The rise of alternative funding and implications for the effectiveness of investor relations

Emerging innovations within the capital market space will continue to present new opportunities for listed companies

The value of assets managed by the global investment management industry and the amount of assets that sit within global mandates continue to rise year on year. Research from PwC predicts that global assets under management will rise to $101.7 trillion by 2020, from roughly $70 trillion today. This will be primarily driven by pension funds, high net worth individuals and sovereign wealth funds, all of whom have been steadily increasing the global component of their investment portfolios.

Tapping into this capital efficiently, however, is far from straightforward for global issuers. As a result there has been a surge of interest in alternative funding methods and new technologies, which aim to boost speed, efficiency and transparency throughout the capital markets. Where exactly is the impact likely to be largest for investor relations teams?
Tapping into this capital efficiently, however, is far from straightforward for global issuers. As a result there has been a surge of interest in alternative funding methods and new technologies, which aim to boost speed, efficiency and transparency throughout the capital markets. Where exactly is the impact likely to be largest for investor relations teams?

Supply-demand matching

First, we can expect to see improvements in how companies target investors. Currently the tools for efficiently understanding who is interested – and to what level – in a given investment story, whether on a deal or non-deal basis, do not exist today. Technology drives the matchmaking process across a multitude of industries. The finance industry has arguably been one of the slowest to embrace its potential to improve the process for the 40,000-odd listed companies and more than 100,000 institutional investors.  Potential benefits include increased accuracy of targeting, a greater degree of access and control, reduced cost and a more diversified range of options.

Peer-to-peer funding platforms for listed companies

Second, we can expect improvements in how companies reach and engage new pockets of liquidity, especially within the retail investor segment. Investment-based “crowdfunding” (or market place investing— both equity and debt) has existed in limited forms for several years through online sites that allow investors to invest in specific projects predominantly for private companies. This model allows companies to raise capital to fund new ideas and more importantly, cultivate new clients who now feel they are participating in the growth of their businesses.

These new marketplaces may work in tandem with existing processes. The crowdfunding platform SyndicateRoom has revealed a tie-up with the London Stock Exchange that will allow ‘crowdfunding investors’ to participate in initial public offerings and placings on the main market of the LSE and AIM.


Blockchain applications

Third, we can expect vast improvements in efficiency and transparency in a variety of shapes and forms. One such form will be Blockchain technology applications within the equity and debt capital markets, which aim to tackle the vast inefficiencies which adversely affect the industry today through a centralised, digital ledger.

The scope of Blockchain’s pilot projects in this area has grown exponentially over the last three years. While these projects have so far generated more hype than tangible applications, the benefits that ‘distributed ledger’ technology can bring to the broader industry seem appealing enough to continue with its funding and development. The prize on offer, as one consultancy recently put it, is a new architecture, where all capital market participants work from common datasets, on an almost real-time basis, and where supporting operations are either streamlined or made redundant.

To take one example of what is already being done, BNP Paribas has designed a pilot scheme permitting private companies to issue securities on a primary market with e-certificates, developing a ‘live’ share register and access to a secondary market all via blockchain technology. We should expect similar progress in the near term in public markets, with increased accuracy in the identification and recording of shareholder movements and interactions.

Initial Coin Offerings and fundraising

Lastly, in niche areas, we can expect new blockchain based applications to support the fundraising process. Initial Coin Offerings (ICOs) are a fundraising exercise for cryptocurrency tokens such as Bitcoin or Ethereum, and have received a lot of press in recent months. Speculators continue to chase this new asset class. While these might at face value seem like attractive fundraising structures, they are ultimately of limited interest in a corporate context. The recent moves by the SEC (stating in July that cryptocurrency tokens can be securities) and China (banning fundraising through ICOs in early September), mean that an ICO is unlikely for the time being to work in an established corporate outside of a new tech startup scenario.

For IR officers, there are nevertheless some newly emerging areas of interest which are raised by the cryptocurrency experience.

