Analysis and trends of investment in the fintech asset management subsector
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- So far millennial enthusiasm for digital advice remains limited to a generational shift. Venture capitalists have bet billions that this will prove contagious for older investors, however, we have concerns about customer acquisition costs outside of their core demographic.
- Many of the largest platforms have accessible easy-to-use core offerings, but differentiation and moats such as brand and expanded product lines are the exception not the rule.
- Alternative investments and strategies have become more accessible to retail and traditional advisors as new fintech gatekeepers have emerged out of necessity with large institutions still paring back hedge fund allocations.
- Alternative data has been one strategy for hedge funds to stem the tide against outflows by continuing to generate alpha.
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.
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.
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.
Perhaps the highest-friction market is in real estate in spite of 60% of global wealth tied up in the asset class. Institutional or other high-net-worth investors require considerable scale to perform the due diligence to invest in revenue-generating opportunities. Several platforms have emerged to outsource this due diligence process, and source deals in income generating opportunities. For singlefamily real estate, transactional frictions such as checking titles and the closing process are well above cost. A number of alternatives to the current status quo are presently under development, using blockchain and other technology to track ownership and make the sale process as painless and cheap as possible. More efficient ways of tracking assets like single-family homes via blockchain may also make it easier for large institutional investment platforms to invest in this asset class at scale.
VCs have bet billions on platforms aiming to leverage the popularity of passive investing strategies. While retail investors would be wise to minimize the fees they pay to a layer of advisors and fiduciaries, so far these platforms’ success has been limited to a generational shift, rather than a truly disruptive force. Roboadvisory platforms need to truly differentiate themselves from competitors on more than just cost, which represents a race to the bottom. VC-backed upstarts lack the scale to outlast more established titans such as Vanguard and Schwab.
Meanwhile, hedge funds, the active managers most flush with cash from fees, have been forced to innovate in the wake of increased competition and technological change. Alternative managers have been forced to be more transparent in order to broaden their reach to potential investors. Startups have also emerged to leverage technology and software to arm managers with alternative data that can be used to generate alpha.
Look for technology to continue to radically shift all aspects of the investment business from real estate to algorithmic trading. Many of the boldest entrepreneurs have been those whose roles were replaced by software and regulation at major banking houses.
Select Company Profiles
Location: Beverly Hills, CA |
Year Founded: 2010 | Capital Raised to Date: $78.65M
First Funding Date: August 2010 | First Funding Amount: $500,000
Latest Funding Date: January 2017 | Latest Funding Amount: $21.15M |
Latest Funding Post-Valuation: $333.15M
Description: The company creates specialized software for institutional investors including wealth managers, roboadvisors, investment consultants, hedge funds and other institutional asset management professionals. Founded in 2010, InvestCloud has raised a total of $78.65M. The most recent Series B2 round completed in January assigned the company a post-valuation of $333.15 million. Investors include JPMorgan Chase, FTV Capital, Altos Ventures, Polar Capital and Kern Whelan Capital.
Location: New York, NY |
Year Founded: 2015 | Capital Raised to Date: $10M
First Funding Date: April 2017 | First Funding Amount: $10M|
Latest Funding Post-Valuation: N/A
Description: Founded by ETF industry pioneers, 55 Capital (and holding company LVH) was founded to deliver dynamically managed ETF products to replicate popular passive strategies, albeit in a more tax-efficient and lower-friction wrapper. The company offers solutions as either white-label or co-branded products. 55 Capital recently raised $10 million in venture capital from Calibrate Management and Tectonic Ventures.
Location: London, UK |
Year Founded: 2008 | Capital Raised to Date: £13.5M
First Funding Date: June 2014 | First Funding Amount: £3.5M
Latest Funding Date: February 2017 | Latest Funding Amount: £10M |
Latest Funding Post-Valuation: £34.78M
Description: Dealflo has developed a platform to automate complex financial agreements specifically addressing enforceability and compliance issues. The platform serves both B2B and B2C clients including many major financial institutions. The London-based company recently raised £10 million from Holtzbrinck Ventures, Notion Capital and Frog Capital.
Article by PitchBook