Wealth & Finance International | October 2015
Building the Future Andy Khawaja, CEO of Allied Wallet, speaks to us about building a billion dollar company, while revolutionising the world of online payments.
CEO of the Month
John Power, CEO of Aerogen, world leader in Aerosol Drug Delivery Systems, outlines the reasons for the firm’s success and gives us an insight into his background and working methods.
CFO of the Month
Benjamin Mulling, CFO of TENTE Casters, explains how he is helping to improve people’s lives and making the way they work, live and mobilise easier.
Guide to Success
We catch up with Farid Arshad Masood, Director of the Islamic Corporation for the Development of the Private Sector, who gives us an overview of the vital services the organisation provides.
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Welcome to the October Issue of Wealth & Finance. This month, Founder and CEO of Allied Wallet, Andy Khawaja talks to us abut his phenomenal success and how he and his business constantly adapt to stay ahead of the pack in a highly competitive market. As the digital revolution continues apace, Matthew Eddolls, Head of Risk Change at CoreStream, talks us through the ins and outs of digital risk management and explains how it can protect investments. Crowdfunding is rising in popularity as more and more people wake up to the advantages of this new investment technique. Frazer Fearnhead, Founder and CEO of The House Crowd, discusses how crowdfunding can be used to great effect in the property market. Elsewhere, we profile our CEO of the Month, John Power of Aerogen, the world leader in aerosol drug delivery systems, and as new domicile tax rules come into force, Andrew Watters, Director of Thomas Eggar LLP discusses this complex issue. Litigation finance is also on the agenda this month and we get Christopher Bogart, CEO of Burford Capital’s take on this exciting subject, and Dennis Krings-Ernst, our Hedge Fund Manager of the Month, talks to us about his firm, White Square Capital, explaining how the business is carving out a niche for itself in a highly competitive market. Plus, we have the usual news and comment from around the globe. We hope you enjoy this issue.
Contents 4. News
8. Building the Future 12. CEO of the Month: John Power 16. CFO of the Month: Benjamin Mulling 20. The Increasing Investment in Fast-Growth Hybrid Businesses 24. The Challenger Bank Revolution 28. Listed Private Equity 32. Shifting Powers – Client-Centricity, the New Must-Have for Asset Managers 34. Do You Know What You Are Getting Into? 36. Hedge Funds: Mutually Inclusive 40. IRESS: Where Does the Future of the UK Wealth Management Market Lie? 42. The Performance Measurement Trifecta: Team, System and Operating Model 46. Taking the Risk out of the Digital Revolution 48. Litigation Finance – The Newest Form of Corporate Finance 50. Taxing Times to Hold Assets Abroad and for Accidental Evaders 54. FinTech – Its Increasingly Close Relationship with Wealth 56. Crowdfunding 60. New Domicile Rules: Greater Clarity and Greater Tax Take 64. Bringing Match-Making Into The 21st Century 68. ICD AMD - Enhancing Returns by Targeting Development in Emerging Markets 3
Wealth & Finance International | October 2015 News
Lego Is Becoming a Better Investment than Shares and Gold It may appear as no more than a popular children’s toy, but investors were able to secure a better return buying Lego sets over the past 15 years than from the stock market, gold or bank accounts, a Telegraph analysis found.
The average Lego set has increased in value by 12% each year since 2000, which highlights a better return than mainstream investments, such as shares or gold. Modern sets are performing even more strongly, with those released last year already selling on eBay for 36% more than their original price. Some Lego sets that once sold for less than £100 now fetch thousands on the secondary market.
Laith Khalaf, an analyst at Hargreaves Lansdown, said: “The returns from Lego look pretty awesome, but investors need to beware that the value of collectables can be vulnerable to fads. There’s absolutely no harm in buying some pieces as a hobby, and you may well make some money, but as a main building clock for your retirement I would suggest sticking to more traditional shares and bonds.”
Savers who invested in gold received a 9.6% annual gain over the past decade and a half, while those who went with a savings account or Isa generated 2.8% according to investment company Hargreaves Lansdown. Many of the highest prices are for old sets based around films such as Star Wars or landmarks or brands such as the Taj Mahal in India or the Volkswagen Beetle. But data from investing website BrickPicker.com showed even sets based on everyday scenes such as police stations and town roads are soaring in value. The largest percentage rise in price for any Lego set has been on “Cafe Corner”, a model of a hotel which went on sale in 2007. The set, which has 2,056 pieces, originally sold for £89.99 but the price has risen to £2,096 since it went out of production – a return for investors of 2,230%. Ed Maciorowski, founder of BrickPicker.com, said the top price would be fetched only if the Lego had been kept in its box, in perfect condition. Used Lego is less valuable, but can still be worth hundreds of pounds more than its original price. “That means anyone with a set at home – large or small, it doesn’t matter – could have quite an investment on their hands if it’s in good condition, as this stuff appreciates very well in value.” The Ultimate Collector’s Millennium Falcon is the most expensive, having gone from a retail price of £342.49 in 2007 to £2,712 today. Two slightly earlier models, the Death Star II and Imperial Star Destroyer, which were released in 2005 and 2002 respectively, also fetch more than £1,000.
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China Slowdown Hitting Business Growth New research from Grant Thornton’s International Business Report (IBR), a quarterly survey of 2,500 business leaders in 36 economies, reveals the extent to which contagion caused by China’s economic slowdown is spreading to businesses around the world. In China, optimism slipped 20 percentage points to net 26% in Q32015. The falls recorded in other economies are equally as striking. Many of China’s top trading partners including Germany (down 46pp to 46%), Japan (down 36pp to -28%), Australia (down 15pp to 39%) and the ASEAN nations (down 22pp to 18%) all report sharp dips in optimism. The global figure dropped 7pp to net 38%.
In Germany, where China accounts for 6.5% of exports, both revenue (down 42pp) and exports (down 7pp) have been hit sharply as orders – particularly of machinery – have slowed this year. Australia, which counts on China for a third of export earnings, has seen export expectations slide further to just 5%, down 9pp from Q2. Japan and Brazil have also seen revenue prospects contract.
Francesca Lagerberg, global leader for tax services at Grant Thornton, said: “The slowdown in China is a major concern for the global economy at a time of stuttering growth and heightened uncertainty. The past three months have shown how reliant global growth has become on China – 20 years ago it was the top export destination for just two countries. Today that figure is 43.
The depreciation of the yuan does seem to have improved export hopes of Chinese businesses (up 5pp to 14%). However this has also made imports to China more expensive with businesses in Brazil (up 9pp to 47%) and Russia (up 9% to 83%) increasingly concerned about the impact of exchange rate fluctuations on their ability to grow.
The IBR reveals that business growth prospects in major trading partners have also been hit. The proportion of ASEAN businesses expecting to increase revenues over in the next 12 months has fallen 21pp to 31%. And expectations for increasing exports have dropped to 0%.
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Wealth & Finance International | October 2015 News
Main Changes Regarding Buy-to-Let Taxes and How It Will Affect Landlords Landlords are becoming increasingly worried about the changes to tax on profits generated by buy to let properties. Many landlords don’t quite understand how these changes will work and how it will affect them.
The biggest shake up to landlord tax rules is the amendment to the interest only mortgage payment on a buy to let property and how this is offset against your tax bill. There shouldn’t be any change to how basic rate tax payers and mortgage free properties are taxed, the change is only applicable to high rate tax payers. Beware, if you are a basic rate tax payer and your rental income pushes you into the higher rate tax bracket, these changes will also affect you!
So they will make a net profit after tax of £280pm. If the interest rate on the mortgage rises to just 4.80% they will be paying £750 per month in mortgage interest payments and making a profit of £250 per month. Under the new tax scheme they will also be paying tax of £250 per month. Therefore the net profit from the property will be zero. If interest rates rose to 6.40% this landlord would be charging £1,000 per month rent, paying £1,000 interest and still be charged £200 per month tax from HMRC.
Currently higher rate tax payers pay 40% tax on the rental income over and above the interest only mortgage payment. E.g. £1,000 per month rent with a £400 per month interest only mortgage payment means that you will pay 40% tax on the £600 per month difference. You are given full tax relief on the £400 per month interest only payment so do not have to pay any tax on this and just pay tax on the profit. Makes sense.
If a landlord reaches the point where they are making no profit from the rent, are spending time managing it and possibly even making a loss on it, the it is understandable that a landlord will consider two things; Firstly, they may look to increase the rent. This is a likely scenario and it seems grossly unfair that the new tax changes could ultimately have a detrimental effect on the tenants themselves. Secondly, the landlord will look to sell the property. Again, this will involve notice being given to tenants and will create a very unstable environment for many tenants who thought they had a long term let agreed as the properties which have long term tenants are more likely to be sold first as these tenants generally have fewer rent reviews and therefore these properties will become unsustainable for the landlords first.
With the new changes high rate tax payers will no longer be able to claim full tax relief on the interest only payment and will only be able to claim tax relief up to the basic rate of 20%. Therefore if we use the same scenario: £1,000 per month rent and a £400 per month interest only mortgage payment this now means you will pay 40% tax on the £600 profit and 20% tax on the £400 per month mortgage payment. This is an increase in this example of £2,400 a year.
What’s likely to happen as a result of the new tax? The expected effect of this tax then will be that more property will come on to the market but only from those landlords that are hitting a higher rate of tax due to personal income (as well as a bit from rental income) these are the landlords that were only really in the BTL game for capital growth (“It’s my pension”) and who have perhaps found themselves enjoying the extra few hundred pounds a month income, it is probably they that will be selling their buy to let houses and flats as the profit margins become less attractive. We have already spoken to several property landlords who will be instructing agents to sale their property.
In the current climate of low interest mortgage rates this is certainly a blow as it will mean higher rate tax payers paying more tax and making less profit on their portfolios. However, what should worry landlords are the consequences when interest rates start to rise. A rise in interest rates equals a rise in tax! Under the new rules, interest rates don’t need to rise that much to make buy to lets costly for landlords. As an example let’s say a landlord owns a property valued at £250,000 with an outstanding mortgage of £187,500 (75%). They charge £1,000 per month in rent and have a current interest only mortgage payment of £400 per month. Under the new system they will receive £600 per month income and pay tax of £320 per month.
Those landlords (sometimes referred to as accidental landlords) selling up will bring more property on to the market for first time buyers and home movers and could see property price inflation easing in certain
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areas of the UK. This scenario would be a good result for First Time Buyers who are currently up against other FTB’s as well as property investors. It is worth remembering that landlord mortgages are not subject to the same regulation as residential owner occupier mortgages. BTL landlords can have a Buy to let mortgage up to 85% on an interest only basis making the monthly payments much less than a regulated mortgage which at 85% must be on a capital and interest basis. For the landlord with only a couple of properties and not earning above the higher rate tax bracket or the property developer that is offsetting costs through refurbishment expenses that doesn’t pay higher rate tax or indeed the wealthy landlord with no mortgages anyway then it will be business as usual. The other tax changes to how much you can offset for wear and tear will have some affect but is not a game changer. So it would seem that the real likely result will be that where one type of landlord sell’s up, a different type of landlord will come along with a desire to buy up that same property. Watch out Brussels is coming! Whilst on the subject of the different types of landlords now is a good time to mention the European led Mortgage Credit Directive which comes into effect in March 2016. The new regulation will regulate some buy to let’s. The legislation will differentiate between 2 types of BTL. They may be referred to as either an ‘Investment Property Loan’ or a ‘Consumer Buy To Let loan’. The accidental landlord that has perhaps been unable to sale their house and who has instead re-mortgaged it to a buy to let will fall under the consumer BTL category and will be subject to new guidance overseen by the FCA. This guidance could see lenders checking affordability for the buy to let using personal income or only lending where there is sufficient savings in place to cover 3 months’ rent in the event of a rental void. Those clients with existing buy to lets or those buying a property specifically to let it out will fall under the Investment Property Loans and will be subject to less scrutiny! In summary the Buy to let market as we know it is changing and interference from Europe and its blanket policies is changing the face of Buy to let.
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Wealth & Finance International | October 2015
Building the Future Andy Khawaja is the Founder and CEO of Allied Wallet, a global leader in online payment processing solutions. We got in touch with Andy to talk about how he built his billion-dollar company, as well as how he continues to revolutionise the world of online payments.
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Although the role of CEO typically involves working long hours, Khawaja manages to clock up a total of 19 hours a day when running his business. “Today I’ve been up since 2am, and will probably put in the same shift as anybody else in any other company,” says Khawaja. “After that, I will be going to Money 2020 in Las Vegas and will then spend another 10 hours in meetings. In total, my average day stretches to about 19 hours. The reason behind this is simply because I really enjoy what I do and every day is full of new ideas and innovations. Innovation really is the future and we want to build it.” Khawaja’s humble beginnings in war-torn Lebanon are a world away from the life he lives today. However, despite the myriad trappings of success, Khawaja has taken great care to not let his impressive accomplishments change who he is. “I’ve seen friends who have become successful and have let their money take over who they are,” says Khawaja. “I strongly believe that people make money, money doesn’t make people. My philosophy from the start hasn’t been about making lots of money, but rather has been about doing something that will be remembered through constant innovation and building for the future. I want people to think of me as a guy who made beautiful things for people to enjoy that also make their lives easier. Above all, I want to be remembered for what I’ve given, not what I’ve taken.” With the fourth quarter of 2015 now very much in full swing, all involved with Allied Wallet can look back on a very successful financial year and look forward to the many exciting new products and services due to launch in 2016. “2015 has been an amazing year, and business has been up around 200%, which is outstanding in our field,” says Khawaja. “I’m really looking forward to 2016 because we’ve got so many new ideas that we’ve been developing .We will be releasing most of them in the first quarter and a bunch of others in the second, and I am confident they are all going to make big waves in our industry.” Among these new developments is ‘New Generation’, a product that Khawaja firmly believes will make a real impression on the business world and beyond. “With New Generation, I’ve combined the services of Amazon, EBay and Ali Baba, and at the same time improved them massively. It really does have everything you could want and more. “We are also working on the virtual shopping mall, which is going to be better than Amazon or EBay and will be the largest shopping mall in the world with a billion users a day. This will probably be ready in summer 2016 and is going to generate 10 to 15 billion dollars a year.” When it comes to innovation, Khawaja has a very simple process. This involves observing other products, finding their weak spots, and building a newer and better product themselves. “We look to improve on what people have failed in, and make our own product that is better, cheaper, and can make the consumer happy. However, you really do need to be on the go all the time to see what’s happening out in the market. In doing so, we are constantly innovating and updating our services.” Developing services such as these, particularly in the world of online payments, requires an incredibly high level of testing and analysis in order to ensure that they are ready to launch. “I’ve seen a lot of companies try and fail, mainly due to the architecture and mechanics behind it,” says Khawaja. “Some companies get two to three hundred million dollars of investment and because of problems with the architecture, they went bankrupt. It’s not just about the money and the coding, it’s about the functionality behind it and how it’s going to work. We ensure that products go out only when 110% ready and there really is a lot of work behind ensuring they reach the high standard of service we set for ourselves. New Generation is a product that really is state of the art, and we strongly believe that it’s going to shape the future.”
