Consider Larry E. Fondren, founder and CEO of InterVest Financial Services Inc. in Berwyn, Pennsylvania, and a client of Huard's. After years of operating proprietary computer networks so insurance companies could exchange blocks of business between themselves, Fondren turned his attention to the bond market.
Little known to many businesspeople, even intelligent and well-informed ones, the trading market for most corporate and municipal bonds has not kept pace with the technological developments that have driven equity trading. "Rather than leading-edge technology, bond [traders] rely on the simple technology of phones and faxes," says Fondren.
In fact, he says, for most bonds, there is very little centralized trading information that lets investors understand trading history, recent prices and bids from other buyers--all of which are standard for even the humblest of equities trading on the Bulletin Board, the lowest rung of the Nasdaq stock market. As a result, the bond market can be terribly inefficient, with hidden costs that can seriously cut into the profits of bond investors.
Enter Fondren's InterVest, which has developed an electronic exchange for fixed-income securities (i.e., bonds) through which institutional investors, brokers and dealers could trade directly with each other without third-party intermediation. (Fondren is quick to point out that, for many reasons, while his system looks like an exchange, acts like an exchange and is even regulated like one, it is not an exchange, as defined by the Securities and Exchange Act of 1934.) The system was officially launched in December.
Of course, developing a system like this takes capital, and plenty of it. After plowing in $3.5 million of his own money, plus another $1.5 million borrowed from friends, family and credit cards, Fondren went looking for more. Working with Huard, Fondren quickly closed a deal with his first outside investor, British merchant banking and trading firm Dawnay, Day & Co.
Though merchant bankers are always looking for investments, the InterVest deal demonstrates the synergies that can occur between U.S. firms and their counterparts overseas. According to Fondren, Dawnay, Day, which is based in London and trades government bonds throughout Europe, invested "not only to get a return but also to get the ability to license and import technology that would give them a competitive edge in their marketplace." Indeed, the InterVest technology was just the kind of system Dawnay, Day would soon find itself competing against, so having it in the company's arsenal was a powerful strategic advantage.
Naturally, Fondren wanted capital, but he also wanted something more. "Our business has global potential," he says. "But trading bonds in the United States is tricky enough. To take our system into, say, Europe, we needed a local partner that knew the subtleties, conventions and regulations in the many different markets there."
In fact, so committed were both parties to the joint venture opportunities that the final deal resulted in two investments. Dawnay, Day invested in InterVest, the U.S. company, but also in InterVest Ltd., a new, jointly owned company that was formed to deliver bond trading services to the European community.