FINTECH · 2019-06-12 · ANALYST REPORT PART 3 ASSET MANAGEMENT FINTECH DECEMBER 2016 Including...

ANALYST REPORT

PART 3

ASSE T MANAGEMENT

FINTECH

DECEMBER 2016

Including data from the PitchBook Platform, which tracks more

than 33,000 valuations of VC-backed companies.

ContentsCREDITS & CONTACTPitchBook Data, Inc.

JOHN GABBERT Founder, CEO

ADLEY BOWDEN Vice President,

Market Development & Analysis

Content, Design, Editing & Data

EVAN B. MORRIS Analyst

NIZAR TARHUNI Senior Analyst

GEORGE GAPRINDASHVILI Managing Editor

JENNIFER SAM Senior Graphic Designer

Contact PitchBookpitchbook.com

RESEARCH

[email protected]

EDITORIAL

[email protected]

SALES

[email protected]

COPYRIGHT © 2016 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.

Analyst Note 3

Overview 4

Recent History 4

Portfolio Theory Concepts 4

The Millennial Investor 5

Market Applications & Segments 6

Robo-Advisors 6

Retail Investment 7

Alternative Investments 9

Private Equity 9

Real Estate 10

Social Investment Research 11

Institutional Capital Markets & Risk Mgmt. 12

Private Investment & Corporate M&A 13

Deal Flow & Capital Invested 13

Investor Types 15

Top Investors 16

Active & First-time Investor Growth 16

Institutional Involvement & Moving Fwd. 17

Company Profiles 19

2 PITCHBOOK FINTECH ASSET MANAGEMENT

Analyst NoteThe asset management industry has begun to adapt as millennials

begin to represent a substantial portion of investors. Just as boomers

ushered in the era of discount brokerages and gen x-ers dabbled in

online day-trading, millennials will leave their own mark on how the tens

of trillions of dollars in global assets are managed. In this report we

examine the technologies and business models positioned to attract

millennial investors, as well as the technology tools and platforms asset

management firms have used to improve their offerings, as economic

and regulatory conditions have placed increased pressure on fees.

Banking and financial services have been among the last industries to be

disrupted by technology due to substantial regulatory and other barriers

to entry, yet the industry continues to carry with it numerous pain points

for both consumers and enterprise customers. We believe that the asset

management segment within fintech provides numerous attractive

opportunities for private investors to generate strong returns as the

innovation in the industry will become inducive for all types of buyers.

This report was written for professional investors, but holds broad

applicability to investors of all stripes. Furthermore, consumers will also

derive value as a number of the companies mentioned offer consumer

mobile and web-based platforms for investment management.

Evan B. Morris


OverviewRECENT HISTORY

The global asset management industry has custody of $69 trillion in

assets, according to Citi, or $87 trillion including insurers, according

to the Bank of England. Much of this wealth is currently controlled

by the post-WWII baby boomers. As the oldest boomers turn 70, the

generation’s wealth is peaking. Baby boomers have witnessed a massive

reshaping of the asset management industry over the course of their

lives. They inherited a world where expensive stockbrokers touted

single-name securities and generated fat commissions competing on

high-touch service and quality of research. As recently as the mid-70s,

one-way transaction costs exceeded 1%, e.g. a broker would charge

a client over $1,000 to execute a $100,000 buy order, and another

$1,000+ fee to exit the position. Brokerage houses would tout expensive

research, which promoted an active strategy of buying and selling shares

in order to churn portfolios and rack up substantial fees.

PORTFOLIO THEORY CONCEPTS

The lack of transparency in the investment industry persisted for

decades. Academics were the first to chip away at the monopoly on

expertise. The Capital Asset Pricing Model (CAPM) introduced in the

1960s calculated the expected return of an asset given its historical

risk. This model divorced a security’s passive return (beta) from the

active return (alpha). Burton Malkiel went one step further with his 1973

book A Random Walk Down Wall Street, which introduced the Efficient

Market Hypothesis. The theory portends the impossibility of “beating

the market” as all price information is immediately reflected in the price

of an asset, suggesting that alpha seeking represents a fool’s errand.

Finally, in 1975, the SEC unwound the nearly 200-year-old Buttonwood

Agreement, which put a floor on brokerage commissions. This change

opened the door to discount brokerages like Charles Schwab and later

online brokerages like E-Trade. Consequently, baby boomers flooded

into mutual funds rather than accounts managed by their personal

brokers, as these new regulations drove down fees.

Baby boomers have lived through a rapid

decrease in brokerage fees over their

lifetimes.

The Efficient Market Hypothesis throws

cold water on the idea that an investor

can beat the market through skill rather

than luck.


THE MILLENNIAL INVESTOR

Since millennials hold just $1 trillion in wealth, with just $250 billion

invested (and hold the bulk of the $1.2 trillion in US student debt),

traditional wealth managers continue to fight over high-net-worth

baby boomers. This represents a huge opportunity to target younger

HENRYs—high earners not rich yet. Millennial investors have shown

a strong preference toward passive investing. Having lived through

two crashes and a steady upward creep in asset prices in the recent

environment, millennials don’t believe in beating the market. These

millennial investors are tech savvy and conscious about fees. Thus, a

major theme of fintech innovation in the asset management space has

been the automated buying and selling with fees charged on an annual

basis rather than for each transaction. Further, millennial investors tend

to favor ETFs over mutual funds, due to intraday liquidity and lower

minimums. ETFs have become popular with boomers as well, having

recently surpassed $3 trillion in market cap as an asset class.