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As well as the many innovations at Allied Wallet, Khawaja also believes the key to its success lies in the fact that it is a global company that is always looking to expand its services. “When you compare us to banks like RBS or HSBC, they don’t have the compliance required for processing global transactions and are simply not capable of understanding that business,” says Khawaja. “Allied Wallet, on the other hand, was created to accommodate global transactions for customers, consumers and merchants worldwide. We did this from the start and this is why we are way ahead of the game. As a result, we really do have no competition out there.” Although Allied Wallet is a company that is always looking towards the future, the company still holds true to many old-fashioned principles when it comes to delivering customer service. “People want to work with a processor that works with them,” says Khawaja. “They want to be able to pick up the phone and talk to somebody. For example, if you try to contact PayPal, you won’t get through to anybody on the phone and everything is done through messaging. What we do is ensure that there is a live human being who can speak to and assist our customers. I know this is old-fashioned, but people like to see we’re paying attention to their problems. “For a lot of processors, it’s all about the numbers and not about the relationships, at Allied Wallet building and maintaining relationships is what is important to us. Banks are all about the business and not the consumer, and this is the biggest mistake they have made. From our perspective, the customer comes first, and with anything else you can solve the problem later. “When you look at other providers like PayPal or any major bank, they’re lucky if a customer stays with them for a year, whereas we focus on building long-term relationships with our customers. We regularly survey them and constantly exceed industry norms for service, preference and security. What many other providers will see is merchants switching from bank to bank and processor to processor so they can save a nickel and a dime every six months. With Allied Wallet, customers sign up, taste the honey and never want to leave.” According to Khawaja, one key difference between Allied Wallet and the major banks is the lack of efficiency in the banks’ services - particularly when it comes to running a business. “If you go into a bank and try and set up an account, they will probably schedule you in for an appointment a month later before going through a process that takes about three months. This really is a joke. How can they run an economy when they are simply running people out of business? Furthermore, you could lose a lot of customers in three months - a full financial quarter. If a bank doesn’t see it like that, then they don’t care about your business. Unlike banks, we want to see our customers becoming successful and we want to see their business grow. With our customers, we guarantee them a customised payment solution in just 12 hours.” As a company that deals with money and personal details, security is also a critical concern of Khawaja’s. “On a weekly basis we update our security to ensure the safety of our customers’ identity through encryption. Furthermore, we don’t have problems with security breaches, however other companies do because they don’t invest enough in security. We invest heavily in security to prevent credit card fraud and credit card theft and that’s why we put in the hours and effort to produce a product that can protect our customers.” With so many satisfied customers across the globe, yet still plenty more work to do, Khawaja is confident that Allied Wallet will continue to innovate, grow and prosper. “We view our work as more of a dream to be fulfilled and I really do see myself as living the dream.”
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Wealth & Finance International | October 2015
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CEO of the Month: John Power Insights from the CEO of Aerogen, a global leader in aerosol drug delivery systems.
of life support ventilators distributed by partners such as Covidien, GE Healthcare, Maquet and Philips. The heart of each nebuliser is our patented palladium vibrating mesh technology, which turns liquid medication into a fine particle mist, gently and effectively delivering drugs to the lungs of critically ill patients. Products such as Aerogen Solo, which will sell more than 900,000 units in 2015, offer improved patient care and less drug wastage while significantly reducing patients’ length of stay and related costs of hospital care.
Within 10 years of founding a business above a butcher’s shop in a village in the West of Ireland, I experienced a rollercoaster ride through merger with a California biotech company, a successful NASDAQ IPO, a hostile takeover after the tech market crash and eventual independence following an MBO in 2007. Today, after eight years of consecutive sales growth and market expansion, Aerogen is a global leader in aerosol drug delivery, specialising in design, manufacture and commercialisation of high performance aerosol drug delivery systems within the Acute Care market.
Through these developments and partnerships Aerogen has emerged as a global leader in aerosol drug delivery and sales growth over the past eight years has surpassed the annual targets we set for ourselves. Our corporate objectives may change year to year but the principles we operate by do not. We strive to maintain a clear vision, bold strategies, strong brand and a committed team. I arrived at these simple watchwords some years back when considering what attributes a company required to survive and prosper through turbulent times, I think they still hold good. Our approach to our key fiscal KPI’s is similarly simple: I instigated ‘The 30/60/20 Rule’ wherein we seek a minimum of 30% revenue growth year on year, at 60% gross margin and 20% EBITDA. We are committed to a clear line of sight for the company vision, ensuring that every employee is aligned with company strategy in order to reach or exceed our targets. In a Global Med-Tech market experiencing 4-5% CAGR, Aerogen’s approach will again deliver greater than 30% growth in 2015.
At this point in my career it is safe to say I have run the entrepreneurial gauntlet! But I have persisted with Aerogen these past 18 years because I had a vision for the company that I knew this technology would one day fulfil. My vision was to transform aerosol drug delivery for the most vulnerable patients in an acute care setting, and I believe that this is what Aerogen has now done. I took an unorthodox route into business, but I believe that has provided me with a variety of experience that has shaped my career success as brought to fruition in Aerogen. I left school at 16 to train as a Technical Draughtsman, gaining first my Design Engineering qualifications and later an MBA through night-school. This route meant I developed my knowledge of research, product development, manufacturing and operations from the shop-floor up, and I am fortunate to have had the opportunity to work within and then manage most functions within both SME and MNC enterprises.
Product development and innovation remains the key to sustaining this success and in the last 18 months alone we have launched two new products that enable more patients across the hospital environment to benefit from Aerogen technology. Working within Ireland, and Galway in particular, allows us to maintain this focus on innovation. Ireland has one of the largest and most developed Med-Tech clusters in the world; our 25,000 people represent 6% of the European sector workforce. Ireland is one of the world’s largest exporters of medical products with annual exports of €9.4 billion to over 100 countries. 18 of the global top 25 Med-Tech companies have a base in Ireland and 50% of the 300 companies in our cluster are indigenous. Add in a 12.5% corporate tax rate and there can be few places in the world better to do business. This is supported by a readily engaged university research competence,
The research and development of breakthrough technology for aerosol drug delivery has become engrained in Aerogen’s culture as a direct result of this learning experience. That effort has consumed over $40 million in R&D funding and over three million patients in 75 countries have now benefited from this investment in innovation. Along the way we have made some major contributions to clinical practice, including becoming the first company in the world to enable delivery of vital medicines to the lungs of premature babies. Aerogen nebulisers, now used by over 60 of the Top 100 hospitals in the US, are available as stand-alone devices for attachment to hospital respiratory equipment and are also supplied as integrated components
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government support through Enterprise Ireland, and a highly educated young workforce where 50% attain 3rd level qualifications. The value proposition of talent, track record, technology and infrastructure is a sound foundation for Aerogen as we maintain focus on the unmet clinical need for high performance aerosol drug delivery. Continued financial growth and prosperity aside, I believe our true success, and our biggest achievement to date, is measured in the impact that Aerogen has had on healthcare internationally. In partnership with our customers in health services worldwide we have changed the science and set a new standard of aerosol drug delivery in critical care which is resulting in better care and superior clinical outcomes for the most critically ill patients from pre-term babies to adults. The superior clinical performance of Aerogen products, service excellence and commitment to the respiratory care profession has been recognised in the many European and International awards conferred upon the company. In 2014 the company was named Irish Exporter of the Year and just this month we have for the second time received the Zenith Award from the American Association of Respiratory Care. Aerogen was selected for the Zenith Award from a long-list of more than 400 suppliers, in an open vote by over 52,000 respiratory therapists and health practitioners. This recognition is both a source of great satisfaction and a spur to greater efforts, and we look to the future now with a focus on climbing the value chain through innovation and diversification. In 2015 Aerogen Pharmaceuticals was established as a Special Business Unit in San Mateo, California and we intend to invest aggressively in building a Specialty Pharmaceutical business focused on inhaled drug/device combination products for critical care. Profits from our hospital device business, together with proceeds of our 2014 strategic alliance on homecare drug development partnerships with Philips, have built up a substantial war-chest to fund future project development. Lead product candidates have been selected and preclinical studies initiated in preparation for advancement to clinical development over the next 18 months. We will minimise the risk and expense of the Aerogen Pharmaceuticals venture by adapting generic drugs with known efficacy and safety profiles, and the Drug/Device Combination Product regulatory pathway enables us to use our device IP to turn generic drugs into patent-protected products. By leveraging our large installed user base, long established practice of integrating directly into leading brands of life support ventilator and technology leadership initiatives like our “PDAP” next-generation mesh programme, Aerogen will create a new high-value “Blue Ocean” aerosol drug-delivery market in Acute Care. I am a firm believer in Peter Drucker’s adage that “a business has only two functions: Innovation and Marketing”. This is where you build competitive advantage and so my secret is spending as much of my time as I can working with our engineering and marketing teams on new growth. This prioritization enables all of the innovative product offerings that will ensure a vital future for Aerogen. Company: Aerogen Ltd Name: Eimear Kavanagh Email: ekavanagh@aerogen.com Web Address: www.aerogen.com Address: Galway Business Park, Dangan, Galway, Ireland Telephone: +353 91 540 400
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CFO of the Month:
Benjamin Mulling, CMA, CPA.CITP TENTE Casters, the global wheel specialists, are dedicated to improving people’s lives and making the way they work, live and mobilise easier. Their CFO Benjamin Mulling who currently serves as the Chairman of the Board for the Institute of Management Accounts (IMA), explains his role within this mission and how he has helped the firm achieve international success. TENTE Casters are a reliable partner and global manufacturer for casters and wheels and the associated processes, systems and solutions. We are always working for tomorrow today. Our overriding aim is: “TENTE will only remain profitable on a lasting basis if we continue to have satisfied customers.”
the third largest TENTE plant in the world. I am responsible for the management of the finance, IT and Human Resource functions in North America, including our Canadian locations. Within this role my primary responsibilities, aside from managing the day-to-day requirements of finance, mostly pertain to the overall development and management of the strategic plan. This involves many facets, including the development of technology initiatives, customer needs management, market analysis (competitors), financial analysis and growth opportunities such as mergers and/or acquisitions, making my work varied and interesting and providing me with a wealth of experience.
Our firm makes more than just first-class casters and wheels. At many international locations our employees ensure mobility that makes life easier with solutions that get things moving. We provide absolute precision, visionary design and service that inspires. Our products are at home in four market segments around the world: Medical, Institutional, Industrial and Heavy Duty.
I earned my title of CFO at the young age of 28 thanks to a proactive and ambitious approach to managing my career. To be successful in today’s environment, you must have these skills. I always attacked my goals (i.e. education and certifications) very aggressively.
Established 90 years ago, we have spent that time improving an invention that moves mankind like no other: the wheel. Tente, a suburb of Wermelskirchen in Germany, is where, in 1923, marketing of ball casters and castors for sliding cupboard doors began. By a decade later, the company was manufacturing casters itself.
I never stopped and always kept pushing myself to learn and develop more in every area, as it is my belief that you must never stop learning. I also always volunteered for projects with whatever company I worked for.
Thanks to proximity to our customers and the highest product quality, TENTE today holds a leading position in a variety of markets. What began as a factory has developed into a group of companies that today does business all over the world, and we continue to grow.
I had a desire to really understand every aspect of the companies that I worked for and this really helped my understand organizations from a macro level and better grasp the industry and what makes a company who and what it is. In other words, when you have an opportunity to be a leader, you must take a hold of that. Our organizations today need personnel who are willing to be seen as a leader, and that was always important to me as well.
What lies behind our success is the expertise, acquired over the decades, with which TENTE solves problems and develops mobility concepts. In close cooperation with our customers, experienced developers and designers create innovative products that are manufactured using production techniques of our own. This approach guarantees the uncompromising quality that makes our castors the no. 1 choice.
I personally believe that there are a number of advantages to being a younger CFO. First, I grew up in the digital era and as a result, I have a passion for using technology in everything I do. Decision support using data analytics has always been something of great interest to me, and that is what I built a lot of my early success on. Big data and data analytics is continuing to boom in the finance and business environment, so it is important not only that you can use this type of technology, but that you can drive change with it as well.
In over 100 countries customers today hold the reliability, long service life and functional design of our products in high esteem. They appreciate our motivation and our delight in innovation, and they have a high regard for the people behind the name. As a family firm with local customer care on four continents, TENTE provides high-performance service that always enables our customers to find swiftly and reliably the right product for their needs.
Second, being a millennial, I tend to be very comfortable with change. In fact, I thrive on it. I feel very stagnant if my company or I is not changing or improving. It’s a continuous process that we all must go through. In our environment today, change is happening in more areas and with more frequency, and it’s very crucial for today’s leaders to be very comfortable in that type of environment. I personally enjoy change as it brings about an excitement and a feeling of progress to my work.