  • ICOs have turned the traditional fundraising process on its head, marketing for a long time then fundraising in a matter of hours. The co-founder of Ethereum said “We managed to grow our base of ambassadors by attending meetups around the world, targeting groups and leaders in certain communities. Once they got on board… about 9,000 people participated in the crowdsale”. Might traditional equity capital raising follow this in certain circumstances, for instance where the fundraising is well flagged? For instance, a company with a well-prepared public market-style equity story can spend time educating potential target investors for up to two years pre-IPO. The public phase of the IPO could then be significantly cut.
  • The rise of cryptocurrency as a liquid means of exchange, irrespective of the underlying use-case, suggests that corporates could treat cryptocurrency as one of the currency options for the fundraising. In August this year, Fisco used a 200 bitcoin 3-year bond (worth $860,000 at the time) for an internal M&A transaction, as a test case with Japan’s approval of bitcoin as legal tender.
  • Primary transaction processes are slow, and investors who are not existing clients of the banks managing the deal are usually not able to participate. Blockchain authentication of the investors’ know-your-customer (KYC) status would broaden the addressable investor base. And this is just one application. In July this year, Daimler used a private version of Ethereum in a test case to issue a €100m 1-year bond. This used Blockchain to manage the whole transaction cycle from origination, distribution, allocation and execution of the loan agreement, to the confirmation of repayment and of interest payments.

The journey from today’s system to a new paradigm for our industry will take time. The obstacles to be overcome along the way may be significant, and it is far from clear what will ultimately emerge. However there is little doubt that technology will eventually transform our industry faster than we think. We can take clues as to how this may happen from examining just how communications, music, transportation, or even video rental industries have been transformed in the last 5 years alone. As in those industries, the finance industry will come face to face with huge opportunities, the beginnings of which we can see today.

The article was co-written by Michael Chojnacki from Closir and Julian Macedo from ECM Team and originally appeared in fall edition of IR Society’s Informed magazine.

 

Technology’s potential to ‘emerge’ markets

Earlier this year, one of the largest remaining ‘closed’ emerging markets, Iran, followed Saudi Arabia in opening up its stock market to foreign investors as financial sanctions were officially lifted following last year’s breakthrough nuclear deal between Iran, the US and other world powers.

Emerging and frontier market fund managers are now looking closely at Iran to evaluate its investment potential, as shown by the rapidly growing number of Iran-focused funds as well as the increase in investor travel to Tehran during the last six months. The Tehran Stock Exchange already has a large, diversified and liquid stock market with more than 400 listed companies and a market capitalization of around $90bn. On top of this, the country’s IPO pipeline is potentially as large as $100bn, an enticing prospect for international investors looking for growth opportunities.

Before they are able to invest substantially in Iran, investors must first satisfy internal compliance teams by getting to grips with a market where investor relations and corporate governance standards still have a lot of catching up to do. This is usually a long and fairly painful process as investors, companies and regulators move at different speeds, speak different languages and follow different practices.

Technology could play a vital role in helping companies in countries who are entering the global capital markets arena for the first time, such as Iran and Saudi Arabia, to integrate and engage with the international investment community. It’s probably fair to say that the success of technological innovation in this area will be based largely on its ability to help companies to level the playing field between global investors and local investors.

The investor relations community has been slow to embrace innovations which are already revolutionising other industries. A Google Street View of the Emirates Airbus A380 for example gives travellers a full virtual product tour of the plane from their desks. Bernie Sanders used the 360 interactive video to great effect at his rally in the run-up to the Iowa caucus.

For most fund managers, there is no substitute for a face-to-face meeting or a company site visit, during which they can see the whites of management’s eyes and walk around the corridors of the company’s headquarters. But as global portfolios become more and more diversified, technology could help investors to cover more ground by increasing the effectiveness of ‘remote’ engagement at a fraction of the cost. Forward-thinking IR teams could adapt 360 technology to enable analysts and investors to interact not only with company premises, but also with senior executives and product managers. In a few years, the Oculus Rift headset could take this idea a step further to provide an even more immersive experience.

Simple smartphone applications allow ordinary consumers to order taxis, find dates, book flights, order takeaways and operate their central heating from the office. They allow warehouse managers to control stock and doctors to monitor patients’ blood pressure. At the same time, IROs and fund managers still rely heavily on emails, phone calls and business trips to conduct most of their daily tasks, which require time, money and organisation. In this environment, it is perhaps unsurprising that the process of building knowledge, trust and confidence in a company or market takes as long as it does.

For innovation to be embraced, it must make the fund manager’s job more efficient without forcing him to surrender his competitive edge or limiting his access to the company in any way. It must help the IRO to tell the company story more efficiently and to a wider audience. The opportunity for such a solution is perhaps greatest in emerging and frontier markets given the lack of existing IR infrastructure and desire for short-term international growth. Despite still being relatively undeveloped from a global capital markets point of view, countries such as Iran, China and Indonesia boast increasingly tech-sophisticated consumer markets, which perhaps bodes well for their respective corporate counterparts.

