Gravitas Spark CrowdFunding

Tag: finance

  • Two Charts Telling The FinTech Story

    Readers of the latest Oireachtas this-is-not-an-Onion-headline could be forgiven for believing printing machines can command eye-watering prices. However, not for the first time, the reality outside the hallowed corridors of power and pecuniary pathos can be very different. Financial markets feature lots of hindsight moments but spare a thought for the shareholders of a company that developed the world’s first ATM machine in 1967 and presently prints almost one-third of the planet’s currencies.

    De La Rue is hardly a household name but it has been at the epicentre of the world’s financial system for almost 200 years. Sadly, this week the management of De La Rue warned that the company’s future was in doubt. That’s a far cry from the confidence expressed by management less than ten years ago when dismissing a takeover bid by French competitor, Oberthur Technologies. The protestations of “hidden value” by the target’s executives then make for distressing reading now.

    That bid in 2011 valued De La Rue at $1.5 billion. Even then, the trend away from cash payments to digital was well established. Stripe was already two years old and barely known but PayPal was thirteen years old, had 100 million active user accounts in 190 markets, and operating in 25 different currencies. Dear oh dear. Yes, hindsight would suggest the $1.5 billion valuation of the world’s largest cash printer was very dear. Here’s the share price chart to show how the rejection of the French bid cost shareholders very dearly.

    Today’s share price indicates current value of De La Rue’s equity is just under $200 million. Arguably, management have told the market that there is a real possibility that valuation could fall to zero. Oberthur shareholders in France will no doubt reflect with wry smiles on another example of a disastrous UK decision to go it alone. However, elsewhere the story is much more positive for the UK in the world of fintech and investment capital flows.

    A new report by Dealroom.co and Finch Capital reveals two very powerful trends in venture capital. Firstly, fintech is now the largest venture capital investment category in Europe. Second, on a global basis the UK has the highest percentage of fintech investment with 30% of its total venture capital funding directed towards fintechs. This is very encouraging for the UK financial sector’s future.

    Clearly, gloomy reports about the potential demise of London as a global financial centre post-Brexit are rather premature. It is also interesting that despite (or maybe inspired by) the parlous state of the region’s banks it is Europe that leads Asia and the US in channeling the largest percentage of investment into fintech. Here’s the chart telling a more positive UK and European fintech story.

    Joseph Schumpeter has written extensively about creative destruction being an essential component of capitalism. One suspects we are living that moment right now in finance and rather than just focus on the death of old franchises we should celebrate life being given to innovation and exciting new companies. In Spanish we might say “Viva La Vida” and at the same time heed the lesson of De La Rue and the destruction of wealth by complacency. Shareholders in traditional financial franchises still enjoying large market shares would do well to read the lyrics in Coldplay’s own ‘Viva La Vida’:


    I used to rule the world,
    Seas would rise when I gave the word.
    Now in the morning I sleep alone,
    Sweep the streets I used to own.
     

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  • ESG: Corporate Health Is Your Wealth!

    Readers may have noticed yet another deal announced in the health technology sector this week. Irish 3D imaging company, 3D4Medical, is about to be bought by Dutch media giant Elsevier for nearly €50m. This newsflow will no doubt keep venture capital (VC) funds focused on current “hot” sectors, health tech and fintech. However, start-up entrepreneurs and retail investors need not despair if they feel they are being excluded from VC activities. There’s another “health” sector which could offer plenty of wealth creation opportunities.

    This writer attends the odd financial conference and was seriously struck by the size of attendance at this week’s Bloomberg ESG Summit in Dublin. The audience was in the hundreds and it had nothing to do with a campaign for the US presidency or a wonderful display of tractors on St Stephen’s Green. The attendees’ focus was ESG investing. In layperson terms, ESG investing describes the application of environmental, social and corporate governance factors into investment selection processes. The corollary to applying ESG investment criteria is a growing awareness by companies that their own response to these considerations, from water management to employee diversity, will be monitored and ultimately “valued” by these investment houses.

    ESG is a term around since 2005 but SRI (Socially Responsible Investing) predates it as an ethical framework. However, latter-day thinking is the assumption that ESG factors have financial as well as ethical relevance. You will often hear the phrase “sustainable investment ” in ESG discussions and this possibly best captures the financial rationale for an ESG focus. Bluntly, if a company culture is not healthy it is at risk of losing fixed assets, customers, quality staff/management, suppliers or investors. None of these potential losses are good for company or investor returns. Financial fundamentals (or health) were always critical to investment decisions but the wider “corporate health” of a company is now a big deal.