This is an aim to which our employees are committed every day and all over the world. We not only develop wheels and casters – we provide mobility. I am the CFO of the North American location of TENTE. The firm has locations all over the world, but our North American location is currently
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Just as I have achieved a vast amount of success in a short period, as has the company. TENTE globally continues to grow and be a leading manufacturer of casters and wheels around the world. In North America we have grown over 70% in the past five years. This is directly attributable to our focus on the markets and bringing value to our customers. Additionally, as mentioned before, we are very comfortable with change. As a result, we can adapt to new processes and opportunities very quickly. This is one of our core strengths in North America as we often use technology to drive a lot of this change. Despite our successes, we have had to face a number of challenges as a company, most notably the financial crisis in 2008, which had a large impact on our company. In North America, we laid off nearly 25% our workforce. This was the time that I actually took over as CFO (Oct-2008). It was a very tough time, but we took this as an opportunity to rebuild ourselves, restructure our operations, and look at things from a whole new perspective. Sometimes these sorts of crisis can bring about opportunities, as changes often do. However, at this time we maintained a long-term strategic perspective and continued with capital investments during this time, and as a result we came out a much stronger company. It was crucial during this time to lead with strength and courage and maintain our composure, especially from the Finance department. We always relied on our data during this process. From that perspective data analytics played a crucial role in identifying which performance metrics we should follow and which levels had the most impact on our operational profitability. Looking to the future we have a number of goals which we are hoping to achieve for the firm. Externally, we continue to focus on the market around us, especially our customers. We lead with what our customer’s need, not just what we want. Internally, we continue to have a strong capital expenditure plan in the coming years. This has already included department expansions, building additions and additional product lines to expand into other markets, which are already completed. Now we will continue to build on that through productivity improvements, automation in production and continue technology initiatives. The main aim is that we do all of this with a long-term strategic focus. We don’t just budget or plan for next year or even the next three years, we strategically plan six to eight years into the future. In addition to this, in 2023 we have our 100th year anniversary which we are excited over, as it shows how far the firm has come. Although looking back on the last century is an intriguing prospect, we always ensure we look to the future. To guide a company, you must be focused on the future. Accountants are often guilty of focusing on historical figures, and while those are important, they don’t really help you develop a company. Future focus is the key. Company: TENTE Casters, Inc. Name: Benjamin Mulling, CMA, CPA.CITP Email: bmulling@tente-us.com Web Address: www.tente.us Address: 2266 Southpark Drive, Hebron, KY 41048 Telephone: 859-586-5558
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Hybrid companies which combine a digital platform and a real life in-demand service on the ground are on the rise. Michael Bruce, CEO of Purplebricks.com, looks at how this revolutionary business model offers opportunities for growth and where investors can look to find the next hybrid superstar.
How to Spot Investment Opportunities in Hybrid Businesses
It is the hybrid model that enables each of these new starters to offer a win-win service, a goldmine for investors. The fusion of online and real life services is opening up markets that purely digital or purely physical businesses struggle to tap into, and growing others beyond their traditional limits.
With the rise of hybrid companies shaking up a range of different industries, there are increasing opportunities for investment in fastgrowth businesses with potential for rapid expansion. From food delivery services like Deliveroo and collection models, to services previously confined to the high street, the hybrid model offers new avenues for progression and in turn possibilities for investors. For those looking to capitalise on this trend, the most promising hybrid businesses offer one – or more – of the following three distinguishers.
2. Convenience and Customer Service It’s not just reaching new markets that can drive rapid growth in hybrid businesses. Providing a far more sophisticated and convenient service is a key success point for companies that combine online and offline offerings.
1. Opening Up New Markets Some of the most exciting hybrid businesses don’t just disrupt a market but open up a new one entirely. While takeaway platforms like JustEat connects hungry customers to restaurants which in turn deliver the takeaway, their service is purely digital. Such websites are an online marketplace: an introduction service, a facilitator and a system through which easy card payments can be made. Its employees power the website – they don’t power the deliveries themselves, which are left to the restaurants.
The consumer market across the board is becoming increasingly 24/7. It’s a buyer’s world, with customers demanding instant choices, instant availability and instant delivery. If your service isn’t bending over backwards to accommodate your consumers, you’d better expect to be left behind. Hybrid businesses have the capability to do this thanks to their 24/7 availability and by making convenience a central focus. It is this fear of being left behind that has caused conflicts between traditional and hybrid businesses. The rise of Uber has led to thousands of taxi drivers staging protests across London, Paris, Madrid, Milan and Berlin in opposition to the company. Ironically, last year’s London protest by black cab drivers pushed Uber registrations up 850 per cent. Uber is a far more convenient alternative to a long-standing, dated service. The effort of finding a cab or waiting for a requested taxi to arrive, exacerbated by the nuisance of finding a cash machine before getting into a cab, means that millennials are flocking to Uber for its ability to accommodate customers’ needs.
Hybrid businesses, however, are now taking cities by storm. Deliveroo, Meals.co.uk and Dinein are all fusion models which bring takeaway to the doors of consumers, but these businesses actually use their own couriers to collect and drop off the food. This hybrid model means that customers can access some more upmarket restaurants and smaller independent eateries that wouldn’t usually deliver. This ‘intermediary’ model is powering huge expansion outside of the capital, with some of these start-ups now operating in cities across the country. The incredibly fast growth of such a business has clear potential for investors. Deliveroo, for example, rounded up $25 million in Series B funding in January.
Customer service is an important part of making sure that the interests of the consumer are at the very centre of all your operations. People place more trust in a company when they can deal with a representative face-to-face, a difficulty for purely digital services. A hybrid model, however, combines their online convenience with people on the ground who can interact with consumers day to day. Giving your business this human face goes a long way in building customer loyalty.
Hybrid companies are often also intermediaries – they sit between the customer and the service or product. Businesses like JustEat and Deliveroo don’t just own the customer’s card details and the transaction platform to make life easy for their users. They also own the customer relationship, having slotted themselves neatly between the manufacturer or service provider and the customer. The relationship between the intermediary and each party is stronger than that between the customer and the company creating the product or service itself, so that the intermediary is always the ‘go to’ and front of mind of the customer.
One start-up offering sophisticated customer service is on-demand shipping provider Weengs, an app which will dispatch one of their couriers to you within 15 minutes of you sending them a photo of the item you want shipping. They’ll package your item up for you, take it to their central warehouse and then calculate the most affordable shipping option. The digital platform works in tandem with Weengs’ couriers to ensure that the customer experience is seamless and as convenient as possible. Speed and availability are key, and hybrid businesses have the capabilities to offer both.
As well as creating new markets, hybrid businesses often have the power to grow existing markets beyond their traditional limits. In San Francisco, Uber has caused the same people to take more taxi rides than previously, because of the convenience they offer. The brand now makes over three times the revenue of the taxi industry in the region.
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It is constant availability that a hybrid model facilitates so well, while still ensuring consumers receive a ‘real-life’ service from people on the ground. Speed and availability are key, and hybrid businesses have the capabilities to offer both. 3. Undercutting On Price One of the clearest ways in which the combination of on and offline services is disrupting the market is in these companies’ ability to drastically undercut costs. A hybrid model can often provide all the vital services of their traditional competitors, but without some of the biggest overheads usually involved. With the combination of ‘on the ground’ and digital resources, many of the costs of the service provided can be eliminated by moving some operations online. For example, expensive high street premises, favoured by restaurants, shops and estate agents, can be avoided altogether. Moving bricks and mortar operations online is especially profitable for those aspects of services which are in any case more convenient, effective or efficient for customers when offered online. Passing this cost saving on to the consumer means that many hybrid companies are disrupting long established markets by offering a service that traditional competitors cannot beat on price. An alternative to getting rid of expensive premises is to utilise your necessary premises to cut costs in other ways. For example, removing the delivery element of certain consumer shops can save money, instead offering convenient click-and-collect solutions. The delivery process is easier for the company, it can be a convenient option for consumers who don’t want to wait in all day for a package, and the cost saving can also be passed on. Combining digital and physical services can in this way be create double or triple benefits for all involved. Investing in a digital-based business that can flex its cost base when it needs to is a great advantage – especially in cyclical markets – compared to investing into a bricks and mortar operation where a business can be locked into expensive leases for a long period. What can your business do? To summarise, the businesses which will likely attract investment are those which are opening up new markets, offering next-level convenience and customer service and drastically undercutting competitors on price - just three indicators that a hybrid business may be heading for the stars. Businesses hungry for recognition in crowded markets should take a step back, look at the wider industry and consider, what needs improving? What could be made simpler or more consumer-friendly? If you look hard enough, existing models will lend themselves to the latest technology, and can be fused together to form revolutionary concepts. But at the same time, people remain key, and the winners will be those companies who successfully adopt the latest technologies without disrupting the vital human element, to ensure customer service remains top of the priority list. As these hybrid companies develop and more enter the arena, the opportunities for investment are only set to grow.
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The Challenger Bank Revolution By Bhanu Choudhrie, founder of C&C Alpha Group
WHEN Vernon Hill’s Metro Bank opened its doors in 2010 it became the UK’s first new high street bank in 150 years.
How have we successfully disrupted the market? Technology is the answer. After ten months of testing we launched an entirely new brand this year, Bank Mobile, a virtual bank targeted at millenials.
Fast forward to 2015, however, and there are 26 challengers applying for banking licences in a bid to transform a staid landscape dominated by the “Big Four” – Barclays, Lloyds Banking Group, HSBC and Royal Bank of Scotland – which control 77 per cent of the current account market and 85 per cent of small business banking. Fidor, the German community-based bank, which crowd-sources ideas for financial products, became the latest UK entrant when it launched in September.
It takes just five minutes to open an account – you simply photograph your ID - there are no fees and the Bank Mobile app, powered by Malauzai software, contains a number of innovations designed to make customers’ lives easier. To pay a bill, you can just photograph it; you can turn your debit card on and off for security reasons, and when you make a direct deposit you get free access to our financial advisors. We have already created an app for the Apple Watch.
Not all these challengers will make it to the start line – just eight banking licences were granted by regulators between 2010 and 2015 and a mere 20 have been granted in the last 40 years. However, in the last 18 months, five challengers have listed on the London Stock Exchange, raising more than £350m of new capital.
We encourage our customers to drive innovation. “Build your own bank”, we call it. Our aim is to rewrite the banking business model by simplifying the mobile experience; we think of ourselves not as a bank but as a tech company with a banking charter. We want to be the Uber of banking. “We are getting back to be a bank people can love,” is the way our CEO Jay Sidhu puts it.
Chancellor George Osborne says he wants to see at least 15 licences approved during the lifetime of this Parliament. The Competition and Markets Authority is currently investigating the banking sector and its study of the current account and small business banking markets could lead to a shake-up, loosening the stranglehold of the UK’s banking giants.
We are targeting recent college graduates, a generation which expects a straightforward, convenient customer experience. We aim to sign up 250,000 in five years. The UK’s banking sector is still dominated by legacy institutions with creaking infrastructure designed for a pre-electronic age. Earlier this year, RBS suffered its latest IT meltdown when 600,000 customer payments and direct debits disappeared, with all the chaos that entailed.
However, the flip side is the Chancellor’s 8% corporation tax surcharge on bank profits and parallel scaling back of the bank levy, which was announced in July’s Budget and is due to take effect in 2016. Challenger banks are lobbying fiercely against the move, claiming it will make it harder to take on their bigger rivals.
In the twenty-first century, customers do not expect to be told it will take three days to put that right. But archaic technology systems mean this won’t be the last IT disaster to inflict the industry.
So, how realistic is the challenge from the new generation of challengers? Can they succeed where their predecessors have failed? Are they worth backing?
Many of the UK’s challenger banks are promising digital-only propositions. Anne Boden, chief executive of Starling Bank, which is seeking to launch in 2016, has been in the industry for more than 30 years – most recently as Chief Operating Officer at Allied Irish Bank – and she is specifically targeting the current account market. A computer science graduate, she is promising to create a banking app aimed at customers aged 20 to 40 who will be given a unique personalised insight into their finances – how much they are spending on clothes every month, for example – and an experience every bit as efficient as that delivered by Apple or Amazon.
I have an unusual perspective on this. I live in London, where my private equity business C & C Alpha Group is headquartered, but sit on the board of two American banks, Atlantic Coast Bank and Customers Bank. It has always surprised me that the UK market has been so resistant to change. Customers Bank has enjoyed six years of stellar growth; back in 2009, it had assets of $250m; four years later, it was welcomed on to the NASDAQ stock market; today, it’s quoted on the New York Stock Exchange and has assets of $7.1bn.
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Rivals, such as Mondo – whose founders defected from Starling – and Open Bank, the brainchild of Ricky Knox, co-founder of money transfer service Azimo, are also promising digital-only propositions. Atom, which has already received a licence and will launch next year, will be primarily digital, using the Post Office to deliver physical services. They have all received substantial backing. Atom, which is raising tens of millions, has attracted star investor Neil Woodford. Among Mondo’s supporters is Eileen Burbridge, of Passion Capital, the queen of the fin tech investment sector. Open Bank raised £10m in its initial funding round and has a target of £100m. Starling is announcing a second round of funding. Not all will get regulatory approval, let alone succeed if they do. But the experience of recent entrants is broadly positive. In 2014, the challenger bank sector as a whole achieved an average return on equity of 3.8% compared to 2.8% amongst the five biggest banks. Breaking the figures down further, the smaller challengers, such as Metro Bank, One Savings Bank and Shawbrook, achieved 18.2% but the bigger challengers, personified by Virgin Money and TSB, achieved just 2.1%. The cost to income ratio among the smaller challengers was 53% in 2014 compared to 64% for the larger challengers. Warren Mead, head of challenger banking at KPMG, expects challengers to outperform the market in terms of pure financial results. He cites their lack of legacy as an advantage, enabling them to build a distinctive brand identity. Delivering simplicity, transparency and a niche offering are the keys to success. Lending to small and medium-sized enterprises is a £160bn market, but certain areas are under-served. In some of the sectors where C & C Alpha Group has a wealth of experience - such as healthcare, real estate and agriculture – smaller businesses have specific needs which are not always addressed. By contrast, in the US, smaller banks are encouraged to commit to small businesses, which are the backbone of the US economy – more than 50% of Americans either own or work for a small company. I have met American businessman Vernon Hill and discussed his dreams and aspirations for Metro Bank. It has 37 branches and aims eventually to grow to 200, but its customer base of 601,000 pales in comparison with Barclays’ 16.7 million. That indicates the scale of the challenge. Customers in the UK remain staunchly conservative; even after the introduction of new rules in 2013, allowing customers to change banks within seven days, take-up has been slow, with 1.2m customers using the service last year. But there is no doubt a banking revolution is under way and establishing a high street presence is no longer a necessary route to success. The number of customers going into branches has fallen by 30% in three years. Customers will use mobile devices to check their current accounts 895 million times in 2015 while there will be just 705 million interactions with their bank branches. They will move £32.9 billion a week using banking apps. The message I can deliver from my experience in the United States is not simply that the future of banking is mobile. The future is already here. Challenger banks, which are daring, disruptive and digital can transform our banking landscape but only if they put innovation at the heart of their story.