The primary downside of ETFs is their variable discount or premium to

the underlying assets. In some cases this tracking error is due to the

difficulty of pricing underlying illiquid assets, which may include fixed

income, options or other derivatives. This may be more pronounced

in periods of market dislocation, or when a number of investors rush

to sell holdings. However, they have a number of benefits as baskets

of securities actively traded during market hours. Mutual funds can be

redeemed only at the end of the day for the net asset value (NAV). In

some cases, mutual funds may make capital gains distributions when

they sell holdings, leaving investors with a large tax bill. A benefit of

ETFs remains that investors have agency over when to buy and sell, and

thus can control when their capital gains bill comes due.

Technology and ETFs have enabled a number of platforms to emerge

around the needs of consumers rather than the logistical issues of

stock trading. Most importantly, dollar-cost averaging allows platforms

to dynamically rebalance holdings according to investors’ allocation

preferences. Prior to the advent of electronic trading and order

management systems, this process would have been highly labor

intensive and unfeasible as each trade order would need to be entered

manually. Entire ecosystems have emerged around bringing these

strategies to scale and allowing individuals to pursue their preferred

strategy while allowing asset managers to cut costs. While many of the

platforms that have emerged around these technologies have modest

AUM compared to the largest asset managers, the increasing shift in

assets from baby boomers to millennials should see many of these firms

continue to rapidly gain scale.

ETFs have allowed fintech asset

management startups to be more

creative with flatter and less expensive

fee structures.

ETFs offer intraday liquidity and tax

efficiency, yet may trade at a discount or

premium to the value of the underlying

assets.


Market Applications & SegmentsROBO -ADVISORS

The high fees of the wealth management industry, combined with a trend

toward passive investing and the advent of the internet, has created

an opportunity for a number of services to spring up, advising billions

in assets. Traditional wealth managers have fees around 2% (thanks to

high regulatory costs), operate primarily over the phone and offer high-

touch services for only the largest accounts. Much of the fee pays for

registered advisors and analysts to come up with custom research and

portfolios for clients, which may not materially differ from or outperform

automated offerings. Main street advisors likely lack the expertise and

products of the best active managers and largest institutions. Further,

the high spend to maintain a brick-and-mortar business model can take

the focus away from a high-quality online user experience for account

monitoring.

When customer financial affairs are simple, a new breed of web-

based “robo-advisors” can allocate funds based on risk tolerance

to a pre-determined diversified strategy. This approach has allowed

robo-advisors to operate with annual fees below 0.5% of AUM with

much lower account minimums. Their lack of brick-and-mortar costs

allow them to prioritize online user experience with slick websites and

smartphone apps, alongside over-the-phone customer support for

those who need it. For taxable accounts, these platforms can leverage

the intraday liquidity of ETFs in order to maximize tax efficiency. This

can be achieved through tax-loss harvesting, which automatically sells

underperforming holdings for a loss while simultaneously buying a

comparable ETF in order to maintain the same exposure. This allows the

investor to offset capital gains with realized losses in order to minimize

tax burden. This has long been a strategy used by investors, but only

available to the highest net worth accounts and not done with much

frequency due to the labor intensity of manually combing through

holdings. According to Wealthfront, daily tax loss harvesting adds

around 1.55% in annual return, while conducting the process just once

a year like a manual advisor would adds just 0.58%. While all tout the

benefits, one should be aware that tax loss harvesting merely defers

taxes into the future, as it can open the opportunity for future gains. In

general, the practice works best when predicated upon short-term-long-

term tax arbitrage, as losses are written off at the higher short-term rate

and gains are taxed at the lower long-term rate.

A new wave of investment advisors

use algorithms, ETFs and mobile apps

to manage client portfolios with fees

generally <0.5% of AUM per year.


The market structure in the current environment has compounded

the network effects of passive investment vehicles that dynamically

rebalance portfolios. For one, ETF liquidity has improved due to

increased interest in those securities. Secondly, as more and more

assets flow into strategies that automatically rebalance each month,

volatility becomes dampened across all public asset classes due

to overperforming allocations being sold off as underperforming

allocations are bought up to maintain portfolio weightings. This further

impacts the ability of active managers to generate outsized returns

by buying high quality and selling short low-quality stocks as a rising

tide lifts all boats, further reinforcing outflows out of active strategies

and making fees more difficult to justify. The phenomena creates a

hollowing out of the asset management space with assets flowing into

certain hands-on private strategies open only to accredited investors,

as well as passive strategies made more and more accessible as some

nontraditional asset managers gain scale. We have seen an ecosystem

emerge around both ends of the spectrum in order to streamline the

investment process for investors of all stripes.

The largest robo-advice startups, Betterment and Wealthfront (see

page 19), have each grown to over $1 billion in AUM with similar business

models based on fitting clients to a basic risk profile, minimal fees, great

UX and a few advanced automated features. Betterment’s fee structure

starts at 0.35% annually and declines to 0.15% for larger accounts, while

Wealthfront operates a more progressive model with fees waived for the

first $10,000 and 0.25% annually on balances in excess of that. These

fee structures do not include ETF fees, which tack on at least a dozen

additional basis points per year. The third major player in the robo-

advice space is Personal Capital (see page 20), which combines the

automated model with advisors available to consult with on the phone,

albeit for higher fees starting at 0.89% for less than $1 million, and

declining to 0.49% for accounts over $10 million.

