“The Roubini ThoughtLab WAM report” and the Pictet case

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The Roubini ThoughtLab report on “Wealth and Asset Management 2022: The Path to Digital Leadership” is a rich source of insights and statistics of the four stages of the digital maturity spectrum, from more than 1500 investment providers and 40+ interviews with senior executives from financial institutions, consultancies, and technology firms.

Screen Shot 2017-10-13 at 7.27.18 AMUndoubtedly, the SMAC stack (social, mobile, analytics and cloud) will be pervasive and the survey shows high double digit adaptation by 2022

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The 9 sectors that are analyzed have naturally very different digital maturity levels but nonetheless, digitalization is unstoppable. Since there is no canned solution on how to use technology to tap into new businesses, new markets, increased profitability, or market share, or productivity; the recipes vary. Financial institutions involved in WAM (mutual funds, private banks, alternative providers, universal banks, brokers etc.) don’t have access to low cost of capital and can’t afford endless experimentation even though the cost of experimentation failure has dropped substantially.

The WAM ecosystem sits well below Amazon which has access to the lowest cost of capital these days and can now borrow money for less than the cost of what China can borrow money. As a result, Amazon can experiment like no other company. Any amount of failure for them is a speed bump and doesn’t even affect their stock price or their customer turnover.

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From the 60 page Roubini ThoughtLab report on Digital WAM, one transformation story captured my interest, that is real and alive: Pictet Asset Management! A traditional brand name that stereotypical thinking could dismiss in terms of their aggressiveness on the digital maturity spectrum.

Pictet is using technology to tap into three new businesses:

  • A geographic expansion into North America to grow their strong global thematic investment offer,
  • A clientele expansion to gain market share in institutions that are underinvested in thematic strategies,
  • A clientele expansion to gain market share with the millennials, who care for socially responsible investing options.

This is no window dressing. Pictet is taking one of its core strengths and leveraging it with technology to improve revenues, profits, productivity, and market share. Pictet has developed 13 thematic strategies:  Biotech, Clean Energy, Digital, Global Environmental Opportunities, Global Megatrend Selection, Global Thematic Opportunities, Health, Nutrition, Premium Brands, Robotics, Security, Timber and Water. They have launched Mega, a Pictet micro-site that aggregates content around megatrends (infographics, videos, blogs etc), uses social media towards increasing Mega-Pictet’s ranking in the megatrends and thematic investing space.  Right now Pictet is reporting 10,000 followers and 8,000 monthly views. They already see that this approach has helped in promoting a new robotics fund and in reaching out to find a partner distributor in the US. Their also adopting elements of the innovative research process that ArkInvest has instituted which includes crowdsourcing intelligence from scientists, and academics as advisors and or theme developers.

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Source Arkinvest

Thanks to Anthony Christodoulou at Robo-Investing, official distributor of the Roubini thought lab report, who brought my attention to the report as soon it was live.

All figures are from the Roubini thought lab report.

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Wrap of Week #40: Drivezy, SEC, Wealthfront and Fundrise, BeeSolar, ICT2017, Data privacy

  • The BBC Monday briefing offered insights the SEC stance towards Crypto-ETFs, Drivezy adopting Bitcoin before Uber. Bitcoin exchange guidance towards Segwit2X, and rising fees for processing Bitcoin transactions.
  • For me, this argument is more about public versus private real estate rather than passive versus active: Read more in: What a wonderful customer-centric investment world! The Wealthfront – Fundrise dispute.
  • InsureTech Connect 2017 (ITC2017) was held in Las Vegas, USA, in early October, with more than 3,500 attendees, including insurers and reinsurers, as well as entrepreneurs, investors, technology employees, and consultants.  48 countries around the world, gathered in Vegas. DailyFintech Review of ITC2017

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What a wonderful customer-centric investment world! The Wealthfront – Fundrise dispute.

customer is king.jpg

It wouldn’t be the first time that Wealthfront defends publicly their view which is opposing another Fintech positioning. We can all understand the motivation of going public against Betterment in the earlier years while aiming for the leading position in the space of standalone Robos 1.0.

What caught my eye last week was the public argument between Wealthfront and Fundrise, a leading real estate crowdfunding platform. The issue at stake was the “optimal” or “customer-centric” way that small investors should gain exposure to the real estate market.

Real estate investing is by no means new and is Not low hanging fruit. It is complex even in a relatively mature market like the US. Public and private investment vehicles to gain exposure to various real estate sectors have been around for a while. What is new is taking advantage of low-cost technology and new business models to improve the UX, increase accessibility and improve the risk/returns.