Technology innovations could offer open-minded IR teams in emerging and frontier markets a unique chance to quickly close the gap between them and their richer, more experienced developed market rivals. The lack of an existing process for engaging with international investors may even give them an advantage over established companies reluctant to think outside the box and adapt.

This article first appeared in the spring edition of UK IR Society’s magazine ‘Informed’.

A New Frontier in Financial Technology

This is re-print of a piece that first appeared in Technology Viewpoint in IR Magazine edited by Michael Chojnacki from Closir.

There’s something different about Level39. Europe’s largest financial technology accelerator opened two years ago in the heart of London’s Canary Wharf with the explicit aim of supporting the next generation of technology start­ups. Most of the growing number of entrepreneurs on Level39 left their jobs in the City to try to solve industry problems their employers and competitors had little appetite to address, following the vast reduction in R&D and technology budgets post­ 2008.

Working in small, agile teams and freed from the internal approval process, the next generation are quickly rising to the challenge. This hasn’t escaped the attention of the large banks and sector players, who monitor the market closely, often looking to partner, invest in or buy from the new kids on the block.

Why should we care? Because the technology developed by entrepreneurs in places such as Level39 will play a fundamental role in shaping the IR industry during the next 10 years. It will dictate how shares are traded, cleared and settled. It will influence the composition of shareholder bases. It will govern how we develop and maintain relationships with investors and analysts. It will impact our access to information that helps us to make intelligent strategic decisions. The most relevant areas of innovation can be broadly categorised into six key themes:

  • Fragmentation of Investment Research 
  • Technologies in the Capital Raising process 
  • Data Science and Analytics 
  • Democratisation of Corporate Access 
  • Development of Trading Technologies 
  • Evolution of Marketplaces and Support systems

Today we would like to address the first topic.

Fragmentation of Investment Research

Before setting up Stockviews, Tom Beevers spent nine years as a pan­ European portfolio manager at Newton, a London based investment manager with over $75bn in assets under management. Like many of his colleagues in the industry, he was a heavy consumer of research but became frustrated with the lack of variety of perspective. As a result he often found himself searching through online forums, blogs and social media for other viewpoints. Seeing an opportunity, he founded Stockviews, an online platform that collects equity research from independent analysts (anyone can write research on any stock) and rates each based on the performance of their past stock picks. This is potentially an interesting development for IR teams. It means that existing sell­side analysts may soon have to make room for the growing number of independent analysts whose views are followed and respected by thousands of followers. It certainly wouldn’t harm IR teams to keep the top­performing analysts on their radar and perhaps even engage in periodic dialogue with them. A fresh perspective can be helpful and innovative ideas like Stockviews are a good way for companies and investors to broaden their horizons.

Wisdom of Crowds

The growing trend towards group opinion platforms is testament to belief in the wisdom of crowds. In 2014 researchers from Purdue University, City University of Hong Kong and Georgia Institute of Technology published Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media. The authors analysed approximately 10,000 articles and comments on a popular social media platform for investors called Seeking Alpha. Its ability to predict stock returns and earnings surprises was much higher than expected, supporting the case for independent research. Others platforms which gather research, estimates, or opinions about listed companies include Estimize, SumZero and Value Investors Club.

Influencers of this trend

Another factor sell­side research teams have to contend with is the new wave of regulation governing payment for research and corporate access services. The proposed EU regulations are expected to severely limit the degree to which fund managers can pay for research out of trading commissions, thus resulting in fund managers having to pay for research out of their own P&L. With investors hesitant to pay out of their own pockets it becomes uneconomical for brokers to cover a long tail of mid and small­-cap stocks. Institutional investors are increasingly setting up their own in­-house research teams, further exacerbating the problem.

In light of the inherent conflict of interest in the current model, the key words behind the latest regulations are ‘accountability’ and ‘transparency’. New market players are increasingly utilising social technology as a tool to level the playing field and democratise the research process. But do social finance platforms have a role to play in the professional investor community? This question was posed at last summer’s annual CFA conference in Seattle. The strong consensus was that online crowdsourcing communities can be very useful, particularly to investors with less access to sell­side analyst reports or those looking for a different perspective. If technology driven platforms continue to make the investment process more efficient and inclusive, they will no doubt become a serious challenger to current industry standards.