RETAIL INVESTMENT

Retail investors had not seen much in the way of innovation from

brokerage houses since the advent of online trading in the 1990s.

Existing platforms typically charge commissions on a per-trade basis

in the $10 range, creating high frictions for smaller investors. If an

individual wishes to withdraw funds, one must figure out which holdings

to sell, making it costly to rebalance portfolios. Furthermore, generally

poor user interfaces make platforms difficult to use.

The current macro environment has

exaggerated the relative merits of

passive investing.


Since the financial crisis, a number of platforms have emerged to offer

lower costs to investors while removing some of the other pain points

around portfolio management and facilitating more complex strategies

for smaller investors. Many of these platforms are targeted toward

millennials who may be relatively sophisticated investors, but typically

lack the capital to scale strategies at a cost that is justifiable.

Many of the opportunities for disruption in the retail investment

management space come via changing the established pricing model

used by retail brokerages. The high fees per trade come as a major

pain point, particularly for smaller investors. Pricing models for fintech

retail investing platforms range between no direct costs to clients,

fixed monthly fees, traditional per-trade commissions and an annual

percentage of AUM. Platforms can offset these low fees by generating

revenue from collecting the interest rate float on uninvested funds

and by collecting interest on margin accounts. Furthermore, execution

of trades tends to be quite inexpensive, as an increased number of

exchanges has made the market highly competitive, with retail trades

subsidized by high fees for data to high-frequency traders and other

market participants.

Retail investment platforms also compete on the product front with

superior user interfaces and more choices for more esoteric strategies to

retail investors. These platforms make accessible the types of investing

pursued by sophisticated closed-end funds. Motif (see page 24) offers

investors tradable thematic lists of securities to mimic the strategy of

global macro funds, as well as automated rebalancing and allocation.

Folio (see page 24) provides a similar offering with more customizability

around user-selected lists of securities, but with fixed monthly pricing.

M1 Finance (see page 21) offers a hybrid between robo-advisory and

online brokerage. Investors pay an annual 0.35% fee to set up an account

with allocations toward individual stocks, ETFs or preset templates with

different risk profiles. Any deposits or withdrawals are automatically

taken from the entire allocation so the investor doesn’t have to sell

individual securities or wait for trades to settle. These strategies can

be implemented for even the smallest accounts through the holding

of fractional shares that can be allocated among multiple clients. The

platforms will typically hold the full shares on their own balance sheets

in order to hedge exposure to clients’ gains.

Increased competition has driven down

execution costs, making it possible for

platforms to offer extremely low fees.


We believe that legacy retail brokerages would be wise to improve their

UX offerings, and to align fee structures with what is in their clients’ best

interests. Typically, retail brokerages offer fee breaks only for the most

active traders. However, statistically, the most active traders lose money.

Fintech competitors may in the long run push legacy players to improve

their offerings, even as all may not survive the scale required to make

the economics of flat fee structures.

It makes sense for these companies to collaborate. Acquisition of these

product-based startups will be a successful strategy for legacy firms

in the future in order to drive inorganic growth and as portfolio churn

slows with investors making fewer trades. Traditional brokerages may

look to acquire platforms in order to combine their scale with superior

VC-backed products. Upstart platforms will look to take on strategic

investors once AUM growth plateaus, which for simple demographic

reasons will take some time to play out. Many of these platforms provide

attractive offerings that can easily compete with the commoditized

offerings of existing online and traditional brokerages.

Alternative InvestmentsPRIVATE EQUIT Y

Gobs of money have poured into private equity in recent years, hunting

for the outsized returns witnessed in the 1980s and 1990s when

pioneers like KKR, Blackstone and Apollo were able to lever up cheap

companies with cheap debt. These early pioneers of the asset class

were able to source attractive opportunities given the abundance of

proprietary deal flow. Once investors of all stripes began to see the

huge returns generated by LBOs, PE became a standard allocation

across all institutional portfolios. Given the chase for yield in the current

environment, returns have gone down and multiples have increased as

there has been greater competition for the same deals.

Historically, private equity firms have pointed to the illiquidity premium,

operational expertise and extensive due diligence as driving outsized

returns. In the paper “Leveraged Small Value Equities” by Brian

Chingono of The University of Chicago Booth School of Business, and

Daniel Rasmussen of Stanford GSB, the authors identified quantitative

factors that can more efficiently replicate private equity’s secret sauce

by using leverage to buy underperforming small-cap stocks. Rasmussen

went on to found Verdad Capital Advisors (see page 26) in 2014, a

Seattle-based hedge fund that uses an algorithm to identify undervalued

and out-of-favor small-cap stocks based on size, value and leverage.

Returns from PE buyout funds have

failed to match the 80s and 90s bull

markets due to increased competition for

deals and capacity constraints.


Traditional private equity investors have also turned to technology and

data to source deals. Though we’re biased, SaaS platforms like our own

at PitchBook—recently acquired by Morningstar—include comprehensive

datasets of every potential target, showing financials, private

transactions, service providers and investors, as well as fund returns and

performance metrics for LPs. Dealmakers can augment their personal

networks with these datasets to uncover more opportunities to generate

returns and evaluate even more deals.