    Current estimates suggest up to $30 trillion of assets under institutional management now include ESG considerations in their investment processes. Clearly, corporate health is a growth area and already forcing both investors and companies to spend money on resourcing this analysis with quality people and information. Remember, all this resource is about outcomes. The luxury goods sector has featured in headlines this week with LVMH making a $16 billion swoop for Tiffany. Perhaps more intriguing, and hidden away from the front pages, was the news that Prada has secured a €45 million bank loan with repayment terms/interest rates conditional on meeting “sustainability targets” in its products and operations. Better health means cheaper capital ….Hmmm. For the entrepreneurs out there here’s a few thoughts as to how one could capitalise on this corporate health rush.

    Companies will need guidance as to best ways to integrate ESG on both cultural and operational bases. This requires expert advice, possible internal training/education and periodic audits of companies’ “health” and responses to ESG considerations.

    Audits require metrics or data. Most ESG conferences these days focus on the challenge of “standardising” ESG compliance. There is a huge opportunity for those that can create and gather credible measures for ESG factors as investors and companies are crying out for benchmarks and raw data. Current thinking is that different companies will provide data in different areas ie carbon footprint(CO2e) and health and safety data(EHS) is likely to come from separate providers.

    The combination of performance and people’s money inevitably attracts the attention of regulators. ESG regulation will follow soon and, of course, the legal profession will be getting giddy at the thought of litigation risk and advisory fees. Be under no illusion, finance always pays the middlemen. As for investors, the evidence is more mixed. So, ESG compliance is going to be a very big area.

    Encouragingly, Ireland is taking the lead in some ESG initiatives. There are currently €140 billion of “Green Bonds” listed on the Irish Stock Exchange as part of the wider Euronext group of international exchanges. This feels like Euronext is betting on Dublin as ESG lead, not unlike the aircraft leasing ecosystem successfully built here too. Furthermore, the existence of a “live” asset class of investment securities in Dublin is a good “lab rat” for enquiring minds trying to figure out how they might monetise the ESG revolution.

    No doubt the VCs will move on from mainstream healthcare one day. However, right now there are 30 trillion reasons for curious minds to get a head start in the rapidly expanding area of corporate health.

     

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  • The Most Important Crowdfunding Chart in Europe

    The market value of The Walt Disney Company is now greater than that of the five largest banks in Europe. If one were impolite you might describe this as a triumph of creativity over destruction. However, the aim of this article to be constructive and recognize the role of Europe’s banks as the primary source of capital for business. That must be a good thing, right? Yes, but there can be too much of a good thing. Here’s a chart from the IMF which should challenge the thinking of all investors and business owners in Europe. It compares the role of US and European banks in funding corporates.

    Wowzers! Banks in Europe provide about 80% of debt capital to businesses. Only 20% of funds are provided by investment markets. In the US the market structure is almost the exact opposite. The graphic above tells us that capital markets are far deeper, more diversified and more sophisticated in the US. It is very apparent, if we consider the US a market leader, that there are opportunities for alternative providers of capital to engage with European corporates. Of course, there are cultural challenges and banking traditions in Europe but the ugly truth is that corporates will have to look elsewhere as ultra-low interest rates (ZIRP) crush banking business models.

    If one were to think further about the market data above it is also clear that European investors have favoured saving in bank deposits rather than investing. In a negative interest rate world that strategy looks a little challenged. It is quite possible decades of traditional saving behaviour will change and seek out new investment opportunities. Many investors will have seen “Dragons’ Den” TV programmes in recent years and wonder can they add a little extra risk/return to their portfolio. The good news is that equity crowdfunding platforms are growing rapidly in size and numbers across Europe to bank the start-up Disneys of the future. The dragons are hunting in size.

    That’s not a fantasy. It’s a current banking reality on Planet ZIRP.

     

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  • Fuel For Thought for Aramco…

    Well, well, well. It appears oil wells are no longer the stuff of bankers’ dreams. For a fleeting moment this writer almost felt sorry for the investment bankers who had to meet with Crown Prince Mohammed bin Salman’s officials in Riyadh at the weekend. The message the bankers had to deliver over the whirring of bonesaws was not an easy one. The crown jewel of Saudi industry and national oil champion, Aramco, was due to embark on a series of investor roadshows around the world this week to sell shares in its planned December IPO. However, there was a small flaw in the plan.

