Here’s the latest entry in PitchBook’s continuing research of the fintech space, with this analyst note providing an update on the most important trends within asset management. As passive investing continues to rake in billions and traditional players either develop their own low-cost digital advisory platforms or engage in M&A, it’s clear that the trend toward lower-cost, more easily accessible pathways to investment is not slowing down anytime soon.
- So far millennial enthusiasm for digital advice remains limited to a generational shift. VCs have been betting billions that this will prove contagious for older investors eventually, yet we have concerns about customer acquisition costs outside of the core demographic.
- Alternative investments and strategies have become more accessible to retail and traditional advisors as new fintech gatekeepers have emerged out of necessity since large institutions pared back hedge fund allocations.
- Many of the largest platforms have accessible, easy-to-use core product suites, but differentiation and moats such as brand and expanded offerings are the exception, not the rule.
It’s no secret how much capital has flowed into passive investment strategies. The post-2008 market environment has seen a rising tide lift all boats, giving investors pause over management and advisory fees. Furthermore, digital natives have entered the workforce for the first time and are demanding strong UX offerings from online financial services. Traditional players such as Vanguard, Charles Schwab and BlackRock have entered the fray either developing their own low-cost digital advisory platforms or through acquisition. Meanwhile, startup roboadvisor services have provided a vehicle for VC investors to place bets that the emerging crop of millennial professionals will desire to manage their money online and thus provide enough scale for meaningful fee income. Beyond roboadvisory, this note will also touch on other capital markets and investment startups. The 2008 crisis and ensuing regulation combined with the emerging technologies of cloud, mobile and AI have created niche opportunities to provide services traditionally provided by banks.
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We’ve experienced a bit of a slide in venture funding since the fever pitch of 2015 and 1H 2016. Since June 2016 we’ve seen just 209 deals account for $1.4 billion going into the fintech asset management space. This is a far cry from the $7.8 billion across 72 deals in 2Q 2016 alone. Much of this previous spike was accounted for by Chinese unicorns such as Lu.com and Ant Financial. China offers potentially an ideal market for online asset management. The massive population skews young and tech savvy. Furthermore the incumbent financial system suffers from trust issues, making startups or spin-offs from ecommerce giants a compelling alternative. US-based unicorns Betterment, Wealthfront and their competitor Personal Capital also contributed to outsized figures in previous years. Now that these businesses have matured, they have some semblance of scale that allows them to raise institutional capital less often and avoid further dilution. Not included in these figures is marketplace lender SoFi, which has expanded into wealth management for its HENRY (high earner not rich yet) “members.” The company has raised a total of $1.87 billion since 2011 from investors including SoftBank, Silver Lake, Third Point, Renren and others, including a round completed in April assigning a post-val of $4.35 billion. This expansion into wealth management comes as other online lender valuations have shrunk including Prosper, publicly traded Lending Club and a rumored upcoming deal for Earnest.
Venture capital interest in the fintech asset management space has exploded while other investor types have retained steady interest throughout the cycle.
Roboadvisory, the business of automating online financial advice via a managed account for a minimal fee, requires great scale. The largest UK-based example, Nutmeg, announced a loss when it raised £42 million in December in spite of assets under management approaching $1 billion. These firms have faced increased competition from incumbents with Vanguard and Charles Schwab’s relatively new offerings having raised $47 billion and $12 billion, respectively, in client assets as of this January. Furthermore, given the reliance on ETF securities to make up digitally advised portfolios, major ETF providers have made a push to enter the game and compete with their superior synergies. BlackRock made waves when it acquired FutureAdvisor for $152 million in 2015. More recently Deutsche Bank has admitted to developing its own offering to complement its Deutsche X-Trackers line of ETFs. Investment banks moving into retail products comes with marketing challenges due to the negative perceptions of Wall Street still pervasive on Main Street since the last financial crisis. However, they have the advantage of cross-selling to a broad base of existing clients and massive marketing budgets.
Entrepreneurial activity in applying technology to the capital markets sector is inexorably tied to the post-crisis environment. Regulation has challenged liquidity in specific markets such as corporate bonds and single-name CDS. Investment banks no longer employ armies of prop traders. Regulations have severely limited the proprietary risks banks can take and many tasks have been automated by technology.
A number of platforms and technologies have emerged to make capital markets more efficient by targeting niches not served by less-nimble banks. Companies like TruMid have created marketplaces for now-illiquid securities like corporate bonds that banks can no longer hold on their balance sheets post Dodd- Frank. Other technologies like the Ethereum blockchain and other institutional competitors promise to develop products based upon smart contracts, like single-name CDS contracts. Blockchain-based payments technologies look to expedite clearing, thus reducing the need for banks to hold collateral.
Niche opportunities to create value exist within the alternative investment space. Alternative investment platforms have sought out previously untapped sources of capital, as capital has flowed out of many strategies due to fee sensitivity. The low-yield environment combined with the recent equity bull market have made it difficult to outperform public indices. Alternative investment firms have begun to use technology in an effort to provide access to the diversification they provide to non-traditional investors. Platforms like Artivest look to aid rather than displace traditional gatekeepers to alternative investment opportunities via online platforms.
In order to compete in the current environment, alternative platforms have been investing in research, data and technology to maintain an edge in alpha generation. Many have written recently that data is the new oil. A number of alternative data startups have come out with targeted offerings for various types of strategies. In one example, SpaceKnow, the sophomore effort by Climate Corp alumni Pavel Machalek and Javornicky, has raised $5.45 million from BlueYard Capital and Reflex Capital. The company creates market indices from satellite data of key sites of economic importance including rail yards, shipping terminals and factories.
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