REAL ESTATE

Investors collectively hold 49% of global wealth in real estate. While

much of this includes single-family primary residences, investors have

long sought out income-generating properties as an asset class. Real

estate also offers a way for investors to diversify globally in a market

less correlated to stocks and bonds. High barriers to entry given the

capital intensity and asymmetrical access to dealflow have closed the

largest and most profitable private real estate investment to all but the

largest institutional platforms. Publicly traded real estate investment

trusts (REITS) have enabled retail investors to gain exposure to the asset

class and have historically outperformed, but their liquidity comes at

the expense of mark-to-market volatility. LPs are limited to REITs and

real estate private equity funds unless they commit to the time intensive

process of sourcing deal flow and due diligence.

These inefficiencies have attracted entrepreneurs leveraging technology

to disrupt the way buyers, sellers and investors connect. Software

platforms have emerged to allow qualified investors to “cherry-pick”

attractive deals sourced from partners with local expertise on the

ground. Some platforms have even begun implementing blockchain

technology to verify transactions with an immutable distributed ledger.

Cynics might characterize blockchain as a marketing ploy, as the buzzy

technology generates consistent headlines. In our view, the utilization of

blockchain technology stands as an example of fintech developing as an

ecosystem that utilizes a core set of tools to build out next-generation

financial services.

One promising real estate fintech startup is CADRE (see page 25),

founded with a focus on the New York metro area, which has expanded

to major national markets after raising a total of $68.4 million from

investors including Thrive Capital, General Catalyst, George Soros

and Goldman Sachs. Another notable platform, Wealth Migrate (see

page 25), has expanded from South Africa to operate nine offices on

six continents in only six years of operation. Founder and CEO Scott

Picken recently announced that the company would be using blockchain

technology to offer an immutable record of every transaction, providing

additional peace of mind for cross-border investors.

The high barriers to real estate investing,

such as access to capital and deal flow,

have only recently begun to come down.

Platforms like our own offering at

PitchBook include comprehensive

datasets of deals, investors, companies

and service providers to aid in every step

of the deal process.


INVESTMENT RESEARCH

Fintech has begun to change the workflows of financial professionals

even at traditional firms. Institutional investors have long relied on

investment bank sell-side research analysts for trade ideas and financial

models. However, Wall Street has long come under scrutiny for the

conflict of interest between research and trading desks. While banks

in the US have been required to maintain a Chinese wall between

investment banking and research since the great depression, during

the 90s tech bubble superstar equity research analysts received eight-

figure bonuses based on the revenue from other divisions driven by their

glowing promotion of stocks. In Europe, this model will soon come under

increased scrutiny due to the Markets in Financial Instruments Directive

II. Among other directives, the MiFID II requires asset managers to break

out research-related costs from management fees.

For active managers reliant on research for trade ideas, the current

conflict of interest baked into the system has obvious drawbacks.

Fintech startups have begun to leverage technology to drive actionable

research for investors without the substantial high-cost structures

of traditional Wall Street research groups. One startup, Estimize (see

page 22), has built an entire platform that offers earnings estimates for

thousands of securities based on the aggregated analysis of thousands

of users. The company offers quantitative research suggesting that

the platform’s “wisdom of the crowd” proves far more accurate than

those officially offered by bank employees on the street because

crowdsourced estimates can more quickly incorporate new information

toward the end of the quarter. Quantopian (see page 27), a platform

allowing users to build and test trading algorithms, has identified

Estimize’s crowdfunded estimates as a source of alpha. Quantopian

has itself generated a lot of excitement, recently raising a $25 million

Series C from Point72 Ventures and Andreessen Horowitz. The company

offers a platform for individuals to create and test their own proprietary

trading algorithms, with Point72 Asset Management allocating $250

million to fund the best ideas.

While not traditionally the first thing that comes to mind as fintech,

social media technology has changed the way that money is managed

by traditional active mangers as well. Social tools allow analysts to share

their best ideas with one another and network. Professional investors

can share more detailed ideas and strategies on the SumZero platform

(see page 23). Founded by early Zuckerberg rival and ConnectU co-

founder Divya Narendra, the platform allows hedge fund, mutual fund

and private equity analysts to submit and share their best ideas. The

platform has moved into promoting member research to facilitate career

advancement and fundraising opportunities.

The MiFID II is a set of regulations in

the EU that governs a range of financial

services from derivatives trading and

volatility hedging to conflicts of interest

for advisors.

Social has been an understated aspect of

fintech, impacting investor information

flow.


For more on Dv01, PeerIQ, Orchard

and MonJa see our previous report,

PitchBook Fintech Part I: Online Lending

http://reports.pitchbook.com/fintech-

part-1-online-lending/

Nepotism and inefficient hiring practices have long been identified

as a problem for both investment banks and buy-side shops. Alexey

Loganchuk, a former JP Morgan prop trader, founded Upgrade Capital

(see page 22) to create a platform for undergraduate and MBA students

to demonstrate investing talent, as well as offer mentoring opportunities

and provide firms a better way to recruit. Asset management firms also

have Harvest Exchange (see page 23) to promote their ideas. Pitched

as a marketing opportunity as much as a social network, portfolio

managers from registered firms can distribute investment notes, while

credentialed readers can subscribe to various channels. However, one

caveat may be that these platforms exacerbate the crowding of trades

into “hedge fund hotels,” as pockets of illiquidity develop around the

most popular ideas. In recent market dislocations, certain names have

been short squeezed for reasons beyond fundamentals.