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Listed Private Equity By Richard Hickman, Associate Director, Portfolio Development, HarbourVest Global Private Equity What is listed private equity? Listed private equity companies enable investors to access the private equity model through the public markets.
In other words, the private equity model promotes clear accountability between management and shareholders. Indeed, the private equity manager’s need to sell the company allows it to incentivise management with rewards to help it achieve that goal.
Private equity managers take large stakes in private businesses. This helps to ensure that the companies are run in the best interests of investors and any unrealised potential is unlocked. It is an ownership model that can be applied across a broad range of sectors and geographies.
How has listed private equity performed relative to the equity markets? Private equity has consistently delivered outstanding returns over the long term. For example, US Private Equity Funds have delivered an annualised return of nearly 16 per cent over the last 20 years which compares favourably with the S&P 500 at nine per cent. However, this outperformance becomes far more exaggerated at the higher end: Upper Quartile US Private Equity Funds have delivered an astonishing 54 per cent annualised return over the same period (Cambridge/Thomson). This shows that getting access to high quality managers is crucial.
Typically, unlisted private equity managers require significant minimum investment levels – sometimes more than £1m. Given there are no minimum investment levels on the stock market, listed private equity represents an opportunity for retail investors to benefit from private equity investments that they would otherwise be unable to access. What are the advantages of private equity? Private equity managers have a vast range of potential investment opportunities to choose from. They can invest in private companies that are at the beginning of their growth journey, unloved divisions of larger corporations, companies that require fresh investment or new management expertise to take them to the next level or they can take-private listed companies that are restricted by the stock market’s short-term reporting and shareholder requirements.
In terms of listed private equity more specifically, we have also seen some attractive long term returns. Overall Private Equity Investment Trusts (PEIT) Sector Average Share Price growth has been 106 per cent over the last five years. During the same period the FSTE All Share Index returned just under 60 per cent. Picking a fund There are a number of listed private equity funds to choose from so it’s important to take time to understand what you are intending to buy.
Most managers are exceptionally selective and spend a significant amount of their time analysing and assessing the potential of companies. This allows them to fully understand the risks and growth potential. Any investment decision is likely to be based on both macro analysis of the company’s sector and role within the overall economy as well as detailed examination at the micro level, for example its accounts.
First and foremost, you need to decide if you want to invest in a direct Investment fund or a fund of funds. The former will invest in individual portfolio companies that together comprise portfolios of directly-held private equity investments. Funds of funds on the other hand invest in funds that themselves invest in individual portfolio companies: they select fund managers to back rather than portfolio companies. The advantage of funds of funds is that they provide the investor with diversification.
Once a manager has made an investment, it will typically be held for four or five years, although some hold onto companies for substantially longer periods. This gives the manager time to implement the changes it believes are required to make the company more valuable. It is therefore fair to say that private equity firms are patient investors that are more concerned with making considerable progress over the long term than short term performance targets. But because they are ultimately in the business of exiting these companies at a profit, they are always open to a sale for the right price.
Beyond this, private equity managers follow a wide range of investment strategies and investors should select the managers whose approach they believe will be most successful and which fits in with their own investment portfolio and objectives. Private equity managers can typically be differentiated based on: • Portfolio company size – venture capital managers tend to invest in start-ups with very strong growth potential whereas some private equity managers only focus on large, mature businesses. • Geographic focus – ranging from dedicated investment in a single country or region to broad coverage of multiple countries and continents • Sector focus – some private equity managers focus on one or two sectors where they see particularly strong opportunities whereas other provide broader coverage
Finally, the fact that managers hold substantial stakes in companies means they can act decisively when things go wrong. For example, if a company’s management are unable to respond to disruptive forces in their industry a private equity manager may acquire a high growth company within that sector and merge the two with the latter’s management team taking forward the combined business.
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Why HVPE? The fund I manage – HarbourVest Global Private Equity (HVPE) – adopts a fund of funds approach. It is listed on the Main Market of the London Stock Exchange and has a net asset value of £851m. HVPE provides investors with significant diversification with over 6,700 underlying company investments spread across the globe but with a bias towards North America and Europe. HVPE invests in and alongside funds managed by HarbourVest Partners, a leading private equity firm that has committed more than $40 billion to investments over its more than 30-year history. HarbourVest has a global presence, employing more than 300 people across Europe, Latin America, North America and the Far East, and its deep expertise, insights and relationships allow it to identify and access the highest quality private equity managers. HVPE’s underlying portfolio has previously included investments in Twitter and Facebook pre-IPO and our holding in the latter was realised at over 296 times cost. Well-known exits last year included: King (makers of Candy Crush Saga), Just Eat, GoPro (wearable cameras), Oculus (virtual reality headsets, sold to Facebook) and Nest (intelligent thermostats). In terms of our current portfolio, this includes investments in Uber, VIP Shop (Chinese online retailer, which went public in 2012) and Zalando (German online fashion retailer, which went public in 2014). The investment process at HVPE involves multiple layers of decision making. Each year, the Independent Board of Directors agree with HarbourVest the total value of new commitments to be made to HarbourVest funds in the following 12 month period. A committee of senior Managing Directors within HarbourVest then recommends to the Board a suitable allocation across the available funds. Those funds then, in turn, proceed to make investments, following HarbourVest’s long-established selection process. Although HVPE’s investment process has gradually evolved over time, it has broadly stuck to the strategy of investing in HarbourVest funds, diversification and steady investments, including at the bottom of the economic cycle. As a result, unlike some of its peers, HVPE is now benefiting from the dollar-cost averaging effect. HVPE joined London’s Main Market on 9th September 2015 having previously been listed on the Specialist Fund Market and Euronext Amsterdam. This has made the fund more readily available to retail investors and it could enter the FTSE All Share and, potentially, the FTSE 250 index over the coming months, which would increase the stock’s liquidity. HVPE is ranked among the top performing listed private equity funds in NAV growth over one, three and five years and is also one of the top performers over the seven-year period since its inception with growth of 57 per cent. The share price has grown even more dramatically: by more 154 per cent over the last five years. Despite this, the fund still trades at a discount to NAV. How do you invest? Shares in listed private equity can be bought in the normal way through an IFA, stock broker or execution only platform.
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Shifting Powers – Client-Centricity, the New Must-Have for Asset Managers by Philippe Gregoire, Ph D
One of the most important trends that has affected the asset management sphere in recent years is the shift of market power toward the High Net Worth Individuals (HNWIs) and institutional investment clients.
But achieving the level of sophistication that a client-centric information model requires is only possible with the help of innovative software solutions that can handle large volumes of data. These solutions must also be able to deliver reports through different channels, and in accordance with each client’s investment processes, regulations, and compliance rules.
According to a report published by Roland Berger AM a few years ago, “the balance of market power is gradually shifting toward the retail and institutional investment clients. These clients] are now becoming better-informed, more professional, more focused on outcome-driven investing – and more willing to pull the plug when they are dissatisfied. Asset managers must pay much more than lip service to client-centricity – a capability that is as rare as it is valuable.”
And that, for most asset managers, is a real challenge. Current analytics and reporting systems don’t allow for such depth and most asset managers will have to adapt, and when needed, replace their legacy systems with next generation tools.
Over time and after many regulatory changes, institutional clients have become more demanding when it comes to their investment portfolio reporting. The volume of required data has substantially increased as we have moved from monthly to daily calculations. Clients are no longer willing to receive lengthy monthly reports that are difficult to digest. Rather, they are asking for easily accessible and detailed daily reports that feature more relevant and timely calculations in relation to their specific portfolio and risk approach.
Beyond the transparency, accountability and auditability needed for improvement, a high level of flexibility and scalability is also required to cater for all the different investment processes asset managers are using to add value to their portfolios; now and in the future.
They also want the capability to customize their reports beyond basic asset classification and regional segmentation, as well as better visualizations so that they can consult those reports anytime – anywhere – on any device.
Understanding the risk profile of each client, how active returns will be achieved, and what key performance and risk indicators are used to monitor the investments is of paramount importance, since it will dictate which analytics and attribution methodologies should be included in the reporting.
Asset managers need to adopt systems that will deliver clean and accurate data at an acceptable cost. They should also allow clients to set up their own workflow, controls and sign-off processes.
Similarly, as asset owners (pension funds, insurers, banks, sovereign wealth funds, foundations, endowments, family offices and wealthy individuals) start outsourcing a greater portion of their investments, asset managers must be able to deliver reporting that fits a wider range of investment processes.
Client reporting services are an important part of the asset manager’s value chain so in order to retain and gain new business, it is imperative that the asset managers listen to their clients and offer services that meet their individual terms.
All of these trends have pushed asset managers to increase their level of transparency and granularity in the data they report in order to deliver the right information to the right people. This means their systems now need to be able to store industry standard and proprietary classifications, performance and risk analytics, and compliance rules. Relevant reporting needs to be delivered on a daily basis, via email or web portal, and be available online when needed.
As the before mentioned report says, it is time for asset managers to pay much more than lip service to this valuable capability that is client-centricity.
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Do You Know What You Are Getting Into? Deal due diligence is all about knowing what you are about to get into… and finding no surprises when you get there.
Robust and comprehensive due diligence, as undertaken by a reporting advisor, is one of the main tools used by bank lenders, PE sponsors and trade buyers to mitigate exposure to transaction risk. Each party will have received a target company’s financial and commercial information, which may have formed the basis of an offer. The due diligence exercise needs to ascertain whether the target-co’s historical performance, management plan and business forecast are accurate and reflect the target’s real underlying performance and potential.
and the likelihood of meeting the minimum requirements of a potential investor or buyer. The solutions to manage the identified risks may involve a price negotiation, deferred consideration or other mitigating actions or protections. If no solution is forthcoming, the ultimate recommendation may be to walk away. Today’s business environment increases the pressure on companies and their incumbent management to perform, thereby increasing the risks associated with any financial transaction… so the question is… are you carrying out enough due diligence to maximise the chances of a successful deal?
Due diligence should never solely rely on explanation of detail provided by the company’s existing stakeholders as there is clearly a conflict of interest. To obtain an unbiased view of the target’s level of maintainable revenues and earnings, detailed due diligence will be necessary to get underneath the reported results and projections in order to more roundly evidence and corroborate explanations.
If you would like to know more about how we may be able to support your assessment of business and market attractiveness, Please contact: David McClelland, Director, via carlton-advisors.co.uk
Importantly, due diligence seeks to understand and convey to the client the logic and rational of the present-day management team (and equity backers) when it has taken, or proposes to take, the business down a particular route to market. It provides the client with an independent, strategic assessment of the risks/benefits found in the target when that business’s trading is aligned to specific markets and opportunities. Taking the target-co’s financial and commercial KPIs into consideration alongside customer/supplier references and other information about market growth and competitors… are business objectives reasonably stated and presented in a vendor’s information memoranda or business plan? Due diligence delivers a pragmatic and balanced view of a target company’s overall strengths, weaknesses, and opportunities. It provides the client with the specific financial and commercial information they will need to have at their disposal if they are to reach a position of comfort that a deal with a target-co’s representatives can be struck. The diligence may assess the degree to which a management team is in control of the target-co’s destiny, whether the business model works and has the capacity to meet present or planned banking arrangements,
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Fred Ingham Head of International Hedge Fund Investments Neuberger Berman
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Hedge Funds: Mutually Inclusive A quiet revolution is happening in hedge funds. Investors continue to allocate to the asset class, but the way they are allocating is changing, while its investor base is growing broader and becoming more inclusive.
With both bond and equity markets facing major challenges, investors are increasingly seeking out strategies that are not tied so tightly to the performance of the broader equity and fixed income markets. This trend has been picked up over several years by the Morningstar and Barron’s Alternative Investment Survey of U.S. Institutions and Financial Advisors, the 2014-15 edition of which was recently released.
hedge funds,” and these concerns came up when investors were asked what makes them hesitate before making alternatives allocations. ‘Top Reasons to Hesitate Investing in Alternatives’ (Percentage of respondents)
Reporting the views of nearly 400 investors, it found that 63% of advisors believe they will allocate more than one-tenth of client portfolios to alternatives over the next five years, compared with just 39% in the same survey for 2013. But more interestingly, over several years the same survey has been showing continued growth in alternatives wrapped in more accessible registered fund structures that offer daily liquidity, as opposed to the more traditional, and exclusive, private funds. Assets in U.S. registered alternative funds have risen from less than $50 billion under management in 2008 to well over $300 billion as of mid-2015. While growth has slowed from what Morningstar and Barron’s described as the “eye-popping” rates of 2013, money is still flooding into “multi-alternative” and managed futures retail products, in particular, with many new funds having been launched to meet demand. Moreover, the trend is spreading outside the U.S.: Strategic Insight’s SIMFUND database reveals a similar trajectory, showing the number of liquid alternative European UCITS and U.S. ’40 Act mutual fund products tripling to well over 1,500 since 2008. Structures, Not Just Strategies Clearly, the latest developments in alternative investing are as much about investment structures as investment strategies. The survey report notes, for instance, that strong positive flows into multi-alternative regulated funds coincide with dwindling traditional fund-of-hedge-fund assets.