What ValueStream Investment Means for Closir

Today we are delighted to announce a strategic investment and partnership with ValueStream Labs in New York. ValueStream is a venture capital firm specialising in financial technology and this is their first European investment.

This news is really exciting for us and the users of our platform. First and foremost, the partnership will will help to extend Closir’s network to the US institutional investor space, who represent the largest opportunity pool for Emerging Market issuers. Over the years, US investors have been steadily diversifying their portfolios and increasing their exposure toEmerging (and Frontier) Markets. The main beneficiary of this trend from the early 2000s has been the BRICs; slowly this has expanded to encompass the 23 counties within the MSCI EM index. The scope of US institutions investing in EmergingMarkets is also quite broad, from mutual, pension and hedge funds to endowments, separately managed accounts and awidening range of passive tools. These institutions are constantly on the lookout for better ways to learn about new opportunities and Investor Relations is at the heart of telling this story.

Developed Market Holdings in Emerging Market Equities, Source: IMF

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While our initial focus is on issuers in Emerging Markets and institutional investors in the US and Europe, our goal is eventually to help any investor to learn about and access any global opportunity. We are convinced technology can deliver a better experience for this process.

ValueStream has experience supporting the growth of a number of successful technology ventures and we are proud to be part of their portfolio as we continue to develop our solution.

Michael Chojnacki

Chief Executive Officer

@mikechoj

The Economist: The Fintech Revolution

This week’s special report in The Economist on Financial Technology (or Fintech) talks about the new wave of ideas changing traditional finance, from payments to wealth management, crowd funding and digital currencies. Fintech start-ups continue to attract record investment year-on-year from the venture capital community, and many are long past the experimental phase. The report also discusses the uncertain and evolving relationship between fintech and traditional banks.

As we have pointed out in some of our previous posts, despite the fact that many of the most relevant trends in this space are still nascent or emerging, there is huge potential for them to impact the asset management industry and subsequently our world of investor relations.

For those fairly new to the subject, you may find our basic Fintech Dictionary useful in explaining some basic concepts and definitions.

A few points from the Economist report in particular caught our attention:

  • Although the amount of assets managed by automated wealth managers (so-called ‘robo-advisors’) doubles every few months or so, the global total is still only around $20bn, compared to roughly $17tr for traditional managers. The argument in favour of robo-advisors, which mainly utilise indexing strategies while staying clear of mutual funds and individual stocks, is that they can use algorithms to provide sound investment advice for a fraction of the price of a real life advisor. The majority of the take-up so far has been from clients under 35 with an average account size of less than $100,000. It is interesting to note that Schoders, Goldman Sachs, Vanguard, Schwab and JP Morgan Chase have all either made direct investments in robo-advisory platforms or are planning to launch their own.
  • The electronic ledger ‘Blockchain’ is the technology behind the digital currency Bitcoin. Blockchain offers a decentralised, public account of all Bitcoin transactions. Enthusiasts believe its application in the financial markets may be much broader; in theory the technology could be applied across a wide range of applications, such as the issuance and trading of securities. Unsurprisingly, a number of large financial institutions, as well as exchanges, have taken steps to explore this further.
  • Providing financial services to millions of customers, especially to those in populous emerging markets in Asia and Africa who previously had no access to them, is another area that fintech looks to address. While only 25% of people in Africa have access to a bank account, over 80% have a mobile telephone. Taking advantage of this gap is M-pesa, a Kenyan phone based payments scheme now used by three quarters of adults in the country. As these concepts evolve it is fascinating to think about the possibilities and applications for providing credit, retirement and investment solutions to millions almost overnight.

We will continue look at some of these ideas in more depth over the summer.

FinTech Dictionary

Welcome to our FinTech Dictionary which will aim to demystify and explain a number of terminology increasingly being used in the industry. If you would like to add a term or contribute to improving some of definitions, please drop us a note.

Bitcoin –  an online payment system invented in 2008 by Satoshi Nakamoto. The system is peer-to-peer; users can transact directly without needing an intermediary. Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain. The ledger uses its own unit of account, also called bitcoin. The system works without a central repository or single administrator, which has led the US Treasury to categorize it as a decentralized virtual currency. Bitcoin is more correctly described as the first decentralized digital currency.