INSTITUTIONAL CAPITAL MARKETS & RISK MANAGEMENT

The well-known struggles of active managers in recent years have

prompted investors to adapt by adopting the tools of their rivals to both

cut costs and offer more sophisticated risk management. The financial

crisis reinforced the importance of risk management, as many high-

profile funds had substantial drawdowns. Furthermore, the post-crisis

regulatory environment has placed increased pressure on the industry.

Advancements in analytics technology has enabled the building of

tools for institutional investors to move risk management beyond

Excel. The lack of due diligence that in part caused the financial crisis

created a demand for viewing loan-level data in credit securities. In

spite of the increased wariness of certain categories of risk, the low-

rate environment has pushed investors further out on the yield curve.

One example is the emergence of new asset classes like marketplace

loans. Companies like Dv01, PeerIQ, Orchard and MonJa offer a way

for institutional investors to monitor loan performance and easily filter

and sort by underlying metrics. These platforms act as intermediaries

between yield-starved yet risk-wary institutional investors and the

lenders themselves.

The desire for increased transparency has been a boon to a range

of upstarts. Among numerous other things, MiFID II has enabled the

buy side to bypass their brokers on the sell side by going directly to

exchanges. While this has enabled asset managers to cut costs, this has

created an opportunity for startups to partially replace prime brokers in

providing standalone strategic services. One example is STRATiFi (see

page 27), which provides quantitative hedging strategies for financial

advisors. Technology has allowed these portfolio tools to be adopted

by more than just hedge funds and family offices. Closer regulations

of the alternative investment industry such as MiFID II have propelled

Irish compliance software platform AQMetrics (see page 27) to help

institutions manage their communications, workflow and disclosure

requirements.12

PITCHBOOK FINTECH ASSET MANAGEMENT

FINTECH: ASSET MANAGEMENT DEAL FLOW & CAPITAL

INVESTED BY YEAR

(ON LY EQ U IT Y I NVE STM E NTS I N CLU DE D)

Source: PitchBook

*As of 11/22/2016

Private Investment and Corporate M&ADEAL ACTIVIT Y

Institutional investor interest in the asset management space has

increased steadily since the financial crisis. The crisis revealed many

flaws in the ways that money was being managed, while the ensuing

years revealed the preferences of millennials managing their personal

wealth and opportunities within financial services impacted by the

recession. Since 2010, institutional investors have made $11.4 billion

of private investments in financial technology firms in the asset

management space, including private equity, venture capital, strategic

acquisitions and IPOs. Interestingly, the peak in capital invested

occurred in 1Q 2016 when investors poured $1.9 billion into fintech asset

management firms. That quarter saw substantial volatility in capital

markets, including both high-yield credit and equities.

Top companies by $ raisedTotal raised ($M)

Lu.com $1,695

Espeed $1,230

Eze Castle Software $1,000

Flow Traders $584.4

Tradestation Group $391.3

Sophis $379.4

KCG Hotspot FX $365.0

GFI Group $333.6

Mx360 Group $239.5

Betterment $205.0

Beacon Capital Strategies $200.0

FutureAdvisor $173.7

Thomson Reuters Portia $170.0

Personal Capital $157.0

Motif Investing $126.0

Primatics Financial $122.0

Wealthfront $119.0

Gilliland Gold Young Consulting

$115.0

Chi-X Canada ATS $113.3

Yooli.com $106.0

DST Global Solutions $93.9

Nutmeg $84.7

Odyssey Group $83.5

Private Banking House $81.5

Gain Capital Holdings $81.0

InvestCloud $78.5

Source: PitchBook

*As of 11/22/2016

$0.4

B

$1.1

B

$0.4

B

$2.7

B

$1.1

B

$3.1

B

$2.5

B

57

80

108

138

202

265

189

2010 2011 2012 2013 2014 2015 2016*

Deal Value ($B)

Deal Count


FINTECH: ASSET MANAGEMENT DEAL FLOW & CAPITAL INVESTED BY QUARTER

(ON LY EQ U IT Y I NVE STM E NTS I N CLU DE D)

The clearest trend has been the steady increase in venture capital

interest in the space. Venture made a large play in 2014, accounting

for 166 of the 202 deals. Further, VCs invested $788 million into the

space that year, accounting for 72% of all capital invested. The period

didn’t see a few outsized financings skewing figures—it was rather the

sum of a number of exciting companies raising conservative late-stage

rounds. During the year, many of the current industry leaders such as

Wealthfront, Motif, Nutmeg, Betterment, Quantopian and Orchard raised

substantial private capital.

Private equity interest in the space has also increased. So far in 2016,

private equity investors have invested 49.1% of dollars in the space,

eclipsing a previous high in 2013 when they made 37.9% of investments

by dollars. Substantial private equity investment signals a maturation

of the industry. Private equity investors have a different strategy from

venture capitalists. Historically, they purchase mature undervalued

companies, add leverage and make operational changes to improve

revenue and profitability. However, recently PE firms have been

doing more and more growth equity deals, taking a minority stake in

companies. This shift is reflective in their increased participation in

fintech deals. One prime example of this is Francisco Partners’ 2015 and

2016 follow-on investments in Betterment.

PE investors have increasingly begun

investing in minority growth deals in

order to generate a return on capital

committed.

