Sempra, the commodity trading powerhouse that boasted a decade-long profit streak before it was sold four years ago, is being reborn.
David Messer, who over two decades built the multibillion-dollar Sempra trading operation, is back in the game as CEO of Freepoint Commodities. The firm is re-hiring dozens of former Sempra employees and opening offices worldwide, pushing into oil and coal markets in the hope of capitalizing on the regulatory and salary travails facing Wall Street.
"What you need to understand is it's really not a launch but a restart," Messer told Reuters in New York on Friday.
"The senior management of our company, by and large, have all worked together for at least 10 years. We've built up this kind of enterprise before and we know what it looks like in the end state."
Launched less than 12 months ago with private equity backing from the $10 billion Stone Point Capital fund, Connecticut-based Freepoint is already expanding its physical commodity merchant model from North American power and gas trading into European crude oil, refined products like diesel, and possibly coal.
Since launching its North American operations in March 2011, the firm has opened offices in London and is set to start in Asia in the coming months. It has already recruited nearly 130 employees worldwide, who will ship tankers of oil, fill natural gas pipelines and trade around physical assets.
Almost two-thirds of those employees previously worked for Sempra during its enviable 44-straight profitable quarters starting in the mid-1990s, before the firm launched a joint venture with one-time British banking giant RBS in 2008.
THE RBS YEAR
That relationship proved to be short-lived, however, with Messer and his senior management leaving the firm within 12-months as RBS was bailed out by the UK government at the peak of the financial crisis.
Messer eventually saw the firm he'd built largely sold-off to JP Morgan in early 2010, allowing the U.S. bank to grow a business that now rivals Wall Street's other commodity titans, Goldman Sachs and Morgan Stanley.
Having once joined forces with the banking world, Messer now hopes to bring traders back. While many commodity players jumped ship to investment banks in the second half of the last decade, the reverse move has been gathering pace as banks face tighter regulations, including restrictions on trading for the firm's own book, and more scrutiny of pay packages.
"To be a privately owned merchant in this environment is an advantage," Messer said.
"We're nimble, we can operate in an entrepreneurial fashion, we don't have layers of management and we're not heavily regulated. We can offer people an environment that is attractive to seasoned professionals."
The bank will start trading residual fuel oil on the U.S. Gulf Coast in February and is eyeing export opportunities in the U.S. diesel market, Messer said, adding the firm also saw opportunities in coal and oil in London.
"We don't have an org chart that says we're going to be in distillates (diesel and heating oil) in North America or agricultural products in Asia, we're more focused on finding the right people to start businesses with," Messer said.
"We started trading in June and I think that's fairly remarkable to launch on March 1 and be trading 3 months later. I think that's testimony to the fact we've been able to reassemble a team that is highly experienced and has worked together. We're currently ahead of our plan."
BACK IN THE GAME
Asked why he wanted to rebuild a company from scratch, rather than easing into retirement or perhaps using his knowledge to start his own hedge fund, Messer said he still had a passion for the hands-on physical business of managing the world's raw materials to market.
"It's a business that's about hitting singles consistently rather than going for the big swing," Messer said.
"We're basically merchants who want to make a little money on every transaction."
Private equity firm Stone Point Capital LLC has put more than $300 million into the venture, while Messer and his long term colleagues, Frank Gallipoli and Robert Feilbogen, also ex-Sempra, have put their own money into the firm.
Freepoint also signed a $500 million credit facility at the end of last year with numerous banks to support its trading activities and expansion.
"In the physical commodity merchant business you need significant bank lines to underpin your trading operations .
"We felt very strongly that we needed a permanent capital base. For us it made much more sense to find a private equity sponsor and to create a trading firm with permanent equity," Messer said.
Messer started his commodities trading career in 1983 with Drexel Burham Lambert and then AIG, trading metals and energy, rising to be president of its trading arm before overseeing its sale to Sempra in 1997. He helped grow annual revenues from $50 million to $1.5 billion over the next eight years.
So far Freepoint's revenues have exceeded their early forecasts, Messer said. But it remains to be seen if after a successful start it will be possible to build a firm quite as large as Sempra, which had more than 1,000 employees worldwide and was valued at well over $3 billion in 2008.
Messer said conditions are right and his team's track record suggests it can be done.
"We're developing a global, physical commodity merchant. We're developing a business that has sustainable earnings that provides excellent returns to our shareholders. We've done this exactly before."