Khan said. “It represents a very significant opportunity for us.”

(Updates story to add CFO quote in 3rd last paragraph. An earlier version of the story corrected the headline and story to clarify the $3.6 billion revenue figure refers to financing unit, and not just prime.)

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