Source: PitchBook

*As of 11/22/2016

$139

$1,0

67

$1,3

70

$134

$151

$419

$167

$360

$981

$1,3

94

$439

$240

$1,9

08

$256

$162

$202

29

23

41 4550

45

5156

75 73

64

53

62

5247

28

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4*

2013 2014 2015 2016

Deal Value ($M) Deal Count


EQUIT Y INVESTMENT IN FINTECH: ASSET MANAGEMENT BY T YPE (# AND $B) S INCE 2010

(DE AL S BY #)

Source: PitchBook *as of 11/22/2016

(DE AL S BY $)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010

2011

2012

2013

2014

2015

2016

*

Venture Private Equity Other IPO

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010

2011

2012

2013

2014

2015

2016

*

Source: PitchBook *as of 11/22/2016


ACTIVE INVESTORS IN PRIVATE FINTECH: ASSET MGMT.

Source: PitchBook

*As of 11/22/2016

FIRST-TIME INVESTORS IN PRIVATE FINTECH: ASSET MGMT.

Top investorsDeal count (since 2010)

Spark Capital 13

Y Combinator 12

Anthemis Group 11

500 Startups 9

Union Square Ventures 8

Digital Currency Group 8

Techstars 7

Start-Up Chile 7

Social Leverage 7

Microsoft Accelerator 7

Canaan Partners 7

Bessemer Venture Partners

7

RRE Ventures 6

TPG Capital 6

Startupbootcamp 6

Menlo Ventures 6

Plug and Play 6

Octopus Investments 6

German Startups Group 6

GV 6

Index Ventures 6

Cabiedes & Partners 6

Blockchain Capital 6

Balderton Capital 6

Source: PitchBook

*As of 11/22/2016

One symptom of the shift in investor type has been the same high levels

of first-time investor participation in deals. Over 300 investors in the

>400 deals in each of the past two full calendar years were making their

first transaction in the space. These sustained strong numbers point to

continued enthusiasm for the subsector.

Source: PitchBook

*As of 11/22/2016

100 101

183192

410

461

313

2010 2011 2012 2013 2014 2015 2016*

73 79

157

151

322 324

214

2010 2011 2012 2013 2014 2015 2016*


Institutional Involvement & Moving ForwardThe shortcomings of traditional asset management have been magnified

in recent years. Active managers have underperformed, and high fees

have eaten up a larger share of returns in a low-yield world. Even so,

the steady increase in global asset prices has made the global asset

management industry non zero sum, making legacy players slow to

be disrupted by VC-backed upstarts. The massive scale of legacy

institutions has given them the clout and assets to derive extensive

economies of scale. Furthermore, the nature of the industry makes

consumers and institutions less inclined to trust counterparties, vendors

and advisors without an extensive track record. However, as boomers

begin to draw down retirement accounts and transfer assets to millennial

offspring, we may begin to see a rush of assets being transferred to

more millennial-centric platforms. Traditional asset managers will have

to acquire more fintech tools in order to bolster their offerings.

As venture capitalists have poured funds into upstart asset management

platforms, institutions have also seen success rolling out their own

offerings. Vanguard and Schwab were late to the robo-advice game,

yet their offerings each boast greater AUM than all upstart robo-

advisors combined. Much of this growth comes from shifting client

assets from their existing offerings. At least $10 billion of Vanguard

Personal’s $50 billion+ in AUM came via transfers out of its Vanguard

Asset Management advisory. Furthermore, there is room for growth as

Vanguard has a much higher account minimum ($50,000) compared to

other platforms. Existing platforms can use the clout that comes with

a long track record and financial resources to outcompete upstarts on

fees and, in some cases, UX. They may also be able to leverage existing

institutional relationships to offer access to other asset classes such

as private markets. Ownership of proprietary ETFs also increases the

percentage of fees that go to the legacy asset manager compared

to startups without the same clout. Since ETF fees make up a sizable

percentage of overall revenue from passive management, being able to

double dip enables these firms to gain the scale necessary to become

profitable since the requisite AUM to break even currently stands in the

billions of dollars for many low-cost platforms.

Traditional asset managers will find many

accretive opportunities in acquiring

fintech startups.


As investors look out for the future of their portfolio companies in the

space, we expect M&A to make up a disproportionate exit route for VC

investors. There are several key synergies between a variety of legacy

business models in the asset management space and upstart platforms

with both consumer and enterprise SaaS offerings. The lean nature of

online platforms would allow acquirers to implement these systems

and cut costs. On the revenue side, these innovative products and

software tools will bring in sticky, younger and/or more tech savvy users

who represent a recurring source of revenue. Many of these platforms

simply lack the scale to reach their full potential, as AUM growth and

global expansion comes with headwinds—the greatest being trust and

regulatory issues related to jurisdiction. Today we see strategic acquirers

pay a premium in order to drive inorganic growth. We see legacy asset

managers being able to pay a higher multiple to drive recurring revenue

on their massive AUM and further increase their customer retention.

Since startups in the asset management space will be relatively more

attractive to strategic investors when it comes time to exit, all else

being equal, funds that invest in these companies will be positioned

to outperform their peers given the higher multiples that we believe

strategic investors will be willing to pay.

We hope this report serves as a valuable resource as you continue to

explore this nuanced sector. As the industry continues to mature, we’ll

keep a close eye on it and provide updates as developments unfold.

As always, feel free to reach out with any comments or questions at

[email protected].

Revenue from asset management tools

is highly recurring and can thus be

modeled out well into the future.


