“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.

The winner of Daily Fintech Venture Pitch Rating System at #swissfintechpitch is…Bee Solar 

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Today I attended the Swiss Fintech Pitch 3 event in Zurich (with 4 ventures and 4 investors pitching).  I used the Daily Fintech Venture Pitch Rating System, which we have used with some success in past Pitchathon events; this is now V3.

Daily Fintech Venture Pitch Rating System

We first tested this out at the inaugural Barclays Techstars Demo Day in October 2014 and my top picks from then seem to have done quite well two years later, so I was emboldened to try it again and refine that MVP at the Nexus Squared Pitchathon in July 2016.

This is Version 3 (at Swiss Fintech Pitch 3, yes 3 is a magic number).

The objective of the Daily Fintech Venture Pitch Rating System is to add some slow thinking methodology and metrics to what is traditionally a fast thinking gut decision.

There are two main attributes – Quality of Presentation & Fundamentals.

For each attribute we use a simple 1,2,3 score (3 is best).

Quality of Presentation. This might sound superficial, but it is a proxy for quality of team & focus. We look for:

  • Strong opening attention grabber
  • Strong middle with the details, real data, hold my attention
  • Strong close, make me want to talk to them.

This is clearly subjective. The quality of fundamentals impacts this (it is much easier to present a great business) but I have seen great businesses that lost investors because of presentation and vice versa. This is also a proxy for quality of founder (see below). So, Quality of Presentation gets a maximum total score of 9.

Fundamentals. This is still pretty subjective as it is based on a quick pitch. We scored Fundamentals on 5 dimensions (so a maximum total score of 15, weighting it more than Presentation):

  •  Pain. Amount of Pain felt by immediate customers/users in market entry niche. Is this a pain that is acute (customers must have to now) or just annoying (may get around it after untangling the headset cord).
  •  Innovation. Amount of Innovation involved in solving that pain. In short, any secret sauce creating a barrier to competitors?
  •  Monetization strategy. Starting with free is good; Freemium works. But the team must have a plan to make money. If the answer is advertising I switch off (because of adblockers, ad-fatigue and because you cannot beat Google and Facebook in what is now a scale game).
  •  Timing. Why now? Brilliant ideas ahead of their time are money losers. Just another follower in an established market needs lots of capital. Timing is the most critical factor in venture success;  see this amazing talk by Bill Gross, the founder of IdeaLab.
  • Go To Market Strategy. Is this clearly articulated and credible? This leads to Product Market Fit, where the “rubber meets the road”. Relates to the Pain question.

Then we add Quality Of Presentation to Fundamentals to get total score (out of a max of 24).

Notes:

  • Filters. Investors use Pitchathons as a first filter – actually second filter, because Incubators, Accelerators and Pitchathons provide the first filter. After a Pitchathon, investors look at those fundamentals in more detail but what they are really doing is rating the founder (based on how well they handle questions about the details). The old VC mantra is back the jockey not the horse.
  • Founder Rating. Do you see a founder who can go the distance in a hard game? If I added Founder rating I would make it as much as the two other attributes put together (so if the max score of Presentation + Fundamentals is 24 I would add another 24 just for Founder). However, you can only evaluate a Founder in a one on one meeting and the objective of the Daily Fintech Venture Pitch Rating System is a quick rating score based on a pitch.
  • CoFounders. “Founder” can mean 2 or more people and that is critical in the early days when founders have to do everything but cannot afford to hire top talent to do those jobs; but the reality is one person tends to emerge as a leader and you have to evaluate that person (think of Bill Gates vs Paul Allen or Steve Jobs vs Steve Wozniak).
  • Fast and slow thinking. The theory behind the Daily Fintech Venture Pitch Rating System is combining fast and slow thinking (from this amazing book). VCs work on “gut” – thinking fast based on a lot of experience. Quality of presentation is a gut call but with some metrics based on dividing the pitch into open, middle and close. The advantage of doing this at a live event is that you can also gauge how the people around you are receiving the pitch – crowdsourced gut if you like.
  • Confirmation bias. This operates at two levels. One level is highly destructive. Some investors base their gut evaluation of a founder on seeing somebody they are comfortable with. This can simply be disguised racism and/or sexism and/or ageism. This is a well recognised problem in Silicon Valley. Although the top VCs may not have diversity among their GPs they sometimes work hard to get diversity in their entrepreneurs because they know how much this matters, but understanding the problem and doing something about it is a different thing. Another level of confirmation bias is based on seeing other ventures  in that “space” succeed or fail. That is why we have Timing as a critical parameter. An idea that failed x years ago might be brilliant now (or vice versa).