    Despite the efforts of the 25 banks employed in the selling syndicate there was almost zero international investor appetite for shares in Aramco at even reduced valuations. The awkward advisory report delivered was that there would be no international roadshows and that the only likely interest was in Saudi Arabia itself and some neighboring Gulf states. The shunning of Aramco is remarkable given its status as the world’s most profitable company. In 2018 it’s profits were $111 billion thanks to an ability to pump an average of 13 million barrels of oil daily. For context, the total US output is 10 million barrels daily.

    The banker embarrassment didn’t end with roadshow cancellations. The much-hyped goal of the Crown Prince to list a company valued at $2 trillion was dashed with current valuations pitched at around the $1.5 trillion level. Without international participation, the number of shares is being scaled back dramatically to just 1.5% of the total share capital rather than the anticipated 5%. One suspects the subjects of the Saudi kingdom won’t have the luxury of negotiating valuations albeit they might get the opportunity to visit the Riyadh Ritz Carlton…

    On a slightly more serious note there are a number of issues to consider for investors in light of this IPO push back. Aramco is no WeWork. It is a hugely profitable company with real assets, sovereign customers like China and the prospect of relatively high dividend yields in a zero interest rate world. It is easy to dismiss investor unease as a fear of being a minority shareholder in a Saudi state-owned enterprise or Aramco’s vulnerability in the unstable Middle East. Recent Houthi/Iran attacks on Aramco refining infrastructure will also bolster that risk factor in investor minds but we think there are bigger structural trends to consider.

    Fossil fuel energy is in a long term downtrend in international financial markets. The US energy sector ETF (XLE) has almost halved in value in the past 5 years. In previous articles, we have referenced hedge funds which now consider climate change risks before every investment. Pools of capital are chasing renewable energy, electric vehicles, recycling, meat alternatives, etc. as the investment assets with future rising demand and returns. Oil is not part of the climate change future. In fact, Aramco alone has generated 4.4% of all the world’s CO2 and methane emissions since 1965. That’s some history. Here’s the misery chart for oil company investors over the last 5 years.

    Fuel For Thought Spark Crowdfunding blog
    So there is definitely an environmental risk factor in most investors’ processes these days. However, that’s not the only risk consideration. The increasing popularity of ESG compliant investment (that’s Environment, Social, Governance standards) is not just driven by a sudden embrace of “good” corporate citizenship by companies and investing institutions alike. The other critical factor is that recent performance data suggests funds which feature ESG risk filters in their investment process are more likely to outperform.

    The problem for Aramco and its outsized share of the Saudi economy was that investors have equated Aramco with the Saudi kingdom itself. The Saudi track record of repression of women, dissent, Shiite minorities and weaker neighbour states like Bahrain was a difficult pitch for the bankers to investors who would be minority shareholders in governance terms. The human rights atrocities in Yemen and the murder of WSJ journalist Jamal Khashoggi are the more lethal examples of societal tyranny listed earlier and would be red flags in any social or ESG risk evaluation.

    Aramco is an extreme example of ESG failure given investors are now prepared to give up on attractive near term dividends. ESG will continue to grow in influence and actually start to impact valuations; think of it in terms of investor demand(ability to invest). Unfortunately for the oil sector, all the ESG trends are moving in the wrong direction. Climate comes first… and then the creditors.

    Many oil and gas companies will in the not too distance future have their Riyadh Ritz Carlton “moment” with their lenders. Tears will flow rather than oil, but not so many from the planet’s citizens who will continue to battle extreme fire, flood and temperature events.

     

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  • The Most Bullish Equity Chart This Week

    Whisper it quietly but Santa might deliver a nice surprise for equity investors by year-end. The source of our optimism stems from activity in a sector upon which we usually hesitate to lavish affection; the banks. The headline news that US equity markets are touching all-time highs is hardly revelatory fare for even the most casual reader of the business press. Indeed, we are often wary of Mr Market’s delight in generating such gushing headlines to attract the maximum number of enthusiastic investors back into stocks before delivering crushing pain.

    Our cautious optimism this time is the return of the US banking sector to 12-month performance highs as captured in the following chart:

    What is worth watching over the next few trading days is whether the chart pattern can “break out” and move above previous highs set at the beginning of 2018. It is true that the US earnings season for corporates has been reasonably positive but the market is still very dependent on the technology sector. To put that concern in context we were struck by a stunning recent data point; the combined $2.3 trillion (yes) market value of Apple and Microsoft now exceeds the total value of all publicly traded companies in… Germany. The Teutonic manufacturing monster is just the 3rd largest exporting nation in the world and 4th ranked economy globally.