Select company profiles

Robo-advisorsLocation: Redwood City, CA | Year Founded: 2007 |

Capital Raised to Date: $129.9M |

First Funding Date: Feb 2007 | First Funding Amount: $150k |

Latest Funding Date: October 2014 | Latest Funding Amount: $64.17M |

Latest Funding Post- Valuation: $700M |

Description: Founded in 2007, Wealthfront became the first robo-

advisor to reach $1B in AUM in 2014. The company offers automated

tax-loss harvesting that mimics index funds by buying and selling the

individual securities in order to maximize the tax write-off for taxable

accounts over $100,000. This can also be done at the asset class level

for smaller accounts, as individual ETFs are bought and sold to maximize

tax write-offs while maintaining exposures. The company targets

millennial investors with a $500 minimum and no fees under $10,000;

assets over $10,000 cost 0.25% annually.

Location: New York, NY | Year Founded: 2007 |

Capital Raised to Date: $205M

First Funding Date: November 2010 | First Funding Amount: $3.0M

Latest Funding Date: March 2016 | Latest Funding Amount: $100.0M |


Description: Betterment offers an online investment platform based on

behavioral finance techniques around goal setting and risk tolerance.

The company also offers tax-loss harvesting and automated rebalancing.

Fees stand at 0.35%, 0.25% and 0.15% with account sizes of less than

$10,000, greater than $10,000 and greater than $100,000 respectively.


Location: San Carlos, CA | Year Founded: 2009|


First Funding Date: July 2009 | First Funding Amount: $2M |

Latest Funding Date: December 2016 | Latest Funding Amount: $75M |


Description: Personal Capital aims to provide a combination of the

smart tools and automated strategies of robo-advisors, with dedicated

financial advisors. The personal touch comes with slightly higher account

minimums at $25,000 and annual fees of 0.89% for accounts less than

$1 million, decreasing on a sliding scale to 0.49% for accounts over $10

million.

Location: San Francisco, CA | Year Founded: 2010 |

Capital Raised to Date: $21.68M

First Funding Date: August 2010 | First Funding Amount: N/A |

Latest Funding Date: September 2015 | Latest Funding Amount: $152M |


Description: The company offers an online dashboard analyzing

investments holistically across multiple accounts, as well as a premium

service that directly manages funds for 0.5% annually. The fee does not

include trading commissions and fund expense ratios. The company

offers tax-loss harvesting for accounts as small as $20,000. Asset

management and ETF provider BlackRock acquired the company in

September 2015.

STASH INVEST



First Funding Date: February 2016 | First Funding Amount: $3M

Latest Funding Date: September 2015 | Latest Funding Amount: $25M |

Latest Funding Post- Valuation: $99.28M |

Description: Developers of an automated investment app for

smartphones where users can choose from a pre-selected list of 30

ETFs. Individuals can open an account with a deposit as small as $5, and

receive automated allocation and investment advice for $1 per month for

balances less than $5000 and 0.25% per year for larger accounts.




First Funding Date: October 2013 | First Funding Amount: $100K |

Latest Funding Date: May 2014 | Latest Funding Amount: $1.75M |

Description: Operators of an online automated investment platform

with no account minimums targeted toward millennials. The company

also touts more advanced hedging tools than competitors in order to

dampen volatility, including the ability include uncorrelated assets like

Bitcoin in client portfolios..

M1 FINANCE

Location: Chicago, IL | Year Founded: 2015 |

Capital Raised to Date: $9M |

First Funding Date: September 2016 |

First Funding Amount: $9M |

Description: The Chicago-based two year old company offers an

intriguing improvement on both traditional brokers and the large

robo-advisors. Investors build accounts around pie chart percentage

allocations to specific securities, ETFs or premade baskets. The platform

is optimized to act as an automated savings account where additions

and withdrawals are automatically rebalanced to the target allocation.

Small account sizes are and withdrawals are facilitated by fractional

shares, some of which the company holds on its own balance sheet.

Location: London, UK | Year Founded: 2011 |

Capital Raised to Date: £68.28M

First Funding Date: May 2011 | First Funding Amount: £700k

Latest Funding Date: November 2016 | Latest Funding Amount: £30.0M

Description: The London-based company offers retail-focused

automated investment management solutions. The platform bases

portfolio allocations on investor risk-tolerance and preferences with

automatic diversification and rebalancing.


Social NetworksOPENFOLIO



First Funding Date: November 2013 | First Funding Amount: $1.1M

Latest Funding Date: December 2015 | Latest Funding Amount: N/A |

Description: The company offers a platform aimed to bring the open

culture of Wall Street trading floors to active individual investors

by offering social benchmarks. The company leverages data from

connected accounts to provide insights and analytics of investment

performance stacking retail traders against their peers.



First Funding Date: September 2012 | First Funding Amount: $1.36M|

Latest Funding Date: July 2015 | Latest Funding Amount: $6M |

Latest Funding Post- Valuation: $36M

Description: The company aims to leverage the wisdom of the crowds

by aggregating individual investors’ estimates on over 2,000 stocks.

The platform markets itself on data showing it’s user base’s earnings

estimates to be more accurate than Wall Street analysts given the larger

sample size and freedom from conflict of interest.


Capital Raised to Date: N/A |

Description: Alexey Loganchuk founded Upgrade Capital after realizing

that students had few opportunities to showcase their achievements

in finance with employers. The firm offers a platform for students to

share their investing skills and ideas with financial firms regardless of

university, GPA or resume. The company has 23 corporate partners

including prominent investment banks, hedge funds and fintech startups

who use the platform to identify and recruit talent, while students can

find mentoring and potential employment opportunities.