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Source: Economist.com

Blockchain  – the technology that underpins bitcoin (a sort of peer-to-peer system of running a currency) and a public record of all transactions in chronological order. In essence, the blockchain is a giant ledger that keeps track of who owns how much bitcoin. The coins themselves are not physical objects, nor even digital files, but entries in the blockchain ledger: owning bitcoin is merely having a claim on a piece of information sitting on the blockchain.

Crowdfunding  – practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet. One early-stage equity expert described it as “the practice of raising funds from two or more people over the internet towards a common Service, Project, Product, Investment, Cause, and Experience, or SPPICE.” The crowdfunding model is fueled by three types of actors: the project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea; and a moderating organization (the “platform”) that brings the parties together to launch the idea.

Cryptocurrency is a medium of exchange using cryptography to secure the transactions and to control the creation of new units. Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies. Bitcoin became the first decentralized cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created. These are frequently called altcoins, ascontraction of bitcoin alternative. Cryptocurrencies typically feature decentralized control (as opposed to a centralized electronic money system, such as PayPal) and a public ledger (such as bitcoin’s block chain) which records transactions.

FinTech –  a contraction of “finance” and “technology” – refers to companies that provide financial services through the engagement of technology. FinTech companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.

Peer-to-peer lending –  commonly abbreviated as P2PL is the practice of lending money to unrelated individuals, or “peers”, without going through a traditional financial intermediary such as a bank or other traditional financial institution. P2PL is not to be confused with peer to peer investing (P2PI). This lending takes place online on peer-to-peer lending companies’ websites using various different lending platforms and credit checking tools. Many also use the abbreviation “P2P” when discussing the peer-to-peer lending or investing industries more generally.

Robo-advisors –  class of financial adviser that provides portfolio management online with minimal human intervention. While their recommendations may vary, they all employ algorithms such as Modern portfolio theory that originally served the traditional advisory community, which has relied on algorithmic templates to conduct portfolio management since at least 2005.

Satoshi Nakamoto –  a person or group of people who created the Bitcoin protocol and reference software, Bitcoin Core. In 2008, Nakamoto published a paper on The Cryptography Mailing list describing the Bitcoin digital currency. In 2009, he released the first Bitcoin software that launched the network and the first units of the Bitcoincurrency, called bitcoins.

Sources: Wikipedia, Investopedia, The Economist

Drivers of Innovation in Fund Management

research study published last week by London-based think tank Create Research deserves a closer look. Amin Rajan, who is both CEO of Create and an early mentor to Closir, conducted a study into how digitisation, and the intrusion of internet and mobile players, looks set to reshape the asset management industry during the coming months.

Fund managers themselves have been slow to embrace technological innovation, although in the last 12 months a number of global trends have started to help the process along:

  • An exponential growth in number of affluent investors
  • An increasingly tech-savvy population
  • Greater flexibility in pension contributions and longer life expectancy
  • Increasing demand for transparency and synchronisation from regulators
  • Growth of geographically ‘portable’ investment products such as ETFs
  • The popularity of social media channels spilling over into the finance community

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The report outlines the emergence of several new models:

In the evolving marketplace, virtual advisors offer the mass affluent market a streamlined communication process through mobile and digital media, enabling them to take advantage of technology while retaining some of the personal touch.

Online advice platforms, or ‘robo advisors’ as they are being called by some, have already started to offer retail clients the chance to build personalised portfolios using proprietary algorithms.

Fund consolidation portals will help them to aggregate and manage investible funds across multiple platforms.

Given the obvious opportunities these trends present for ambitious and resourceful technology players, it’s unsurprising to hear Google and Apple mentioned as potential disruptors. Create’s report suggests mobile phone providers may also be well positioned to enter the fray.

Although industry players have been losing sleep over the tech giants for some time, there are obvious hurdles for data-sharing social technology companies in an industry which is defined by a strong risk culture, regulatory oversight and the importance of data security.

Strategic partnership with finance players may be a good option for technology and mobile companies, as it offers them a way to mitigate these concerns while making the most of complementary skill sets. There have already been some high-profile collaborations, with Aberdeen Asset Management forming an alliance with Google and Canadian mobile provider Rogers Communications partnering with Canadian bank CIBC.

Change may be gradual in an industry traditionally resistant to technology. Create points to the airline industry as a successful model, where both customers and providers quickly adapted to the increased efficiency offered by technology as concerns over security proved to be exaggerated.

Source: Create Research