The 4 ventures in their own words

Bee Solar Sàrl

(BeeSolar offers a new type of impact investment by installing solar panels on residential buildings in Switzerland)

IMburse 

(A payments marketplace to access any payment type to collect and pay out monies.)

Lend 

(Lend matches investors with borrowers. Both benefit from a fair and transparent business model.)

Protos Cryptocurrency Asset Management 

(Protos Cryptocurrency Asset Management invests in pre-ICO tokens and trades established tokens like bitcoin using advanced quantitative strategies.)

Werthstein 

(A Revolutionary Private Wealth Management.)

And the winners is – drum roll please

With a total score of 19, Bee Solar is the winner.

From the snapshot description I had not expected this one to win. It appears to serve a real need and the way they have set this up was elegantly simple. If the IRR (net over 15%) bears up under scrutiny, they are onto a winner.

We don’t do negative reviews on Daily Fintech because we respect how hard the entrepreneurial journey is. So we don’t say why we gave low marks to others.

And we can of course get it totally wrong. The best ventures often surprise everybody and are roundly rejected/dismissed at the time of launch.

Now we have to wait a few years to see if that was a good call. That is why we waited a few years from the V1 MVP at Techstars in 2014 as we can then see how these ventures performed in the years after the pitchathon applause has faded away.

Investor Rating System

Sitting on the entrepreneur side of the table, you look for two things to qualify if an investor is worth talking to:

  • Stage. Do they like to invest Early? Look for clarity below the words e.g. in actual deals and in ticket size and is it pre or post PMF? Investors may say Early but really prefer late stage. Late stage maybe sensible for investors, but I focus on early stage because that is what most attendees at pitchathons are looking for.
  • Value Add. Do they have a clear point of view on where they can add value beyond cash and is that relevant to early stage investors.

It was hard rating the investors in this event because there were three different types:

  • Angel representing an angel network.
  • Corporate VC (Swisscom and AXA in this event).
  • VC Funds (RedAlpine and DI Ventures in this event).

My take is that VC in Switzerland is still pretty immature. It does not have even close to the depth of other markets. It was notable that the Swiss VCs had invested in more ventures in Germany (mainly Berlin) than Switzerland. It appears that more VCs VCs fly to Switzerland to pitch to LPs than to invest in ventures.

I was also looking for mention of the elephant in the room – ICOs. Privately everybody was talking about this. On stage it was not mentioned.

Serial Entrepreneurs and Capital Formation

The Keynote was by a Serial Entrepreneur (Stefan Heitmann of MoneyFarm, who is now onto his next venture after a good exit). This is how it works in Silicon Valley and other Swiss Serial Entrepreneurs include Richard Olsen and Dorian Selz. So it is now happening in Switzerland and I expect this will soon have a positive impact on investor appetite for early stage ventures.

Image Source.

Bernard Lunn is a Fintech deal-maker, author, adviser and thought-leader.

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.

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

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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.

What does the wisdom of the market tell us about the Fintech bubble question?

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Markets going through disruption tend to be a bit manic depressive, with headlines alternating between:

“Its a bubble, the big crash is coming, sell sell sell

“Its going to the moon, load up today, buy your Lamborghini tomorrow, buy buy buy”

The Fintech bubble question has become a staple as the media chases page views with sensationalist clickbait headlines.