Source: Morningstar and Barron’s, “2014–2015 Alternative Investment Survey of U.S. Institutions and Financial Advisors, July 2015.” We believe that investors who are moving their exposure to hedge fund strategies into the regulated fund world are addressing these issues without throwing the baby out with the bathwater. Let’s take them one by one: Fees The typical fee for a hedge fund used to be a 2% asset-based management fee, with a 20% performance fee on top. Investing through a fund of funds at peak pricing could have added an additional 1% and 10%, respectively. Competition has brought costs down, but they remain high—and the addition of hurdle rates and high watermarks on performance fees adds complexity and variability.
Indeed, while U.S. advisors, who tend to be heavier users of mutual funds for liquid hedge fund strategies, have been increasing their allocations, U.S. institutional investors more used to traditional hedge fund structures have been cutting back from the latter: The Morningstar and Barron’s survey found that those expecting to allocate more than 25% to alternatives declined from 31% a year ago to 22% today. The survey report suggested they “may be tempering their enthusiasm as a result of fees, lockups and poor transparency in traditional hedge funds, as was the case with CalPERS’ announced decision to withdraw from
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While many UCITS still charge management and performance fees at higher, “hedge fund” levels, some providers are consciously bucking that trend and bringing fund expenses in line with typical U.S. practices. Although generally higher than those charged on most long-only mutual funds, management fees on alternative ’40 Act funds are generally set to compete with those on other specialist mutual funds, and are lower than fees charged by traditional hedge funds because they do not have performance fees, which are prohibited for funds offered to retail investors. Redemption terms Many hedge funds allow only monthly or quarterly redemption and often include longer-term lockups after initial commitments. During the stressed markets of 2008, some hedge funds “gated” redemptions, only allowing a certain amount of cash to be withdrawn at any one time. Mutual funds are required to offer daily redemption at a fund’s next NAV. (Again, while this is required for U.S. mutual funds, it is not always the case for regulated funds in other jurisdictions.) While some of the less liquid parts of credit markets may be out of bounds for funds offering daily redemptions, a multi-strategy, multi-manager liquid alternatives product offering daily redemptions at NAV should have access to a substantial portion of the hedge fund strategies available, minimizing selection bias. Transparency Hedge funds often only report to investors once a month, with a delay, and position-level transparency is not the norm. Multi-manager alternative funds often utilize a separate account structure, as opposed to the traditional fund-of-funds model, and this ensures position-level transparency for the portfolio managers on a daily, or even real time, basis. It allows for greater risk oversight and improves the ability of the portfolio manager to react to changing market conditions. Additionally, certain regulatory requirements applicable to registered funds require that all securities be maintained at a custodian bank and, therefore, the fund maintains total control over its assets. Corporate governance It is not always clear that hedge fund directors are sufficiently engaged in governance, and in traditional funds of funds investors have little oversight of the selection of prime brokers, administrators and auditors. As part of the comprehensive regulation provided by ’40 Act and UCITS, regulated funds’ boards, which include members that are independent of the manager, provide a much-improved governance framework. For multi-manager funds, they can help improve the process of monitoring the underlying managers and often allow the fund, and not the underlying managers, to select and directly oversee other fund service providers. Encouraging Trend The fact that more and more products are being rolled out to fit this investor-friendly profile is encouraging. Morningstar and Barron’s have tracked 475 launches since 2009, and the 118 new products for 2014 represented a significant jump from the 89 that appeared in 2013. This reflects an increasingly competitive hedge fund industry: Managers are both more willing to adapt their hedge fund terms to match those of regulated funds and more willing to launch regulated funds to access a bigger pool of investors. This is happening largely without injurious hedge fund-style terms being smuggled into regulated fund structures, or the watering down of hedge fund strategies. That is why we believe this growing phenomenon has earned its distinguishing descriptor: “liquid alternatives.”
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IRESS: Where Does the Future of the UK Wealth Management Market Lie? The wealth management industry globally is at a cross roads, and the UK is no exception. The challenges of regulatory change, technological advancement and the growth of the informed consumer have created an interesting conundrum for modern wealth managers. How can they both serve the needs of their established client base and engage and retain the younger, new breed of HNWI who not only bring new demands but also, according to the 2015 World Wealth Report* have a greater propensity to switch wealth managers if their needs are not being met? Throw in increasing competition with a new breed of online advice provider and it’s not an easy question to answer, but it’s one which needs to be addressed urgently if the industry is to flourish in the Uber-age.
There is also a strong case for implementing these same technologies as part of a complementary service offering, enabling clients to choose the level of service they require depending on a given set of circumstances.
The first point to consider is that wealth managers are doing a great job, with client satisfaction levels quoted in the 2015 World Wealth Report* at 72.5% globally. They provide a valued service with a strong emphasis on trusted, individual relationships, backed by demonstrable insight and expertise. This hasn’t changed. However, clients’ expectations also increasingly cover a range of needs aligned to process and accessibility, such as ease of on-boarding, quality of research and reporting, and on-demand access to their investments via their device of choice. This creates an interesting tension for providers who can risk over-complicating their core offer in a bid to be all things to all men. This needs to be carefully managed; the drive to evolve and adapt to address modern client needs is a positive step, however it is critical that ‘gold’ standards of service and insight remain core to the proposition.
And it’s not just about managing threats, opportunities abound for the agile wealth manager too. The Government’s pension freedom reforms recast retirement as something you invest for rather than insure against. This seismic shift has effectively created a new breed of investors who will now be looking for the best way to approach their elder years. Younger HNWI demonstrate a high degree of concern with regard to affording retirement, resourcing soaring education costs and estate planning – all requiring detailed and personal advice provision, from a human being. Key to grasping the opportunity is separating out where client needs can best be met by investing in capabilities and resources and where they can best be addressed by implementing technology. A cornerstone should be having the right core advice technology in place to deliver the optimum client experience in on-boarding, communication and reporting and ensuring it is integrated with complementary systems. The rationale is simple: if advisers want to offer the best client experience, efficiently, systems need to work together with minimal reliance on manual processes or rekeying.
By not only retaining but positively re-asserting this USP, wealth managers have a weapon in their arsenal for dealing with the onslaught of ‘DIY investment’ tools growing in popularity amongst clients. True activist investors may consider this a lower cost alternative to the traditional discretionary type fees clients are used to being offered. But equally, given the choice, many of today’s so-called ‘DIY investors’ might prefer to have access to insight from an experienced wealth manager even if they ultimately execute the transactions themselves. Going forwards wealth managers need to ensure they have the bandwidth to accommodate this kind of investor alongside a more traditional client base.
Automation and new generation technologies offer wealth management firms the tools to enhance and extend services to clients, with a multi-channel approach, providing choice and ease of access. These tools also open doors for engaging and attracting clients, firms are then able to easily and quickly on-board new clients, especially the younger generation clients who are used to doing everything digitally. Looking ahead to the next two years, the UK wealth management market is still set to see further regulatory review on top of pension freedoms in the form of the Financial Advice Market Review (FAMR) and MiFID II changes. Wealth managers mustn’t lose their identity within all of these changes as they can still add value to their clients’ investments. The high tech, high touch debate is over. Technology doesn’t detract from the wealth manager’s core purpose of serving the client, it simply supports and enables the efficient delivery of affordable, engaging, professional financial planning services to those customers, and frees up wealth managers to provide the value add.
The launch of a number of online investment managers, which replace the front and back-end with an automated ‘machine’ has caused more disturbance in the wealth management sphere. This increasing commoditisation of core services requires a response from wealth managers, to differentiate their services and demonstrate the value they can add for clients. There is a shift towards goal-based, holistic wealth management planning, encompassing both business and personal needs and with the trusted wealth manager relationship providing client access to a firm’s entire capability.
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Simon Badley is the Managing Director of IRESS, a leading supplier of innovative technology for financial markets, wealth management and the mortgage industry in the United Kingdom, Australia, Asia, New Zealand, Canada, and South Africa
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The Performance Measurement Trifecta: Team, System and Operating Model by Katie Kiss, Director, Performance Analytics at Confluence In today’s world we are often overwhelmed by the sheer volume of information around us. Without realising it, we are constantly filtering information to keep what is valuable and useful to us while ditching the less relevant content.
Performance measurement teams, however, are often much more detached from the overall investment process when analysing the end performance. This is perhaps a result of analysts spending more time doing manual data quality checks than true analysis.
Similarly, performance measurement teams and their end clients are dealing with vast amounts of data and information and there is often the temptation to churn out more and more detail without considering who the end recipient is.
I wonder though, as they are all evaluating the performance return, attribution and final output through different lenses, if for better accuracy and more relevant and consistent information, performance analysts should aim to evaluate the performance output through the same lens as the portfolio manager and the end client?
Understanding what is relevant and of value to the end clients is key in today’s landscape where client demands and expectations are always increasing and ever changing.
Ideally, performance analysts need to be more actively involved in understanding the investment process and guidelines detailing the objectives, the investment structure, the benchmarks, the risk profile, the restrictions and more. They need to strive to better understand the market, and have more in-depth knowledge about how specific indexes, benchmarks or stocks have performed recently. They need to be technical experts in their field, which is something they can’t achieve without first shifting their focus from data scrubbing to analysis.
Performance measurement teams need to be armed with the right tools to transform data into information and to be able to filter it based on clients’ needs. I prefer the concept of information rather than data because I firmly believe that performance measurement teams are providing information to their clients, both internally and externally. Data such as holdings, transaction, benchmarks and market reference are the building blocks of information – the end return. However, if the data is flawed, the information we derive from it is inaccurate and, as a result, cannot be developed into reliable knowledge. Good data quality is something that still challenges many performance teams who are too often acting as data specialists and not analysts.
But how can performance measurement teams succeed if data quality is still a challenge, resources are still limited and internal processes are inefficient? They must be equipped with the right tools coupled with the right expertise and the right team structure, including separation of data specialists from performance analysts and reporting specialists.
Performance measurement teams present this information via various mediums to their end clients who evaluate its accuracy through different lenses.
Firms need to start evaluating their performance system landscape in order to reduce the number of performance measurement solutions they have in place and define an operating model relevant to their individual firm’s operational process. Too often we see performance returns being provided from a system and attribution from a different one, while inconsistent methods are used across the two – transaction based vs buy-hold with a simple disclaimer explaining the difference. This is no longer acceptable for clients who require transparency.
While the end investor is evaluating total return relative to the objectives and the investment strategy mutually agreed upon within the investment guidelines, the portfolio managers perform more in-depth scrutiny of the performance output. Relying on market insights and experience, they have expectations on what performance should be. They evaluate specific stock contribution, stock selection and asset allocation numbers.
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How can vendors help solve this problem? First and foremost, the solution needs to fit the internal operating model and be able to adapt to clients’ changing requirements. Not every performance team has the same operational challenge when it comes to the accuracy of the end return, so the solution needs to be flexible to allow performance analysts to build checks that are relevant to their specific needs. While there is a lot of focus on workflow and process automation, generic workflows that are not adaptable to the internal process will not improve the operational efficiency. In this case, flexibility and the ability to adapt to ever changing needs without vast amounts of technical expertise are of paramount importance. Similarly, with each new reporting requirement there is a new challenge for performance teams as many solutions have preconfigured reporting templates. Besides the typical month-end performance reporting, performance analysts would like to provide value-add reporting capabilities to their internal clients which, at the moment, is usually achieved through Excel and macro-driven reports or long and costly internal development projects. Performance measurement solutions need to be more than just tools that generate accurate returns and attribution results. They need to be flexible enough to fit the operating model and internal process. This is true from a reporting standpoint as well, since it will enable firms to better answer client needs and address new market conditions. Having the right operating model, the right team structure or the right system in isolation is not enough. Team, system and operating model all need to work together. About Katie Kiss Katie joined Confluence in June 2015 as a Director – Performance Analytics and is responsible for the global go-to-market plan for Unity® Performance & Analytics. She has more than 12 years of experience in the performance measurement field. Prior to joining Confluence Katie was Global Solution Manager for Performance at SS&C. Prior to SS&C she was UK Head of Performance at UBS Global Asset Management where she was responsible for performance reporting and analysis. Katie also led the strategic implementation of a new global performance and attribution tool across the organisation. About Confluence For more than 20 years, the global asset management industry has relied on Confluence to deliver innovative solutions to the industry’s toughest data management, automation and regulatory challenges. The unified Confluence platform enables asset managers to consolidate and leverage data across business operations—including the collection, creation, confirmation and delivery of investment product data. Results are lower costs, reduced risk, decreased reporting turnaround times and the scalability to automate more processes without additional resources. From the Confluence traditional install, hosted and outsourced Unity® platform solutions to our enterprise-grade SaaS enabled Unity NXT platform, Confluence automates critical fund management and administration processes—such as regulatory reporting, financial statement preparation and performance reporting. The platforms feature solutions to support asset managers and a wide array of fund types – including ’40 Act mutual funds, ETFs, hedge funds, Canadian mutual funds, and UCITS funds. Seven of the top 10 global service providers license Confluence products and eight of the top 10 global asset managers have business processes automated through Confluence. Headquartered in Pittsburgh, Pennsylvania, Confluence serves the international fund industry with key locations in Brussels, Dublin, London, Ho Chi Minh City, Luxembourg and San Francisco.
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Taking the Risk out of the Digital Revolution
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Matthew Eddolls, Head of Risk Change, CoreStream
Risk, governance and compliance - three simple words that carry astounding weight and meaning for any business, anywhere in the world. Many businesses recognise the challenge of having risk management, governance policies and compliance procedures in place yet five years ago few would have foreseen the latest requirement on the horizon. Digital risk management.