We have innovations focused on the Data aspect of Real Estate which is an information business.

Others focused on the Speed, the consistency of underwriting and analysis.

Others democratizing the deal flow with more transparency.

More than 200 companies in the US are startups in the digital investment part of the stack. Staring with crowdfunding platforms (Fundrise being one of them) that have taken off after the JOBs act, marketplace lending platforms specializing in real estate (like Sharestates) and eREITs giving exposure to a diversified portfolio of commercial real estate with a very low denomination and cost.

And just recently, companies like StackSource who have created a digital marketplace for commercial real estate lending that connects both “online” and “traditional” lenders.

Circling back to the dispute between Wealthfront, who naturally uses publicly traded REITs in their portfolios, and Fundrise who has launched the eREITs innovation.

eREITs are public but Not-traded structures that offer to small investors (as low as $1000 denominations) exposure to small-cap commercial diversified property portfolios. RealtyMogul has also launched similar structures as Fundrise.

Wealthfront claims that REITs and real estate ETFs offer not only more liquidity and greater diversification but also better returns. The argument is valid and is supported by the usual passive average outperformance versus active real estate portfolio performance.

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Fundrise claims that their business approach is more like a Blackstone and should be evaluated on the basis of opening a market segment that was not accessible before to retail investors and that actually presents low-cost investment opportunities. Fundrise claims that the entry point of the assets they are packaging in eREITs is much lower because of their lower liquidity and their private status. Fundrise believes that there are better opportunities in the less liquid Private commercial sectors and that eventually, they will offer better returns to retail. The example of the recent IPO of Invitation Homes (INVH) shows how expensive the public markets can be. INVH was priced 215% higher in the public markets than in the private markets, according to data from Google Finance (source).

For me, this argument is more about public versus private real estate rather than passive versus active. I see analogies with the other relative illiquid asset space (i.e. loans) which is also creating all sorts of investment vehicles for retail.

The fact is that yield-starved investors of all sizes are “begging” for something juicy and are moving down the liquidity curve. In these conditions, I wouldn’t be surprised if a someone launched a Robo platform for retail with an exclusive focus in private markets (not listed on central exchanges). A contemporary “alternatives” platform (hedge funds or private equity are not alternative any more) that you can create a portfolio with investments with tokens like the YC Combinator idea, eREITs like Fundrise, and marketplace loans like Mintos.

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Wrap of Week #39: Haven Life, Snapsheet, Swiss Fintech, Collect AI, SPACs, Curve-Xero, Zen, Barbados, Fidelity

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NYSE & Nasdaq fueling the mini-boom in SPACs – The Bancorp leading Fintech SPACs

Some may have been at the beach in July when NYSE’s filing regarding SPAC listings got approved by the SEC. The enhanced ruling means that NYSE is opening its doors to listings of early-stage companies and SPACs!

There is no hype right now around SPACs. They are nowhere close to being the poor and distant relative of ICOs; in terms of branding. They are not new structures. But they are on the rise thanks to NYSE’s and Nasdaq’s eagerness to find new streams of revenues. A mini-boom is going on and is more or less unnoticed and shadowed by political macro risks and ICO related events.

What is a SPAC?

The acronym SPAC is “Special purpose acquisition companies”. For some of us who were Star Trek fans early on, it does resonate but I can assure you that the structurer of this “special vehicle” is not Spock.

A SPAC goes public and raises money that is kept in a trust. The mandate of the SPAC is to go out hunting to acquire a private operating company (or companies) in a specific sector. It used to be a tech unicorn hunt in the old days. The success of SPAC listings a decade ago didn’t actually become a hit. It was an expensive process that partially made it faster to list for private companies of a certain size (typically above $200mil valuation) and the returns were not that spectacular. In many cases, the SPACs never completed an acquisition and liquidated. Data from listings since 2003 in the US shows that 55% of SPACs completed acquisitions. In the rest of the case, either the targets were not identified or the merger/acquisition was not approved. In which case, 95% of the invested funds were returned upon liquidation (another haircut).

The management team of the SPAC upon listing has a period of time, usually 24 months, in which to identify a private company acquisition target and complete the acquisition. If such a deal is made, management of the SPAC profits by owning 20% of the common stock acquired from the shares of the founder and any other shareholder and receiving an equity interest in the new company. This is a large “haircut” that hasn’t changed.

The key part of NYSE’s recent SEC filing was about modernizing the listing rule requirements for SPACs, revising the fee structure and developing new distribution standards for SPACs upon listing.