I want to bring some data, rather than add to the landfill of opinions. That data is lurking in the markets (both stock and cybercurrency). Investors have skin in the game. They back their opinion with cash. Investors can be wrong for a while, but in aggregate their actions usually signal something more interesting than an opinion.

In this post we seek data from the markets to answer the question whether Fintech is a disruptive force or a bubble waiting to pop.

What does the KBW Index tell us?

For example, if Fintech disruption is real, it might be reflected in Bank stocks declining in price. You can see the logic from past disruptions such as e-commerce disruption hitting retailers or social media disruption hitting publishers. In that scenario, bank stocks would be declining.

KBW created a leading index of Bank stocks with symbols BKX. There is another one with a more regional bank focus called KRX. A quick glance tells us that investors still like bank stocks.

BKX KRX

The price action to date has nothing to do with Fintech. It is more likely simply that monetary policy in America is on a path to rising rates which benefits banks and there is an expectation that the regulatory load will be lightened under the Trump Administration. The big moves can be easily tracked to the Trump election and statements by Janet Yellen.

So, the takeaway is “Fintech is a bubble, it is having no impact on bank stocks”. Not so quick, read on.

Lets look at publicly traded Fintech stocks.

Fintech ETFs – FINX and FINQ

Daily Fintech created the first Fintech Index back in March 2015. More recently a couple of companies created tradable ETFs from the simple idea of an index – FINX and FINQ. Zacks offers a comparison

These are not as cheap as buying a Vanguard S&P fund. Both charge 68 bps.

There are some differences between weighting by big, medium and small cap and by geographic region, but they share one thing in common. The holdings are almost all “traditional Fintech”; this is Wave 1. Some are Wave 2 which is Emergent Fintech based on SMAC (Social Mobile Analytics Cloud). This is natural. To get to scale big enough to be a public stock you need to play within the current system.

(See this post for a description of the three waves of Fintech). TL:DR: Traditional Fintech Wave 1 is “we bring you lunch” (aka vendor), Emergent Fintech Wave 2 is “lets split the bill and partner” (aka B2B2C revenue share partnership) and Disruptive Fintech Wave 3 is “we eat your lunch”.

So it is natural to see these Fintech ETFs going up in tandem with KBW and the overall bank market. When the banks prosper, the vendors and partners to those banks prosper. Many of these companies are moving from a pure vendor model (here is my technology and here is the price) to a revenue sharing model (either white label or co-branding). In short, Traditional Fintech is morphing into Emergent Fintech as quick as they can; but in both models Fintech and Bank interests are aligned.

There are some great companies in these ETFs, however don’t trade it as a hedge against bank stocks. The correlation is surprisingly strong.

First we show the two Fintech ETFs together (taking a 1 year view):

FINX FINQ

They track pretty closely. FINQ seems to stop this summer and as they track closely enough I only use FINX for further analysis.

So, lets look at Bank stocks and Fintech stocks together. In a 3 month view we see some outperformance by Fintech, but on a longer term horizon we see mostly correlation:

BKX FINX

Stop yelling, its Yellen that matters

Looking at all these ETFs, there is high correlation. Its The Macro Stupid.

So lets look at some individual stocks on opposite sides of the Fintech Bank divide and how they reacted to similar crises.

Comparing Lending Club and Wells Fargo crises

When the Lending Club CEO did something stupid, the board fired him immediately and the stock tanked. In my view, the market overreacted and LC was a bargain and I was fortunate to buy in at the all time low of 3.51 (see this post for my analysis at the time) and sold a few months later.

When Wells Fargo did something stupid my analysis was a) that this was worse than what  Lending Club had done and b) the underlying cause was probably related to Fintech disruption (a thesis I outlined in this post).

So you would think that Wells Fargo stock would have crashed like Lending Club did. A quick look at the two charts (on a two year view to get the LC crash) shows this is not true:

WFC LC

The takeaway, scandals are rougher on Fintech upstarts than Banks. How long this will remain true is a matter of opinion. Wells Fargo and Equifax will be stocks to watch, but also assume we will see many more blow-ups like this in the months ahead – it is Act 3: Denial in the 7 Act Creative Destruction Play.