So while the predictions of the new DRO role abound what can businesses who’ve not yet made the hire do now? Empower your knowledge base The majority of businesses, especially multinationals, will be blessed with a group of knowledgeable employees (or consultants) such as lawyers, security executives, risk officers and senior executives. When combined these individuals can and should provide a cohesive view of the organisation’s digital assets and legislative/regulatory requirements in each location.
As our worlds of BYOD, IT, IoT and an always on, always connected society permeates every corner of the globe the risk for any business and multinationals in particular has grown exponentially. So much so that Gartner predicts that by 2017, one third of large enterprises engaging in digital business models and activities will have a digital risk officer or an equivalent .
Think global, act local By auditing the businesses across every location and recording the different digital assets produced and stored the risk management team can start to gain a clear view of any challenges or areas for concern as well as flagging future challenges in a reliable risk management system.
So what does that mean exactly? With the superset of technology now available to businesses and consumers alike organisations have strived to share information, branding, content via multiple social channels and much more online. Paper and print is diminishing as we place more and more online, in the digital sphere. What this does is create an enormous bank of digital content and in all likelihood, a disparate bank of digital assets depending upon the geography of an organisation’s offices. What might be deemed appropriate content and branding in the US and UK, for example, may be entirely different for Asia Pacific or South America. So how do senior executives, responsible for meeting multiple legislative and regulatory requirements monitor and manage their digital assets?
Set realistic expectations Regulatory and legislative organisations will expect organisations to recognise the importance of their digital assets but the acknowledgement that digital risk management is still in its infancy means that you could be ahead of the curve. Be proactive Proactively prevent issues – don’t wait for the proverbial to hit the fan. By having a robust risk management policy and procedures in place you’ll be able to detect, report and address issues that are important. After all prevention is better than having to continually firefight problems.
As Paul Proctor, vice president and analyst at Gartner says, “Digital risk officers (DRO) will require a mix of business acumen and understanding with sufficient technical knowledge to assess and make recommendations for appropriately addressing digital business risk.” Creating a role or responsibility for digital assets within an organisation is a smart approach but how does one individual or perhaps a team monitor these assets across a multinational organisation?
By creating a clear data collection process in your business you’ll be able to profile the risk of assets and use the information to compare value – therefore optimising the risk and reward balance.
Businesses need to consider the variety of different regulations across different regions, for example, the forthcoming amends to the data protection act across different countries, the assessment of technological risk of systems used to manage digital engagement or even the representation of a brand. All of these and more require regular assessment and monitoring so that if or when a DRO or risk management team is questioned about the organisation’s digital assets they can easily report back to the regulatory body or auditors, demonstrating that the organisation complies appropriately.
Overall remember those producing digital assets never envisioned that they would one day have to comply to the growing regulatory demands that modern businesses now face. If you want to be successful in motivating your entire organisation into being compliant remember to keep things simple, educate and collaborate. By getting all employees to appreciate the associated benefits of risk management you’ll be more likely to succeed in implementing and maintaining your digital assets. 1. http://www.gartner.com/newsroom/id/2794417
The other major benefit a DRO role brings to an organisation is the ability to drive value from digital asset spend. Multinationals, in particular, will often have countries or regions producing duplicate or overlapping content. With an accurate understanding of the global digital estate the DRO will enable decisions based upon not only the risk profile of assets, but also the value they deliver. Avoiding unnecessary spend where value maybe sub-optimal or where assets have become stale due to lack of updates. The accurate understanding of the entire digital estate through effective data capture and governance will then provide insights for better and more impactful decisions but also create savings and drive savvier purchasing decisions. Ultimately ensuring the DRO role pays for itself.
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Litigation Finance
– The Newest Form of Corporate Finance
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By Christopher Bogart, CEO, Burford Capital.
Outside the walls of law firms and corporate legal departments, knowledge of litigation finance is often limited to its most basic form: the funding of one company’s legal case against a bigger foe, often in a ‘David v. Goliath’ scenario in which economic necessity is a driving factor.
Another intriguing future avenue for litigation finance is this: it opens up the closed-shop, partnership model-driven legal services industry to outside investment. Those opportunities have not previously been available.
In this model of litigation finance, the ‘David’ firm requires outside funding to see through its single civil court action against the might of the ‘Goliath’ company which it feels has caused it loss or harm. That outside investment is provided by a specialist investor—a litigation finance company—that will cover case costs in exchange for a portion of the damages if the case is successful.
Today, only two law firms globally are publicly traded. The second only listed earlier this year. Yet the size of the legal services market is enormous. If the UK Magic Circle law firms listed in London, they would become FTSE 100 companies. Litigation finance companies are of course themselves investors in the legal services industry.
In recent times, however, the landscape for litigation finance has grown and evolved dramatically. Litigation finance is now much more than the single case funding model. It has gotten smarter and a lot more sophisticated.
But some also provide an entry point into the legal market for outside investors themselves, be they institutional or retail, by offering the chance to buy and sell stocks and bonds in litigation finance companies.
Largely due to forward thinkers in what is now a global industry, it can now be considered the latest tool in the world of corporate finance. Embracing this tool is founded on seeing litigation differently: as an asset to be monetised.
Consider this: in July 2015, Burford Capital, which is traded on AIM, announced to the London Stock Exchange a 48 per cent increase in income for the half year to $40.6 million from the same six-month period to end-June in 2014, driven by a 64 per cent increase in income from the litigation investment portfolio to $30.7 million.
This asset-based view of litigation represents a big change. In the past, ‘litigation’ as a term has struck fear into the hearts of CFOs, financial directors and other executives. It’s easy to understand why. Pursuing a claim can mean a sizeable hole in the balance sheet and an extraordinary drain on a company’s resources. Regularly released P&L figures showing huge litigation costs—particularly those of the world’s big banks fighting various rigging scandals—underline this.
Since inception, it was disclosed, 38 investments generated $299 million in gross investment recoveries and $124 million net of invested capital, producing a 71 per cent return on invested capital. One attraction to investors is that unlike most other markets where asset values are often strongly correlated to the performance of the wider economy, litigation outcomes move through a non-commercial system. Combined with this is the fact that the legal process will usually conclude within a certain number of years, thus delivering a natural exit per investment irrespective of the health of the economy or stock market.
But by adopting the attitude that litigation can actually be an asset, the dynamic changes. It can be a driver for company growth, unlocking what might have once been a hidden asset value. To provide one such example, Burford provided a corporate debt facility to a listed UK energy supplier, linking the finance to that firm’s arbitration case with Bolivia. The supplied capital helped the company grow its business while pursuing the claim, the legal fees for which it already had covered.
Diversification is a golden rule for investors; that’s why they often put money into investment funds, accepting returns that are uncorrelated to equity markets and that dampen portfolio volatility, rather than just to see high returns. Perfectly uncorrelated assets are rare, however, and their value to investors becomes increasingly apparent during times of market volatility, as we are seeing at present.
To unlock the asset value of such pending claims, litigation financiers need specialist expertise to assess and make the decision to invest in what is a potentially risky receivable. But in doing so they provide an invaluable service to corporate and financial executives—and as a result, demand for their capital has grown. With the growth in demand, companies operating in the market have adopted a variety of models. Some financiers are focussed solely on class actions and anti-trust, others on lower-value case funding or purely the traditional ‘David v. Goliath model described above. Burford, which takes a broad approach in the field of commercial litigation and arbitration finance, has also expanded into financing existing, non-enforced judgments in litigation and arbitration.
The legal world is consistent. Litigation claims will be made in times of trouble just as they are in times of prosperity. In fact, it’s when everything seems to be going wrong that lawyers can find themselves in most demand. Although the global litigation finance industry is evolving, invested cases remain only a small fraction of those which run globally. But through its evolution, it is likely to present more opportunities to lawyers, company CFOs and General Counsel – and to savvy investors.
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Taxing Times to Hold Assets Abroad and for Accidental Evaders By Kay Aylott
The taxman cometh Chancellor George Osborne, has made tackling tax avoidance a signature issue throughout his tenure at the Treasury. The political climate also suggests something harsher, with a crack down on offshore tax avoidance a valuable buttress to continuing domestic austerity.
Whilst it has never been acceptable to evade tax, the UK has been allowing people to regularise their affairs with favourable amnesty terms. That toleration is about to change. As has been observed: a ticking time bomb now exists under tax dispensations. The most generous of these reprieves, the Liechtenstein Disclosure Facility (LDF), ends in December, marking the start of a much tougher regime from Her Majesty’s Revenue & Customs (HMRC).
Almost all Osborne Budgets have added something to make ‘aggressive’ avoidance harder, with one HMRC official noting that the first purely Conservative Budget in a generation this summer was no exception, unleashing what he described as a ‘tsunami’ of proposals, including new powers for HMRC.
The LDF has been a valued way for non-compliant individuals to regularise their financial affairs. It is ending several months earlier than originally announced, a sign itself of Government impatience with what is deemed unacceptable avoidance.
As if to underline his determination, Mr Osborne, unfettered by coalition politics, also gave the revenue service a further £750 million to spend tackling evasion. The money will be used to triple the number of people who can be investigated, and target offshore trusts.
It has been a particularly useful device, not least for the Treasury which has recouped more than £1 billion from nearly 6,000 disclosures since it began in 2009.
Against this backdrop, experts believe the penalty rate for what replaces the LDF will be punishing, perhaps as high as 30 per cent; and that the 10 year limit on liability may also disappear. Crucially, there will be no guarantee against prosecution.
But the LDF has also been good for individuals looking to get their financial house in order, even generous. Anyone making a disclosure under its terms is only liable for back taxes to 1999, as opposed to the usual 20 years.
The terms of entry are also likely to narrow. For example, it may no longer be possible to use the replacement as a funnel through which to declare a wider portfolio.
The scheme sets a composite rate of 40 per cent for the tax years up to and including 2008/9, with 50 per cent generally applicable thereafter.
If that were not enough incentive for individuals to bring their financial affairs into order, there is more on the horizon.
The penalty is also relatively low, at 10 per cent of money owed up to an including the tax year 2008/9, with a higher rate for liabilities in subsequent years.
Further pressure will come from growing co-operation between 94 tax authorities around the developed world. These will share information about people from 2017, making it much harder to find shadows in which to hide assets.
Under the LDF, only a portion of assets need to be held in the Principality of Liechtenstein for those held elsewhere also to be disclosed. There is no risk of prosecution either, unless a crime is evident or a fraud investigation has begun.
The accidental evader But in fact the process of shining light on hidden wealth begins faster sooner: Data collaboration will begin in earnest with Guernsey, Jersey and the Isle of Man from next year.
Although it will be replaced, no details have been given yet. But nobody is expecting anything as generous.
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The Government has also made clear its intention to make the non-disclosure of overseas assets a criminal offence. There will be no exceptional circumstances allowed. This raises the risk for some, perhaps beneficiaries of trusts established abroad, that they could be unwitting evaders, unaware that liability always fall on the beneficiary, not the settlor, as far as HMRC is concerned There are also people who have historic liabilities, but of which they are utterly unaware. Issues arise when money from offshore trusts filters down through the generations, with understanding of the original trust by those benefiting from it dimmed over time. It is not just the very rich who face being caught out either. Many offshore trusts were created in the 1970s and 1980s involving relatively modest sums removed abroad to avoid Capital Gains liabilities, perhaps the equivalent to £250,000 today. Experience also suggests that individuals benefiting from offshore trusts are often unaware of their strict liability to declare, even when they do know about them. Some believe, incorrectly, that a capital distribution, for example, does not incur a tax liability. They also assume that trustees will have alerted them to any tax issue. But there is no obligation on them to do so, and frequently no expertise on tax matters anyway. What is often forgotten is that trusts can be highly complex in their structure and require considerable expertise to understand, particularly in relation to tax owed. No ifs no buts A further discomforting threat that HMRC has made to encourage people forward with irregularities now is, under the new regime, ‘naming and shaming’ those it investigates and finds in breach. Furthermore, it intends to be unforgiving about ignorance. Tax advisers will soon be subject to much tougher rules, essentially requiring them to make their clients aware of opportunities to disclose irregularities, and the penalties for failing to do so. The intention is to ensure that nobody can say they were not warned. When all these steps and undercurrents are taken together it is clear that something quite fundamental is changing if not altogether clearly. Tax avoidance was once understood and applied as the legal counter to tax evasion. That distinction has now blurred. What began as a moral crusade against ‘aggressive tax avoidance’ after the financial crisis of 2007/8 has become, certainly for those with UK reporting liabilities, an increasingly legal one. The prospect of greater collaboration between tax authorities worldwide signals that the UK is not alone in its tougher approach. The window of opportunity to deal with difficulties favourably is shutting very fast. Kay Aylott is Director of Private Client and Trusts at accountancy firm Kreston Reeves. www.krestonreeves.com
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FinTech
– Its Increasingly Close Relationship with Wealth 54
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By Jonathan Rogers, partner, head of Financial Services Regulatory at Taylor Wessing
The financial services industry has consistently digitised itself over the past two decades – it is over 15 years since newcomer online-only banks started to shake things up and capture market share. Online banking is now the norm and multi-channel delivery is a must-have rather than a USP. However, some sectors, such as wealth management, have moved at a slower pace.
interest, is also a potential factor. It remains to be seen how much pressure discretionary and advisory models will come under from execution-only alternatives, given this loss of confidence on the one hand and technology driven availability of execution only platforms on the other. Technology is also influencing the shape of investment products as much as investment services. The ability of fund managers to capture and process data across a growing range of investment classes and sectors has seen the rise of cheaper, passive funds, such as ETFs, that track particular market performance. The emergence of these lower cost products offers timely support for the efficiency of the online advisory or execution-only services referred to above where competitive pricing is a major factor. The more ‘intelligent’ these passive funds get, the harder it will be for more expensive, actively managed funds to distinguish themselves in terms of performance. Crowdfunding and alternative or peer to peer lending platforms have also brought greater diversity to the investment options available. Furthermore, some of them permit such small and diversified investments to mean that users have another basis on which to execute themselves rather than use an adviser.