As competition between exchanges for the listing business is not a gentlemen’s game, Nasdaq also recently filed for a SEC approval to allow for new rules for SPAC listings on their platform.

SPAC listings – facts and figures

SPAC structures have a long history dating back to the early ‘90s, when the SEC issued Rule 419 to govern these blind pools of money as listed acquisition vehicles. SPAC listings hit a peak in 2007, with a total of 66 SPACs which at the time accounted for more than a fifth of all IPOs!

For 2017 the WSJ reports that 22 SPACs (18 of these listings were in NASDAQ) have floated IPOs so far, raising nearly $7bil. This is double the size from 2016 and 7 times more than 2010 (Source).

A great example of a SPAC listing of a large size is Social Capital Hedosophia Holdings Corp. listed on NYSE in September IPOA.U) and sold $600 million worth of shares to the public so that it can go out and hunt for a private tech unicorn to take public. This SPAC is a collaboration of a US and a UK VC (Social Capital in SanFran & Hedosophia in London). They want to address the fact that as of May 2017, there were about 150 private tech startups valued at over $1 billion, compared with about 200 public technology companies with a market cap of $1 billion. One of the reasons being that there is so much private money around that many companies stay private. Chamath Palihapitiya, the founder of the venture-capital firm Social Capital, is setting himself up to become the Warren Buffett of tech investing. (Source)

According to CB insights unicorn listings in Fintech, we have 25 listings currently and about half of them are close to the $1billion cut-off that could make them great SPAC candidates.

Company            Valuation          Unicorn  status

Greensky $2 10/22/2015 United States
Mozido $2.39 10/22/2014 United States
51Xinyongka $1 9/21/2016 China
Rong360 $1 10/12/2015 China
Adyen $2.3 12/16/2014 Netherlands
AvidXchange $1.4 6/8/2017 United States
One97 Communications (operates Paytm) $5.7 5/12/2015 India
Stripe $9.2 1/23/2014 United States
Kabbage $1 10/14/2015 United States
TransferWise $1.1 1/26/2015 United Kingdom
Avant $2 9/30/2015 United States
Social Finance $4 2/3/2015 United States
Klarna $2.5 12/12/2011 Sweden
Robinhood $1.3 4/26/2017 United States
Coinbase $1.6 8/10/2017 United States
Saxo Bank $1.45 8/21/2015 Denmark
Credit Karma $3.5 9/29/2014 United States
Zenefits $2 5/6/2015 United States
Funding Circle $1 4/23/2015 United Kingdom
Tuandaiwang $1.46 5/30/2017 China
Lu.com $18.5 12/26/2014 China
LaKala $1.6 6/23/2015 China
Symphony Communication Services Holdings $1 5/16/2017 United States
Gusto $1 12/18/2015 United States
Avaloq Group $1.01 3/22/2017 Switzerland

I also believe that lending and crowdfunding platforms are great candidates that we may see “wrapped” into a SPAC in the next months rather than taken over from a private equity firm. Think of the recent announcement of Prosper raising $50mil of capital – what an injection for treating the trauma of losing its unicorn status! Its valuation has plummeted over 70%!

Screen Shot 2017-10-02 at 9.20.28 AM.pngSource

The only pure Fintech SPACs are listed on Nasdaq, FNTC and FNTEU. They are both was a managed by The Bancorp (TBBK) and aim to acquire a financial technology business,

First FinTech Acquisition Corp. (NASDAQ: FNTC) which listed on Feb 2015 and raised $100mil. On March 2016 it acquired CardConnect, a decade-old private payment processing firm with 60,000 merchants on its platform and over $17 billion in credit card transactions processed to date.  The acquisition was based on a valuation of $350 million in cash ($180mil) and stock ($170mil).

FinTech Acquisition II (FNTEU) was listed in Jan 2017 again to acquire a financial technology business and raised $153 million by offering 15.3 million shares at $10, up from the 13.5 million shares originally filed. Currently trading close to $10.50 and hunting for a target.

Bancorp is a small cap dedicated Fintech player in many different ways. Not only have they partnered with Fintech startups but also have invested in two innovation labs! Last year Bancorp partnered with Varo Money, the mobile-only banking app, in which The Bancorp Bank will be providing private-label banking services for Varo’s mobile checking and savings accounts. Just last December it launched Bancorp Cube8, a division to “explore unconventional–even radical–ideas in financial technologies”. The initial focus will be on digital lending, digital payments, mobile payments, and blockchain. Cube8 also will explore ways to improve efficiencies in AML/Bank Secrecy Act sphere, big data and artificial intelligence.