Searching for negative correlation via Disruptive Fintech

Smart money is waiting for the OmniBubble to burst. This is bigger than all previous bubbles, whether Housing or DotCom, driven by money printing all over the world. If you see this OmniBubble, none of the normal strategies work. All the sensible assets are also over valued. You want to buy something that is anti fragile that will benefit from a crash.

There are not many tradable stocks in Disruptive Fintech category of Crypto Finance. There are lots of private companies but then you buy into the public/private valuation inversion which was the subject of no 7 of our Top 10 Fintech Predictions for 2017:

“7. Uber will not do an IPO and may do a private down round.This will signal the dramatic end of the public private valuation inversion (private higher than public valuations). This started in 2016 and will have its dramatic end in 2017.”

Uber is still making brave noises about an IPO, but it is likely that an IPO will be a massive down round. Some other overvalued private companies are “taking their lumps” now and getting the pain over. One example is the 70% valuation drop for Prosper. Their problem was that Lending Club was such an obvious comparable.

The only public stock I can see where any Josephine Q Public (aka unaccredited investor) can buy without permission into the Crypto Finance Third Wave is Overstock ($OSTK) where TZero and other Crypto Finance ventures are lurking within an e-commerce company. That is not a pure play.

That explains the hunger for ICOs. Those ICO issues are all you can buy if you think Blockchain, Bitcoin and Crypto will change the world and you don’t have access to private deals. However there is a much, much simpler investing strategy hiding in plain sight:

You could not buy The Internet in the 1990s, but you can buy Bitcoin today.

There are obvious parallels between the Dot Com bubble and today’s ICO craziness.

In the 1990s, you could not buy “The Internet” if you saw The Internet changing the world. All you could buy was lousy stocks like Pets.com. Today’s equivalent is a lousy ICO. If you see Crypto Finance changing the world and you are an unaccredited investor, all you can do is buy an ICO. Not quite true. Today you can also buy Bitcoin. If you see Crypto Finance changing the world, your actionable trade can be as simple as buying some Bitcoin. Any “dumb” retail unnaccredited investor can do that without anybody’s permission. Meanwhile the smart money buys into overvalued private deals. Err, who is the sucker at this table?

Getting back to the bubble question, one way to look at this is that we are witnessing the end of the Financialization Bubble. This has been going on for so long that it is harder to see it as a bubble. For years, the smart money has seen this and while pumping the securities bubble as much as possible, they buy gold and land as better stores of value than paper assets. More of them are now also buying Bitcoin as an alternative store of value, which explains the rise in price. Some on Wall Street trash talk Bitcoin and some buy it and some do both. All understand that Bitcoin, weird as it may sound, is the anti fragile portfolio response to decades of loose money policy.

Image Source.

Bernard Lunn is a Fintech deal-maker, author, adviser and thought-leader.

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.

Swiss Fintech is moving into prime time #swissfintechpitch

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The third Swiss Fintech Pitch event is in Zurich next week.

Daily Fintech is global. We have subscribers from 130 countries, mostly tracking GDP but skewing English speaking (until we get our act together in other languages) and our 6 Authors are from 5 nations of origin and 5 nations of residence (which are different as we have two Greeks in two countries and two people who moved to Switzerland).

So we don’t take sides in the Fintech capital of the world debate. But as I love living in Switzerland, I may have some cognitive bias.

Which is a long way of saying that I am looking forward to the third annual Swiss FinTech Pitch on October 11th at Landesmuseum in Zurich. Daily Fintech readers can get a 25% discount by quoting sfpmedia discount code.

I want to mark this occasion by noting how far Swiss Fintech has come in a few years and to give a shout out to the pioneering work of John Hucker in bringing this community together. If you wanted to connect with the Swiss Fintech community in the early days, you went to the MeetUps organised by John. Today the meetings have morphed into more professional events as the community became bigger, but it is still a gathering of the tribes.