A number of factors are at play here. Delivery of wealth management services requires knowledge of the client’s individual circumstances and building this awareness of the client has, traditionally, been achieved through face to face contact. Wealth advisory and management models are also moulded by the regulatory environment which requires identification of a customer’s particular investment objectives, financial circumstances and awareness. This personalised approach is not easy to replicate online. Wealth management services also tend to reach a point of commercial viability in the context of larger client portfolios, which brings us back to an inclination to a more personalised service. There are signs however that this is changing and technology is a key catalyst for this change. Shifting customer inclination towards receipt of digital services and growing confidence in transacting, or at least initiating, important decisions ‘online’ and not face to face, is an important factor. The next class of emerging professionals/wealthy have been referred to as ‘millennials’, defined not just by their age group but by the fact this means they have grown up exclusively in a digital age and instinctively look for digitally delivered and mobile solutions.
What is certain is that along with the opportunities that new technologies will bring, it will also bring risks. Technology is simply a new medium and the delivery of services through it will only be as good as the underlying model and tools and the people behind it. Some of these risks will be new; just as it is easy to self-buy a stock or fund online, it is easy to sell one. While a professional adviser or manager will be hardened to short-term volatility in pursuit of a long term strategy, a self-investor receiving dismal daily updates on their App may not be and may find their resolve tested, resulting in trade fees and a floundering strategy.
There is also a growing awareness that with our personal longevity on the rise and interest rates remaining low, the need for some regular investing is becoming highly relevant to a population that might not historically have considered themselves as deserving of a personal wealth service. The newly delivered pensions freedoms will also play a role here.
A particular challenge of using technology in the delivery of wealth management services is that automation places a greater responsibility on the customer to understand the investment process and the related offerings. While websites will do their best the investor must navigate themselves through the investment options and attendant risks and the consequent self-selections, to reach a suitable investment decision. This requires a great deal of discipline as well as self-awareness of personal needs and capability. In order to avoid customer dissatisfaction or, worse, regulator sanction, investment firms will need to be scrupulous in reviewing innovative services through the eyes of the consumer.
There is still the question of affordability. However there are signs of a potentially happy convergence between these two factors, inclination and need, with improving technology that makes it possible to provide effective but palatably priced services to this sector. So called ‘robo-adviser’ platforms are already gaining ground, based around an online experience of identifying customer needs, risk appetite and investment objectives. The platform then allocates customers to a pre-configured managed portfolio that matches their requirements. The automated nature of much of the model allows smaller investment sums to be dealt with in cost efficient way.
While it seems certain that technology is going to disrupt the wealth management sector, as it has other financial services sectors before it, it is too soon to predict the demise of face-to-face investment services. A strong wealth management service can offer the opportunity for out-performance, tax planning and a truly fiduciary level of service. What will be interesting to see is if technology brings with it competition and thereby the need for firms to get their particular mix of delivery method, target segment and pricing exactly right in order to stand out from the crowd.
It is also reasonable to suppose that there will be an upswing in what could be described as a DIY or ‘execution-only’ model. Through technology, investors now have access to online self-help investment tools and a greater amount of comparative data that is increasingly easy to use; the Warren Buffet App has arrived. The possibility that some investors will also want more control of their investments, unimpressed throughout the financial crisis by reports of mis-selling and conflicts of
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Crowdfunding Frazer Fearnhead, Founder and CEO, The House Crowd
Although the basic idea of crowdfunding has been around for centuries, the modern day crowdfunding concept is said to have originated in 1997, when British rock group Marillion used a web campaign to raise $60,000 to tour America. Having found success in the United States, the crowdfunding sector has since found a footing in the British financial market. In 2012, The House Crowd was the world’s first crowdfunding platform to embrace property investment, opening an investment mechanic seen as a barrier for many and permitting a cost effective entry for all.
Since its beginnings, The House Crowd has attracted a customer base of investors who have a strong understanding of the property crowdfunding model and its potential for capitalising on savings. Dean Ayres, 58, a retired air-traffic controller, and Cathy Taylor-Ayres, 53, live in Wimborne, Dorset, and had built up a good pension by Dean’s retirement in 2013. Having originally considered investing directly in buy-to-let properties, they discovered The House Crowd and its crowdfunding platform for property investment online. Since their initial investment, Dean and Cathy have contributed to 22 projects with just over £155,000 total investment so far.
How does it work? The premise is simple: investors pick a property, transfer as little as £1,000 to The House Crowd, and once the target level of investment is reached the property is bought and packaged as a Limited company known as an SPV (Special Purpose Vehicle) which owns the property outright. Shares are issued to investors in proportion to the money that they have invested. The property is then looked after on behalf of the shareholders by The House Crowd over the agreed period of the investment. The participants receive a yield throughout the ownership and receive a proportional amount of capital appreciation when the investors vote to sell the property. Investors in each SPV are able to sell their shares should they find a willing buyer. Traditional buy-to-let entry carries the responsibilities of legal fees and expensive deposits; these are negated by the crowdfunding model, allowing individuals to become property investors for as little as £1000.
“I like the concept of crowdfunding and peer-to-peer lending, and I like to be able to make my own investment decisions,” said Dean on his reasons for investing with The House Crowd. “With a mixture of income a mixture of income and the possible capital growth, plus investment away from the overheated housing market in the South, The House Crowd seemed an ideal home for around a 25% lump-sum from my pension. “What I like most about The House Crowd model is that it provides better returns than many conventional investments. It has a personal touch, and I like being involved in identifiable projects rather than one big pot. Also, the security of having shares in the SPV that owns the individual property is something I regard as highly valuable.”
Frazer Fearnhead, founder and CEO of The House Crowd, developed the idea of this property investment method for the wider market on the back of a career in music industry law and his own involvement in property investment. Fearnhead’s foray into property began in 1994 and eventually led to the genesis of The Armchair Property Investor, a property investment consultancy, in 2005. Two years later, the company having won Best Start Up Business 2006, Fearnhead sold the company for £2.25m. In 2012, crowdfunding was truly entering the mainstream. Fearnhead spotted the opportunity to combine this burgeoning financial method with his matured understanding of the property market to offer an alternative to the poorly performing ISAs, pensions, and savings accounts on the market. The idea took off. The House Crowd currently employs 11 people at its head office, with a further 30 tradespeople in employment refurbishing the houses invested in by customers. The company expects to create at least another 12 jobs in 2016.
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Why invest in property rather than more traditional institutional funds and PLCs? Buy-to-let has become something of a buzz-word of investment in recent years, and for good reason. When The House Crowd was set up, it was partially in recognition of the downfalls of the more institutional options available. Traditional avenues such as investment in funds and PLCs leave the investor with little insight into the goings on beyond the point of payment. Investors are not involved in the company, the payments to the directors, or how their investment is spent, and whilst the stock market tends to fluctuate quite regularly, property will continue to more reliably climb in value over a period of years. Investing in property means that investors will only lose money if they are forced to sell at a loss at the wrong time and, according to a study produced for lender Landbay, over the past 18 years buy-to-let investments have outperformed investments in any other asset class including the FTSE 100. Crowdfunding is continuing to grow year-on-year, and reflecting the global trend in the sector The House Crowd grew by 211% in 2014 alone. Global crowdfunding overall enjoyed accelerated growth of 167% in the same year, reaching $16.2bn, up from $6.1bn in 2013. In the UK, crowdfunding overall expanded by 420% in the past year. This year, the industry looks set to double once more, raising $34.4bn globally. The Real Estate Crowdfunding Report 2015 released by Massolution revealed that property crowdfunding is now worth $2.5bn, and by 2020 is set to grow to a value of $250bn worldwide. In 2016, The House Crowd itself expects to raise £100m in investments based on the extrapolated growth in the initial years and the ambitions that the company has in the short term. How can you get involved? Having read and accepted The House Crowd’s terms and conditions of investment, a potential customer must register without charge as an investor. Once registered, investors are presented with a portfolio of current investments. To proceed with an investment, investors must sign an application form and transfer the relevant funds to The House Crowd’s solicitor. No money is ever transferred to the company itself, with funds being held securely until the full asking price of the property has been raised. Any interest earned whilst funds are held by the solicitor is credited to the SPV’s revenue in which investors will share. From this point, The House Crowd takes over and the investor’s involvement is fairly limited besides being able to check up on their investments through their online portfolio. The process throughout is entirely transparent and the investors are kept informed throughout the project period of anticipated yields and the progress of their investment. The House Crowd’s model offers a near-effortless investment, as the process is nurtured by the experienced team at the company. This ease has been one of the key factors seeing traditional buy-to-let investors turn their attention to and put their faith in The House Crowd. To find out more about The House Crowd, visit www.thehousecrowd.com
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New Domicile Rules: Greater Clarity and Greater Tax Take Andrew Watters, Director, Thomas Eggar LLP
One of the more eye-catching measures in Chancellor Osborne’s summer Budget was the proposal to introduce new domicile rules. The concept of domicile is a historical remnant of the UK’s imperial past which accepts that special tax rules should apply to those who come to live in the UK but who are not domiciled in the UK.
of 16; mentally disordered persons; and before 1 January 1974, all married women were considered to be dependent persons and so obtained their husband’s domicile on marriage. A former client of the author came into this last class. Having unwittingly acquired a UK domicile by virtue of marriage, and having divorced the husband in question, she was unhappy to discover that it was easier to rid oneself of an unwanted husband than an unwanted domicile.
Unhelpfully, given the very significant tax consequences which flow from one’s domicile status, the law in this area has not previously been codified in statute but rests on accumulated case law. The key concepts are:
Deemed domicile Irrespective of the intentions of an individual, extended residence in the UK will eventually trigger an automatic treatment as being UK domiciled for inheritance tax purposes. This ‘deemed domicile’ arises after spending 17 out of 20 tax years as UK tax resident (and is therefore also known as the ’17 out of 20 rule’). Once obtained, a deemed domicile was retained until the individual spends at least three years outside the UK. This then resets the clock in calculating the ‘17 out of 20’ rule.
Domicile of origin At birth every individual receives a domicile of origin. This is generally inherited from the father’s domicile at the date of the child’s birth. Domicile of choice One can acquire a domicile of choice to displace the domicile of origin. This does not involve ‘choosing’ one’s domicile status but is a question of fact. The judgement is on whether an individual both resides in a new country and has an intention to make his home in the new country permanently or indefinitely. This statement has subsequently been cited and approved by the House of Lords and, in the absence of a statutory test, the test for an individual acquiring a domicile of choice is that they must be resident in the country in question and have an intention to remain there. The residency test is relatively straightforward and reference can be made to the Statutory Residence Test introduced in 2013. The ‘intention to remain’ test is more problematical. One way of thinking about it is that the individual may not have the positive intention to reside in the jurisdiction permanently, but has no positive intention of leaving. The advisor who is considering whether an individual has acquired a domicile of choice is required to review case law for guidance. Domicile of dependency A third type of domicile concerns a dependent person. Such a person has the domicile of the person on whom he is considered to be dependent by law. Dependent persons are: unmarried children under the age
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Tax advantages of non UK domicile If one is not UK domiciled, as a general rule, one is not taxed on income and gains arising outside the UK unless one ‘remits’ them into the UK. Also, non UK assets are excluded from UK IHT. These are very significant advantages. It was sometimes difficult for advisers to provide certainty to individuals as to whether the domicile status to which they believed they were entitled was exposed to challenge by the revenue authorities. There has been recent media coverage of individuals who had inherited non-domicile status and who, to the casual eye, seemed permanent fixtures of UK life. The problem has been that with case law guidance on criteria such as ‘intention’ and ‘reasonably anticipated contingency’, one had to factor in messy daily life. To this Gordian’s Knot of complexity, Chancellor Osborne has applied the sword. Budget proposals The UK government announced in its 2015 summer Budget that from 6 April 2017, individuals who have been UK resident for 15 out of 20 UK tax years will be treated as deemed UK domiciled for all tax purposes. As previously, becoming deemed domiciled for IHT means the individual’s worldwide estate becomes subject to IHT. However the extension of deemed domicile will mean they will also be subject to income tax and CGT as a UK domiciliary. The right to claim the remittance basis of taxation will therefore cease. The detail of how this is to be introduced is subject to consultation. A crucial point is that any excluded property trust created before the individual became deemed domiciled will be unaffected in as much as it will not be in the settlor’s estate for IHT. However, if a UK resident beneficiary receives benefits they will pay UK tax according to normal rules. It will still be possible in theory to ‘reset the clock’ to avoid reaching the 15 year trigger by ceasing to be UK resident. However, the time ‘out’ of being UK resident to achieve this has been extended to six tax years. Also, any individual who seeks to achieve this can expect detailed scrutiny under the Statutory Residence Test as to whether they have achieved non-resident status. Returning UK domiciliaries The new rules are particularly harsh for individuals who have a UK domicile of origin, who leave the UK and acquire a foreign domicile of choice, but later return and become UK tax-resident. They will automatically be UK domiciled for all tax purposes from the date of return (although there may be some period of one or two years before the rule is fully applied). For returning UK domiciliaries it appears that excluded property trusts created while the individual was not resident and not domiciled will be looked through. Domiciled under general law The UK revenue authorities believe that some individuals who believe themselves to be entitled to ‘non-domicile’ status may not be so under general law. The Consultation Document is careful to confirm that any consideration of the application of ‘deemed-domicile’ status will wish to consider whether in fact the individual was UK domiciled under general law.
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Bringing Match-Making Into The 21st Century Brian Pallas, CEO & Founder, Opportunity Network
rum research have proven the hardest part of making business happen is finding a trustworthy counterpart to do business with.
Trust is the most important factor in building a business from the ground up. As the CEO and founder of Opportunity Network, creating a sense of total trust is critical to my business. Opportunity Network aims at connecting the CEOs of the best firms around the world so that they can do business together and grow their companies. It’s exactly by providing trust that Opportunity Network adds value to its members, by unleashing the potential for their companies to do business with trustworthy business partners worldwide. This has enabled Opportunity Network to grow to be valued at over $100mn.
