AN AIR OF hype habitually surrounds the founders of startups and their venture-capital backers: everyone is an evangelist for their latest project. But even allowing for that zeal, something astonishing is going on in fintech. Much more money is pouring into it than usual. In the second quarter of the year alone it attracted $34bn in venture-capital funding, a record, reckons CB Insights, a data provider (see chart 1). One in every five dollars invested by venture capital this year has gone into fintech.
Deals are also proceeding at a frenetic pace. PitchBook, another data firm, reckons that venture-capital firms have together sold $70bn-worth of stakes in fintech startups so far this year, nearly twice as much as in the whole of 2020, itself a bumper year (see chart 2). These included 32 public listings, a first. Fintechs took part in 372 mergers and acquisitions in the first quarter, including 21 of $1bn or more.
In the past few weeks Visa, a credit-card firm, has paid €1.8bn ($2.1bn) for Tink, a Swedish payments platform. JPMorgan Chase, America’s largest bank, has said it will buy OpenInvest, which provides sustainable-investment tools—its third fintech acquisition in six months. Upstarts, such as Raisin and Deposit Solutions, two German platforms that link banks with savers, are merging. Others are going public. On July 7th a listing in London valued Wise, a money-transfer firm, at $11bn. Other recent or planned multi-billion initial public offerings (IPOs) include that of Marqeta (a debit-card firm), Robinhood (a no-fee broker) and SoFi (an online lender).
This blizzard of activity reflects demand from investors as they hunt for juicy returns and as the digital surge in finance takes off. But it also reveals something more profound. Once the insurgents of finance, fintech firms are becoming part of the establishment.
The current investment boom has several novel features beyond its scale. For a start, it is increasingly focused on the biggest firms, says Xavier Bindel of JPMorgan. Smaller me-toos and startups with business models that have struggled during the pandemic are no longer in favour. The first quarter of 2021 saw the most funding rounds ever for private fintech startups valued above $100m; the median round raised $10m, a quarter more than in the same period last year.
The location of activity has changed, too. Five years ago the fintech story centred on America and China. Today, Europe is catching up. A funding round in June valued Klarna, a Swedish “buy now, pay later” startup, at $46bn, making it the world’s second-most valuable private fintech firm. Revolut, a London-based neobank, is reportedly in talks to raise up to $1bn, which would value it at $30bn. Firms in Latin America and Asia, especially when led by Stanford-educated or Silicon-Valley-trained founders, have become magnets for investors. Nubank, Brazil’s biggest digital-only bank, for instance, is worth $30bn.
The craze also extends beyond payments. A surge in savings in rich countries in the past year has boosted so-called “wealth-tech” startups, such as online brokers and investment advisers. Insurance-tech firms received $1.8bn through 82 deals globally in the first quarter of this year. Lending has proved trickier to disrupt—perhaps owing to regulators’ firmer grip on this area of finance—except when it crosses over into payments, as illustrated by the rise of Klarna and its rivals.
This broadening out points to one explanation for the explosion in funding: the huge growth in the market for fintech offerings during the pandemic. Consumers and companies adjusted with rapidity and ease to the closure of bank branches and shops and the resulting digitisation of commerce and finance. Many of their new habits are likely to stick.
Factors specific to fintech are also behind the big bang. Most of today’s fintech stars are not overnight successes but were set up in the early 2010s. Since then their user numbers have swollen to the many millions and they are nearing profitability. These have become big enough to appear on the radar screens of late-stage venture-capital and private-equity firms, such as America-based TCV (which has backed Trade Republic, a German variant of Robinhood), Japan’s SoftBank (a recent investor in Klarna) and Sweden’s EQT (which backed Mollie, a Dutch payments firm, last month).
Moreover, some institutional investors—such as asset managers (BlackRock), sovereign-wealth funds (Singapore’s GIC) and pension funds (Canada’s Pension Plan Investment Board)—have made a lot of money by snapping up shares in big tech firms in recent years. These are now trying to gain an edge by investing in promising startups before they go public.
The huge cheques from these investors come just as fintech firms are looking to write the next chapter. Most startups were created to “unbundle” finance: to carve out niches where they could offer a better service than the banks. Now, however, most successful firms are rebundling, adding new products in a bid to become platforms. Acquisitions provide a handy shortcut; their high valuations mean the big firms can often snap up smaller ones on the cheap by swapping equity.
Stripe, the most valuable private fintech firm in the West, is a good example of the sector’s coming of age. It was set up a decade ago to help firms accept payments online. Now worth $95bn, it also offers services ranging from tax planning to fraud prevention. That breadth was partly achieved through acquisitions; since October it has bought three other firms.
A similar logic animates credit-card giants, which are trying to hedge against innovations in online payments; and the banks, which see fintech as a way to plug gaps in their digital offerings, cut costs, and diversify away from lending. Goldman Sachs and JPMorgan are bringing lots of smaller acquisitions under the umbrella of new, versatile consumer apps. As a consequence, the distinction between fintech and traditional banking could eventually blur, predicts Nik Milanovic of Google Pay, the tech firm’s payments arm.