The Swiss Fintech world has changed a lot in a few short years. In December 2014 I reported back from one of those early MeetUps with Zurich Fintech Fans Look Jealously To London. in those days it felt like Switzerland was playing a catch up game at best and the game itself (Fintech) was not in prime time. Nearly 3 years later, the whole Fintech market is moving into prime time and Switzerland is taking a leadership role.

7 reasons why Swiss Fintech is moving into prime time:

  1. Bitcoin is a legal currency in Switzerland. This is a little known fact (obscure history around WIR). Nor do many people understand the significance, but it is quite simple. For Bitcoin to go mainstream it must be legal. The companies that want to profit from this move to the mainstream want a country that welcomes them rather than fights them legally.
  2. Switzerland led the way with the first wave of innovation around ICOs. Yes, that wave went too far in one direction (free and easy wild west era) and is now moving into the next phase which is more regulated and professional. If Switzerland can get the balance right between enabling innovation and regulating away the bad actors, the country can lead the change that is coming to the Innovation Capital business (from Seed to IPO)
  3. London scored an own goal with Brexit. As a Brit by birth, it is sad for me to note this. London will always be a great Fintech center, but Brexit has sure made it easier for other centres to grab more share.
  4. Switzerland is a great place to live and work. This is true whether you want the beauties of nature, a thriving arts scene or business friendly environment or a well educated workforce or great trains and other infrastructure.
  5. Switzerland as a Financial Centre is right-sized. It is big enough to have capability but not so big that they have to play defence. Fintech is better for upstarts than incumbents. If the market and the regulations are dominated by incumbents with more to lose than to gain, innovation will be stifled.
  6. Switzerland has a very innovative Fintech License. Nobody would have forecast this three years ago, when FINMA was at best playing catchup with FCA and MAS. (See this post for more).
  7. The Crypto Finance specialisation. This is where Switzerland moved from playing catchup in the 1st and 2nd wave of Fintech to taking a leadership position in the third wave of Fintech by playing to strengths rather than overcoming weaknesses. The combination of regulation, technical bench strength and financial capital in Crypto Finance is hard to beat.

3 hurdles for Swiss Fintech:

  1. Cost. It is expensive here, which is a killer if you are trying to get traction based on a skimpy seed round. What we are now seeing is startups from all over the world coming here for expertise in crypto finance, to raise money the modern digital way. So we can see ventures where most of the workforce is outside Switzerland, making the high Swiss costs less of an issue.Nor are ICOs usually skimpy rounds, so there is less problem being undercapitalised.
  2. Angel investor tax incentives. The SEIS tax scheme in UK has been a major boost to angel investing. Switzerland has a perverse/strange issue where individual investors pay zero capital gains tax on occasional investments but pay at income tax rates if they are classified as a “professional” investor. What determines professionalism – total amount invested, number of deals, IRR? That maybe why one sees a lot of Funds in Zug which is a low tax Canton.
  3. Risk aversion. This will take time. It happens when founders become serial entrepreneurs. This is happening today with Lykke and Squirro for example – but in Silicon Valley there are hundreds of examples like that.

The issue of risk aversion brings us back to the Swiss Fintech Pitch event. In addition to the usual mode of entrepreneurs pitching investors they have a reverse form of this where investors pitch entrepreneurs. This makes sense as investors need high quality deal flow and if they tell entrepreneurs what they are looking then they are more likely to get deal flow that is a good fit. This “reverse pitch” also illustrates the changing balance of power between founders and investors. This has been well understood in Silicon Valley, where there is great competition by investors to get in the good deals. Seeing this happen in Switzerland is another sign of Swiss Fintech hitting prime time.

In short, if you live near Zurich and are into Fintech be there or be square. I will be there. Details are at Swiss FinTech Pitch.

Bernard Lunn is a Fintech deal-maker, author, adviser and thought-leader.

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.

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. 

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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.