My idea was to tap into existing networks and to extend them in order to create a broader one characterized by trust. I began this journey by tapping into existing Family Business Clubs of top MBA programmes. From this essential starting point, I then expanded Opportunity Network by securing the top clients of the best financial institutions and professional service firms around the globe. I took this approach in order to maintain the high quality and broker trust among our members.
This company is the coming-together of all my business experiences. Several years back, I worked for my family’s corporate event business in Italy, organising meetings and fairs for international clients. Later, as a private equity associate in New York, I evaluated investment opportunities in multiple sectors and helped launch big projects for portfolio companies. This meant working for a number of years with world leading companies, devising and executing planned strategies for corporate mergers, across a myriad of industries.
Opportunity Network is now a world-leading platform that enables companies globally to achieve growth through partnerships, M&As, and supply trade agreements. Trust is the fuel of business It is a members-only platform that enables CEOs of middle-market companies, family offices and ultra-high-net-worth individuals to share business opportunities with one another, anonymously and seamlessly.
The problem with deal-making Those experiences changed the way I looked at medium-sized businesses; they fueled ideas for how things could be improved, and how I could help.
We have a deal flow of roughly $15bn. When members look for an opportunity, no matter how exotic, they are usually able to find something. And all interactions are opportunity-centric, so it really sorts the wheat from the chaff.
In everyday life, the world now seems a lot smaller and we think on a global scale. The availability of flights to anywhere in the world, the ubiquity of the internet, even in the farthest flung parts of the world, are a testament to this changed mentality. By contrast, traditionally, businesses have focused nearly exclusively on trade growth in their own backyards because geographical proximity meant familiarity and trust. This is something I believe has to change.
As a clearing house that brings together global networks from the top financial institutions and service providers around the world, the trust and opportunities within Opportunity Network are by default maximised many times over. In our first year, we added over 40 such partnerships. The network now counts thousands of companies from more than 75 different countries.
Nowadays, global digital networks have made growth opportunities just as possible in far-flung corners of the globe. Your company can strike a supply agreement, enter a partnership with or be acquired by another one on a different continent entirely.
Everyone is able to find trustworthy partners wherever they want to achieve growth. We have many success stories and hundreds of thankyou notes.
But how do you trust potential partners when you have never met faceto-face, when you have not yet established trust? World Economic Fo-
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The make-up of a CEO I used to think that the best thing about being a CEO was being fully responsible for developing an idea, and being the owner of all my company’s decisions. But that was before I became one. Now I understand that there are so many external and internal factors that impact on a company beyond your control, that is not realistic to think you can be across everything fully. A CEO should always have three things uppermost in mind. First is to think about long-term growth strategies. Second is communicating them properly, so that they are clear to everybody. Third, is all about hiring the best talents and providing them with the resources and freedom to express as much as possible their knowledge and potential, while being there if they need support. Turning org charts upside-down At Opportunity Network, I have implemented an atypical organisational structure. Usually, companies have their most senior people at the top of the tree, but we are the reverse - we put our most senior people below our juniors. Some people who are three reports away from me are paid more and have more experience than people who are closer. Usually, companies hand junior workers routine tasks and occasional decisions, leaving senior executives’ energy cluttered up with frequent important decisions. The management team, however, may need spare capacity to tackle unpredictable events. So we drive as much business-related decision-making as possible down to our experienced executives, leaving those farther up the ladder to think bigger. We find it’s a very efficient way to work. This is the approach I try to bring to my work. Trust is key - you need to trust the people you work with, both within your organisation and with clients and suppliers. The result is achieved collaboration and collective growth. Overcoming international barriers In the business world right now, we are in front of an unprecedented moment - we are living the fourth industrial revolution, fueled by digital economy. The world is changing at a speed that humanity has never experienced before and this is translated in the speed and number of opportunities that can be captured to grow your company. More and more countries are emerging and growing, thanks to their demographics and investments. After the “BRICs” of Brazil, Russia, India and China, just look at the growth of Indonesia, or Nigeria, for example. Growing countries represent new opportunities for ambitious CEOs in developed markets. But, although the world has become smaller through globalisation, it is still full of barriers to companies. Fragmented national laws, cultural unfamiliarity and opaque foreign markets challenge companies to grow overseas, despite clear opportunities. The future is bright The future is full of opportunities and Opportunity Network wants to help seize them. Our mission is to stimulate economic growth by removing barriers and brokering trust among businesses from all over the world. We have become familiar with the idea that there are six degrees of separation between people. In the business world, we want to reduce them to just one, trustworthy, degree of separation. We hope that what we are doing will have a long-term effect on GDP growth at a global level.
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ICD AMD
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The Asset Management Department of the Islamic Corporation for the Development of the Private Sector helps guide investors into exciting new opportunities in emerging markets. We speak to Farid Arshad Masood, Director of the department, gives us an overview of the vital services they provide. The ICD AMD’s role is to help connect our clients (sovereign wealth funds, financial institutions, pension funds, insurance companies, endowments, foundations, family offices and high-net worth individuals) with investment opportunities across emerging markets. AMD provides investors with fund management solutions spanning the full spectrum of asset classes in diversified industries within a wide-geographic footprint. Our multi-billion product offerings are tailored towards unique return and risk objectives in more than 51 countries. AMD runs a core product portfolio of proven, seasoned managers in whom we have a high level of confidence to provide high risk-adjusted returns over benchmark funds. ICD Asset Management has one of the most experienced investment teams in the Middle East and North Africa. The latter is complimented with robust processes and control structure aligned with interlinked risk frameworks and bespoke investment guidelines. AMDs products include Money Markets, Sukuk, Public Equities, Small and medium enterprises (SMEs), and Private equity.
In line with ICD’s strategy, the Asset Management Department has developed a three-phased plan: Concept Implementation, Focused Expansion, and Growth. • Phase I - Concept (1435H-1436H): AMD focused on building the core infrastructure of the asset management business by developing three primary fund platforms: Income & Capital Markets, SMEs and Private Equity. Each platform offers a set of solutions (funds) across unique asset classes and select geographies complimented with extensive market intelligence and industry-leading risk management. Each fund is setup with its own style, strategy, management and partnerships. • Phase II - Expansion (1437H-1438H): AMD will expand its product line across asset classes, geographies, and sectors and will grow existing AUM through a dedicated fund raising team within the department. • Phase III - Growth (1439H-Onwards): After setting-up the core infrastructure, expanding the product range, and addressing key challenges through spin-off, the ICD asset management business will be set for growth through further expanding the range of products (asset base, fund type, geography and sector) thus, increasing AUMs while further raising the multiplier effect.
AMD aims to create an “Enabling Environment” for the growth of Islamic Finance and build “Partnerships” with the private sector to enhance resource mobilization. The vision and philosophy of the ICD’s asset management business is derived directly from these core pillars of ICD’s strategy. Thus, the various key objectives of ICD’s Asset Management Business are: (see image below)
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Income and Capital Market funds seek to generate high yielding and consistent excess returns by delivering a periodic dividend stream (on a monthly, quarterly or semi-annual basis) through risk analysis and intelligent investments. The diagram below conveys the different products and positioning: (see image opposotite page, above)
managers and establishment of appropriate fund structures catered to 1) maximize rewards to its investors and 2) boost OIC development. ICD and investors will continue investing in SME funds, primarily through external fund management companies, and in some cases through establishment and ownership of fund management companies where demand has been identified in a specific geographic market.
AMD launched the Money Market Fund (MMF) as a US$ 50M seed investment from ICD in September 2013. By Q3 2015, the fund reached US$ 230M. MMF outperformed treasury funds in its category generating an average of 3.8% (well-above target return of Libor+200BPS) in EY2014. This success led to a surge in capital raised from 3rd party investors, as it grew its AUM by 4.6x invested capital (to US $230mn as of present).
At present, ICD has outperformed its requirements as two of the operational funds, Saudi SME and Tunisia SME, have started generating investment returns and offering dividends to shareholders during the commitment period. AMD has been actively developing a number of funds in 1436H and are expected to be launched in the next two years, including: Turkey SME fund which will be launched in 1437H/ Q1, a regional MENA SME fund in collaboration with European Bank for Reconstruction (EBRD) in 1437H/Q2, Algeria SME Fund, Bahrain SME Fund and KAUST Venture Capital Fund in 1437H/Q2 and Kyrgyzstan SME Fund in 1437H/Q2. The platform is also planning to develop and launch new funds in the regions of West Africa and East Asia.
This was a result of well-crafted asset allocation strategy, risk framework implementation and an experienced portfolio management team. Within the next year, AMD plans to launch the Sustainable Islamic Fund representing a diversified public equities fund while initiating the first stages of a Turkey Sukuk Mutual Fund.
As well as overall asset management, our department is also heavily involved with helping our clients manage their private equity.
In EY2014, the Unit Investment Fund (UIF – a fund encompassing two sub-funds; Trade Premium, Corporate Premium and a legacy portfolio of fixed income products) delivered a 4% dividend distribution just north of its target return of LIBOR+300BPS. Within the same year, the fund underwent significant restructuring initiatives: optimized portfolio allocation, revisiting strategic plan, changing regulatory status and a market investors plan. The fund is currently launching two new subfunds, which recently have received traction and teaser requests from top-tier financial institutions. The sub-fund strategy is expected to grow UIF in AUM as well as performance.
Earlier this year, the global consultancy firm, McKinsey & Co., published a report describing the strong growth in alternative investments: an asset class which includes hedge funds and private equity. As conveyed by the report, alternative investments have produced almost double the rate of growth of assets under management over traditional investments (pension funds and mutual funds) over the 8 year period ending 2013. With just over $7trn in assets, the sector has become an even more formidable category than ever. Additionally, over the past several years, several high profile institutional investors have allocated an increasing amount of their assets into alternative investments seeking higher returns and reduction of risk not easily achievable in traditional investment categories.
In emerging and frontier markets, entrepreneurs and business owners looking to start or grow SME businesses face significant challenges particularly in terms of access to appropriate financing, experienced business support and the market linkages and networks needed to succeed. SMEs are also considered too large for micro-finance, too small for traditional private equity and too risky for traditional security-based lenders as they are often informally structured (compared to large corporates) or lack security or track record. Thus, many entrepreneurs and business owners find themselves in the ‘missing middle’. SMEs are strategic to ICD in multiples ways: 1) crucial to the development of strong OIC economies 2) principal means of job creation for the bottom of the pyramid individuals and the driving force for a thriving, formal economy and 3) building a healthy national infrastructure, and encouraging political and social stability For this reason, ICD offers a solution of “access to finance” for the region’s underserved SME Sector through deployment of mezzanine capital in well planned, properly capitalized and skilfully managed businesses. Over the past two years, 1435H-1436H, AMD strategy has enabled the launch and development of SME funds across select high growth geographic markets (as conveyed by the infographic opposite, below). Despite the targeted annual double digit returns attained from investment in the SME sector within the OIC, the management of the fund can be quite challenging, as enterprises require close follow-up. Our experience shows that selected local fund managers can do this job in an appropriate manner, and still contribute to the creation of considerable value. ICD has accumulated competence in selection of strategic fund
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It is clear that the future mantra for success in private equity is going to be adding value by operational improvements. As a result, private equity firms or funds need to have sector expertise which, in many cases, can mean that they focus on particular themes. Mandated by multilateral developmental initiatives and investor fiduciary milestones, ICD AMD setup specific thematic funds to help address problems created by trends such as resource shortages or urbanization. The funds established by AMD offer a wide range of thematic based funds geared towards investors seeking higher double digit returns with a longer-tenor appetite. AMDs approach to private equity is exposed to highly volatile valuation environments within the OIC, which demands a solid asset management team, Similar to SME funds structure, AMD will partner with well-renowned international firms with solid expertise in their relevant sector verticals for fund management and advisory. In tandem, ICD AMD’s private equity approach is focused on ensuring tangible collateral and diversified cash flows to provide a sound foundation for long term investment value, as well as developing a platform from which meaningful growth can be achieved. During 1436H, AMD launched the Islamic Banks Growth Fund (IBGF) with a first close of US $100mn. IBGF targets Islamic retail banking in economies requiring high traction in Islamic finance and leverages ICDs in-house expertise and core-competency in Islamic banking. In addition, AMD is in the final stages of achieving its first close of US $300mn in the Food & Agribusiness Fund (FAF) which is expected to be launched in the beginning of the next quarter. FAF invests through equity and quasi-equity in select food and agribusiness companies across the full value-chain to (a) generate attractive commercial returns; while (b) promoting development of the food and agribusiness sector in the various target countries. The fund is setup in partnership with top tier regional private equity fund firm in the DIFC in Dubai and with knowledge partnership from Rabobank (Dutch-based global leader in Food and Agribusiness financing and sustainability oriented bank). Additionally, AMD has been able to achieve a first close of US $50M for the Central Asia Renewable Energy Fund (CAREF), a clean technology fund focused on hydro & wind energy sources (with a guaranteed off-take structure) managed in partnership with strong local partners: The Lancaster Group, a premier business group of Kazakhstan and National Agency for Technological Development (NATD), a Kazakhstani government institution for the development of renewable energy projects in the region. Ultimately, navigating the turbulent terrain and dynamics of emerging markets merits scrutiny and thus demands a globally experienced management team to capitalize on opportunities. ICD AMD brings the best in-house and international management teams, a breadth of unique and well-positioned products and develops an ecosystem that boosts development across the OIC. This enables AMD to meet investor goals and realize ICD’s vision of becoming an emerging market leader in its domain. Company: Islamic Corporation for the Development of the Private Sector Name: Farid Arshad Masood Email: fmasood@icd.org Web Address: http://www.icd-idb.com/ Address: PO Box 54069, Jeddah 21514, Kingdom of Saudi Arabia Telephone: +966 12 646 8177 Fax: +966 12 644 4427
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