HARVEST EXCHANGE

Location: Houston, TX | Year Founded: 2012 |


First Funding Date: January 2013 |

First Funding Amount: $1.96M | Latest Funding Date: June 2015 |

Latest Funding Amount: $5.07M | Latest Funding Post- Valuation: $20.07M

Description: The company, founded in 2012, offers an online platform

and social network for investment firms and individuals to share and

access ideas, creating opportunities to target clients and build private

communities of investors.


Capital Raised to Date: $1.41M | First Funding Amount: $275k |

Latest Funding Date: June 2012 | Latest Funding Amount: $1.0M |

Description: A global community for professional buy-side investors

founded by Divya Narendra, also the founder of ConnectU, an early

social network. The platform allows buy-side employees to post and

share ideas, leading to collaboration, professional development and

career opportunities.

Retail Portfolio Management



First Funding Date: October 2007 |

First Funding Amount: $2.5M | Latest Funding Date: May 2016 |

Latest Funding Amount: $33.0M | Latest Funding Post- Valuation: $171.78M

Description: The company, founded in 2007, offers managed accounts

to investors with a $2,000 investment minimum and a 0.25% annual

fee. The platform also syncs with more than 80 brokerages to track your

401(k), IRA and brokerage accounts in one place and provide insights on

overexposure, risk and performance.


Location: Rancho Cordova, CA | Year Founded: 2010 |


First Funding Date: June 2010 |

First Funding Amount: $6.0M | Latest Funding Date: January 2015 |

Latest Funding Amount: $40M| Latest Funding Post- Valuation: $463.43M

Description: An online investment platform offering thematic baskets

of up to 30 securities called “Motifs” as well as individual stocks, ETFs

and access to J.P. Morgan-led IPOs. The company also offers automated

investing tools via its Motif BLUE platform for a $4.95 monthly fee and

no commissions.

ROBINHOOD

Location: Palo Alto, CA | Year Founded: 2012 |


First Funding Date: December 2013 |

First Funding Amount: $3.0M | Latest Funding Date: May 2015 |

Latest Funding Amount: $50M| Latest Funding Post- Valuation: $250M

Description: The company offers zero-commission brokerage accounts

for retail investors. Robinhood makes money by collecting the interest

on uninvested cash balances and interest from margin accounts.

Alternative InvestmentsLocation: New York, NY | Year Founded: 2014 |


First Funding Date: March 2015 |First Funding Amount: $18.4M |

Latest Funding Date: January 2016 | Latest Funding Amount: $50M |

Description: The company offers an online platform providing a

transparent and secure way for institutional investors to review and

invest in real estate transactions. Cadre serves as an intermediary

between investors and developers seeking capital. The platform

automates a range of services for investors and asset managers desiring

exposure to real estate.


Location: Tygervalley, South Africa | Year Founded: 2010 |


First Funding Date: April 2015 |

First Funding Amount: $12.7M |

Latest Funding Date: February 2016 | Latest Funding Amount: $13.1M |

Description: Wealth Migrate facilitates cross-border real estate

transactions for investors well below the threshold of traditional private

real estate investors.

Location: Seattle, WA | Year Founded: 2010 |

AUM to Date: $20M |

Description: The company aims to recreate the fundamental of private

equity’s early success of using leverage to buy cheap undervalued

companies. The emerging manager invests in small-cap companies it

identifies as attractive based upon criteria based upon the founders

experience at Bain Capital and refined in a thesis at Stanford’s Graduate

School of Business.

Capital Markets & Risk management



First Funding Date: March 2015 |

First Funding Amount: $8.25M | Latest Funding Date: June 2016 |

Latest Funding Amount: $36M| Latest Funding Post- Valuation: $116M

Description: The company backed by Peter Thiel and George Soros

provides a marketplace for corporate fixed income securities. The

platform provides a unique solution offering trading in bursts during

short time windows improving liquidity and price transparency.



Capital Raised to Date: $2.2M* |

First Funding Date: November 2014 |

*includes funding raised by Sliced Investing and LoGe Solutions, which came together

to form STRATiFi in a merger-of-equals in 2016.

Description: utilizing machine learning technology, the company offers

analytics and portfolio management tools for investment advisors to

utilize options overlays in order to hedge against volatility in client

portfolios

Location: Boston, MA | Year Founded: 2011 |



First Funding Amount: $2.15M | Latest Funding Date: November 2016 |

Latest Funding Amount: $25.63M |

Description: The company provides a platform for users to create, test

and generate profits from trading algorithms. Through an agreement

with backer Point72 Ventures, the family office of Steven A. Cohen will

allocate $250 million to invest in user-created algorithms chosen by the

company.

Location: Kildare, Ireland | Year Founded: 2012 |



First Funding Amount: N/A | Latest Funding Date: February 2016 |

Latest Funding Amount: $3.25M |

Description: The company offers an automated risk and compliance

platform for Hedge Funds, Asset Managers and other financial

institutions. Features include intelligent data management, security, and

advanced analytics.


Date post:	31-Mar-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

FINTECH · 2019-06-12 · ANALYST REPORT PART 3 ASSET MANAGEMENT FINTECH DECEMBER 2016 Including...

Documents