Who else will join Bancorp in listing Fintech SPACs? Maybe Visa or Mastercard? Are some fintech sub-verticals natural acquisition targets for Fintech SPACs?  “It makes sense,” says Ellenoff (from a law firm specializing in SPAC structures) “I could see over the next six months or so a SPAC buying a crowdfunding platform.” Source Is fintech the next hot SPAC market?

Wallets are too early, crowdfunding, lending, and payment solutions are riper. But all the Fintechs whose unicorn status is vulnerable (just close to the $1bil) and are B2C plays are also yummy SPAC prospects.

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

 

 

 

 

Consensus amongst European Asset managers about Research costs

mifid ii

MIFID II will be under every Christmas tree in Europe this holiday season, with a “Switch On” button that will autoboot on Jan 3, 2018! But the minute all the European MIFID II boxes are unpacked, the unbundling of research costs will affect all global asset management and research businesses. And as regulations continue to be regional, the European Fairness based ruling around how research costs are allocated, absorbed and reports; is a huge headache. As always, the intention is ethical and noble (fairness, reduce conflicts of interest, protect consumers etc) but the solution may create unintended consequences.

September started and in the Labor day edition of FT, I was reading about the latest sentiment around how to conduct business after Jan 2018 with brokers, research providers, and institutional clients. Reducing the number of brokers can be part of the solution, reducing external research providers, paying closer attention to the quality of research. This could account for a rough average reduction of 30% of the costs but at the end of the day, asset managers have to decide whether they bill clients or absorb these costs internally (i.e. from their own P&L).

FT was reporting that JP Morgan Asset mgt. (ranked in the top ten asset managers by AUM) had just joined the middle list “Absorb cost = Reduce margins”. Undecided and declining to comment, was still a very long list. Those having decided to “Pass costs onto the client” were 8 large players.

Screen Shot 2017-09-20 at 9.32.22 AMScreen Shot 2017-09-20 at 9.32.57 AM

* Previously said it will charge clients, but now says it is still deciding
** Preferred approach, but says final decision has yet to be made
Source: FT research

Just two weeks later and the market tipped after four major European institutional managers changed their position. They switched over to join the heavyweight list with JP Morgan Asset Mgt and Vanguard that took a position from the start in “Absorb cost = Reduce margins”.

“Schroders, Invesco, Union Investment and Janus Henderson have all today announced they will absorb costs onto their balance sheets. All four previously indicated they would pass this cost on to clients as part of fund management charges.” Four managers U-turn on MiFID II research costs

 At the same time, the undecided Blackrock also switched to “Absorb cost = Reduce margins” along with Newton Investment Management, Aberdeen Standard Investments, Aviva Investors, AXA Investment Managers, Insight Investment, Deutsche Asset Management and Franklin Templeton. What a rush to make sure that market share is not lost due to price competition. Only Amundi from the first list, the subsidiary jointly created by Crédit Agricole and Société Générale to regroup their asset management operations, hasn’t announced a switch; and the remaining undecided. We still haven’t heard the final decisions from Credit Suisse, Goldman Sachs Asset mgt, Morgan Stanley, and State Street. According to IPE research, only one quarter of the 120 European institutional asset managers have made their decisions.

The devil remains in the details, as always. Many of the large institutional asset managers have both clients in MIFID II jurisdictions but also outside. JP Morgan Asset management is one of those that has publicly announced a very clear position: a) Absorb costs for Non-US clients; b) Fund research alongside commissions for US clients. According to Integrity-Research, there are currently 11 global asset managers that have announced “Ring-fencing” MIFID II accounts: Invesco, BlackRock, Templeton, Janus Henderson, Invesco, Deutsche, Schroders, Vanguard, Northern Trust, T.R Price,..

At the end of a day, what will determine the impact of the research unbundling via MIFID II each business, is the AUM of MIFID II actively managed assets. This varies a lot depending not only by jurisdiction but also by asset class. Traditionally, quant and fixed income research costs were already absorbed by the asset managers. Company and sector analysts were the main areas where regulators saw conflicts.

  • Will this be another marginal tilt towards the growth of ETF?
  • Will this be another stab to small-cap research?
  • Will European budgets for data science, AI, ML, sentiment, NLP etc. increase and traditional equity analysis be reduced before even getting more automated?
  • Will European asset managers feel even more pressure to increase AUM in order to mitigate the reduction in their profit margin from absorbing these costs?

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Wrap of Week #37: Chinese crypto exchanges, IOTA, ICO summit in Zurich, Insurtech Connect & tropical storms, Bill.com, JP Morgan, Mexican Fintech

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