Swipe right All this splurging and merging also carries risks. One is that the hefty prices paid for fintechs prove unjustified. Visa is buying Tink at a price that is 60 times the startup’s annual revenue; Wise is valued at around 20 times its revenues and 285 times its profits. Banks in particular may find out about promising fintech firms only once they are too expensive.
Another risk is that competition and innovation are stifled. Founders of startups that have been acquired often leave at the end of their “vesting” period—the minimum amount of time they must stick around for before they can sell their shares, usually one to three years. The culture that allowed a firm to thrive could then wither. Fintechs bought by banks in particular could struggle: after a deal, cultures can clash; customers often leave. Most neobanks acquired by old ones, such as Simple (bought by BBVA, a Spanish bank), have been either shut down or sold.
Nevertheless, one thing seems clear. Fintechs are inexorably gaining critical mass: their value has risen to $1.1trn, equivalent to 10% of the value of the global banking and payments industry, and up from 4% in 2018. Prices may be stretched today and some firms may flop, but in the long run it seems likely that this share will only rise further.
Is there a good book you recommend for retail investors? I have read several that explain how markets and trading work, but I have found very few that discuss the strategies one should use to invest profitably. One of the hardest decisions I have is when to sell, since if I don’t have extra cash the only way to buy another stock is to sell something first.
As I discussed in a recent column, I’m not a fan of trying to create wealth by trading. Instead, I believe in building a diversified portfolio of solid companies, or exchange-traded funds, and holding them for the long run. Focusing on stocks that raise their dividends regularly has worked well for me, as a growing payout is usually a sign of a healthy company and provides a powerful incentive to stay invested instead of constantly trading in and out.
When I was starting out, one of the most influential books I read was Lowell Miller’s The Single Best Investment: Creating Wealth with Dividend Growth. It is an engaging and accessible read that will not only give you the tools to identify great dividend stocks, but will help you deal with the 24/7 onslaught of market noise that often leads small investors astray.
I’m not exaggerating when I say the book might very well change how you think about investing.
As Mr. Miller, the founder and now-retired chief investment officer of Miller/Howard Investments, writes in the book’s introduction:
“Investing isnʼt some athletic event where agility and flashes of virtuosity are the secrets of success. Rather, investing really is investing – the methodical accumulation of capital through a sensible and disciplined plan which recognizes that ‘shares’ are not little numbers that jump around in the paper every day.
“They represent a partnership interest in a real and going business. Your plan, very simply, must recognize that you will manage your investments by actually being an investor – a passive partner in a real and going business.”
Even though it’s a U.S. book and the latest edition was published in 2006, the principles are still relevant to Canadian investors. Here’s the best part: The book is now available as a free PDF download from Miller/Howard’s website at: bit.ly/SingleBestInvest.
Prefer a hard copy? Check online or at your local library.
In The Single Best Investment, Lowell Miller writes that a company’s bonds should have a Standard & Poor’s credit rating of BBB+ or better – considered “investment grade” – to qualify as a suitable stock. Is the bond rating something you consider when buying a stock for your model portfolio? Is there an easy way to check this for individual companies in Canada? I have tried scrolling through lists of bonds in my brokerage account but I can’t seem to find bond ratings for individual companies.
Yes, I consider the credit rating when buying stocks personally and in my model Yield Hog Dividend Growth Portfolio (tgam.ca/dividendportfolio). A lousy credit rating indicates that a company could have trouble meeting its obligations, and in such cases the dividend is often the first casualty. For that reason, I usually stay away from companies whose bonds are rated as “speculative,” or below investment grade.
Mr. Miller’s minimum credit rating is slightly more stringent than the common definition of investment grade, which includes anything rated BBB- or higher by Standard & Poor’s. According to S&P, companies in the BBB family generally have “adequate capacity to meet financial commitments, but [are] more subject to adverse economic conditions” than those rated A, AA or AAA. (Fitch and DBRS use a similar letter rating system as S&P, while Moody’s defines investment grade as anything rated Baa3 or higher on its scale.)
(One exception to the investment grade rule in my model portfolio is Restaurant Brands International Inc., whose debt is rated BB by S&P. However, the agency recently upgraded the owner of Tim Hortons, Burger King and Popeyes to “stable” from “negative,” saying it expects a continued rebound in sales and profitability as the pandemic recedes and the company opens more franchised restaurants. So I’m comfortable giving Restaurant Brands some slack on its credit rating.)
There are several ways to find a company’s credit ratings. One is to check the investor relations section of its website. A Google search of “BCE credit rating,” for example, brought up a company web page with all of BCE Inc.’s bond, commercial paper and preferred share credit ratings from S&P, Moody’s and DBRS. BCE and other companies typically provide additional credit rating information and analysis in their annual reports.
Another option is to go directly to the credit rating agencies themselves. For example, the DBRS website – dbrsmorningstar.com – lets you search for a company and read detailed reports about its recent credit rating changes or confirmations. This will give you an even deeper understanding of the company’s financial position and outlook. S&P and Moody’s also make credit reports available, but you’ll need to register to get access.