    The other way of expressing this hope in financial market terms is that the “value” style of investing is due a comeback after years of underperforming “growth” stocks fueled by the technology sector. Typically periods of value outperformance are rather short and very significant so we should find out rather soon if the market driver baton is passed on to the laggard value sectors like energy, mining, banks, etc. Of course, the financial press will quickly create a macro/geopolitical narrative to “explain” the melt-up in equities markets. Take your pick from the following two early favourites:

    • Potential de-escalation of US-China trade tensions.
    • China turning on the credit spigot again and the Yuan stabilizing.

    Of course, these potential macro developments are helpful but let’s be very frank here. There is really only one financial datapoint that counts; how much money(at zero cost) or liquidity is being pumped into markets by the central banks, led by the Fed.

    As a quick reminder, in 2018 central banks tried to remove financial markets from the monetary methadone clinic by phasing out quantitative easing(QE) and actually raising rates. The result was a very large negative bag of performance coal from Santa at the end of 2018.

    Now check out the policy u-turn by central banks in 2019 with the Fed cutting interest rates for the third time in recent days. By some measures global liquidity provided by central banks has passed the $75 trillion mark and it doesn’t look likely to stop for some time. See in the following chart how the S&P 500 is moving in lock-step with central bank largesse in 2019. Note this in sharp contrast to the pattern in 2018 when liquidity was drained and interest rates were hiked by monetary authorities across the globe.

    The consequences of super-easy money in the longer term are for another article but, for now, let’s just say extra liquidity needs to find new investment homes; most likely they will be neglected laggard sectors showing ‘value’. Banks might be just the start…

     

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  • 5 Surprising Stats from the Financial World this Week

    President Trump just wished everyone a happy Columbus Day. As the Kurds in Syria reap the murderous whirlwind of another Trump foreign policy screw up, it is a disconcerting experience to see an icon of ignorance celebrating an icon of discovery. However, in the spirit of discovery we thought it appropriate on a Nobel prize-giving day to highlight a few developments in finance which might resonate with the curious.

    Let’s start with Brexit (where else…) and then flag four other statistics which caught our eye on Columbus Day:

      1. Brexit negotiations enter a crunch week. The latest research from the institutional research team at Alliance Bernstein now puts the odds of an extension to the 31st October deadline at 80%. Possibly more interesting is that, if the general election is inconclusive and a referendum ensues, the chances of a win for the Remain vote are put at 70%. Clearly, the general election is now key to how Brexit plays out, with the chances of a no-deal Brexit hovering around 50%. That elevated level of risk is definitely not priced into European share prices.

    There still appears to be a significant amount of hope that Brexit will end with a deal. A deal is possible in a pragmatic informed world. One is less hopeful in a world of populist politics, ignorance of facts and a casual approach to the truth. Furthermore, beware the politicians overly dependent on hope. Perhaps Alfred Nobel himself said it best.

    “Hope is nature’s veil for hiding truth’s nakedness.”

    1. Up until this week there had been only one female winner of the Nobel Prize for the Economic Sciences in the past 50 years. Esther Duflo became the second female winner this week and is also the youngest ever winner at 46 years of age. Her prize-winning work with two colleagues (Banerjee and Kramer) used empirical research to explore the causes of poverty and the policies which actually work. Unsurprisingly, education and gender equality hurdles feature strongly in their research but it could be argued the field of economics also shares similar challenges…
    2. The trials and tribulations experienced by the banking sector are well known to long-suffering shareholders. What is possibly less well known is how quickly some banks are transforming their business models to survive. It might surprise those with pre-conceptions of banking inertia to read that RBS has already closed 56% of its branches in the UK.
    3. We have written quite frequently on the benefits of long term investing and the powerful trifecta of time, volatility and compounding. A YouGov study in the UK found that over 52% of women have never owned an investment. The number for men was 37%. Clearly, those RBS branches missed an education opportunity!
    4. Trade war Twitter headlines continue to drive financial markets. As the Hong Kong protests continue to simmer there is still the possibility of an additional headwind; Capital wars. China, when it isn’t bullying the NBA or Apple, could choose to weaken its currency(Yuan) and exacerbate trade tensions with the US. This will clearly have negative implications for the world’s largest trading bloc, Europe, and its companies. So which companies would be worst affected? Nowadays, thanks to super powerful processing power and modern data crunching techniques, there are analytics available to answer that specific macro question. Surprisingly, it’s not your classic German industrial which is most exposed. The UK macro analytics firm, Quant Insight, see AIB as the most exposed large cap European company to a negative move in the Chinese Yuan(CNH) versus the USD. If ever you wanted confirmation Ireland is very much a barometer of global trade this is it.

     

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