E-mail your questions to email@example.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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Dear Tony: We are retiring this year and considering downsizing to a condo. We have started looking at both new and existing properties around Vancouver and Victoria, but we encounter challenges with both options.
New developments are often available only through presales and the time periods for completion would require us to sell, rent until the property is ready, and with few assurances of completion dates would require us to move twice with no guarantees how the properties would be managed or how fees would be structured for long term operations.
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Existing buildings are more attractive; however, we find most properties are sold within days of listing, and there appears to be more of a concern by realtors to keep strata fees low rather than looking at the age of the buildings and the long-term maintenance to protect owner investments.
Are there any standards or consumer rules we might consider following? As new buyers into a condo lifestyle we would like to avoid a sinking investment.
Karyn and Jerry W.
There are many existing buildings and communities that are an excellent investment. They are easily identified by reviewing the financial reports, investments, a depreciation report completed by a qualified consultant or reserve planner, and by reviewing the minutes of the strata corporation to identify how they address maintenance, planning and funding for the future.
While every building has different amenities, staffing and servicing requirements, an annual budget that identifies all the service contracts for maintenance and operations is a significant asset. An active use of the depreciation report to plan for future renewals and major maintenance components is a healthy indication of a well managed property.
Low strata fees are problematic for strata corporations as they often indicate a community dependent on special levies. Special levies require a 3/4 vote of owners at general meetings and many owners vote against a special levies generally due to affordability issues. The result of failed special levies is deferred repairs that will only rise in cost and damages, and the potential for court actions or CRT orders.
There is also a direct link between low strata fees, deferred maintenance and renewals, and higher risks for insurers. This results in higher insurance rates and deductibles for strata corporations.
Buyers should always request copies of depreciation reports, any engineering and environmental reports, minutes of annual meetings, the bylaws and rules of the property, copy of the strata insurance policy, and a Form B Information Certificate, which will also identify any courts actions or decisions against the strata corporation. Read all documents and discuss any issues with your realtor and lawyer. This should help separate the well managed buildings vs the buildings at risk.
New construction in some ways is easier to manage as the strata corporation is enabled to make the right decisions that will impact funding and future operations. Owners can have a direct effect on their investments by joining and supporting the newly formed strata council and making decisions that ensure a well funded and planned operations plan.
Strata fees for new properties often start low in the first year as there are service contracts included with the new construction that are included in the warranty period and some developers will entice buyers with low costs. Plan on an increase of fees once all units are occupied and the strata corporation is fully serviced for operations and maintenance.
This may be impacted by insurance costs, staffing, and consulting for warranty inspections, legal services and the management of warranty claims, the commissioning of a deprecation report, and operational requirements.
Every building, which consists of endless components, will have failures. The effective management and planning of those issues when they arise is the true test of a well managed property. Product failures and installations are often beyond anyone’s control; however, a well funded property will also be able to respond without a significant crisis for owners.
Tony Gioventu is executive director of the Condominium Home Owners Association.
Goldman Sachs Asset Management and Germany’s DWS are preparing bids for NN Group’s investment management arm as consolidation in the industry gathers pace.
The Dutch insurer said in April it was considering a sale of NN Investment Partners, which has €300bn in assets under management.
The deadline for final binding offers is Monday. GSAM, which has more than $2tn in assets under supervision, and Frankfurt-based DWS are still in the sale process and preparing bids, said people familiar with the situation.
The deal price is in the region of €1.4bn, one of the people said. NN Group, GSAM and DWS declined to comment.
UBS Asset Management, Janus Henderson and US insurer Prudential Financial are among those to have previously registered their interest. All three declined to comment.
Investment managers globally are embarking on mergers and acquisitions designed to shield profits from rising costs and falling fees, while seeking to tap into fast-growing markets such as passive investing, private assets and ESG, and open up new distribution channels.
“The competitive environment for traditional active asset managers has intensified and a smaller group of larger players are now dominating the institutional segment,” said Vincent Bounie, senior managing director at Fenchurch Advisory, a specialist investment bank for financial services.
“It has become complicated to grow and very difficult to have a profitable business, in particular if you have undifferentiated plain vanilla products.”
Asoka Woehrmann, chief executive of DWS, which is majority owned by Deutsche Bank, told shareholders at the €820bn group’s annual meeting last month that it wanted to be “an active player” in industry consolidation. It is seeking further scale to challenge rival Amundi for supremacy in Europe.
Meanwhile for insurance companies, a prolonged period of low interest rates and higher capital requirements under Solvency II rules is prompting groups to weigh up where they allocate their capital, Bounie said. “For many of them, subscale asset management divisions are no longer core activities and there will probably be more divestments.”
NN Group, which is based in The Hague, came under pressure last year from activist hedge fund Elliott Management to improve returns and streamline its operations. It said in April it was considering options including a merger, joint venture or a partial divestment of the division.
NN Investment Partners has about 950 employees. Of its €300bn in assets under management, two-thirds is managed on behalf of its insurance parent company with the remaining third run for external investors.
The division’s range of funds covers fixed income, equity, multi-asset and alternative investment strategies. It has a strong position in ESG investing, notably in areas such as green bonds, impact equity and sustainable equity.
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