Investment

Family offices plough $1.4 billion into fintech so far this year – this latest bond deal underlines the trend

Interest in fintech ventures has recovered from its first-quarter Covid-19 swoon. Deals remain dominated by institutional players but family offices are raising their game. They have invested in 93 transactions worth $1.4 billion so far this year, according to Marc Debois, ING’s global family office head. 

The devil is in the detail, but returns from sectors like payment processing and insurtech have often been astounding.  Robinhood (share trading) and Chime (challenger banking) have boomed by using technology to save clients money. 

Newly-ennobled Lord Michael Spencer, founder of interdealer broker Icap, through his family office, has backed a £4.3 million funding at Digital Debt Capital Markets

The $130 trillion global bond market is next to face disruption, as digital solutions to inefficiencies emerge, just as earlier computations led to a derivatives boom in the 1970s and 1980s. 

Investment banks are keen to concentrate on value-added services by agreeing to disruption. Clients and investors want to pay less to participate. Everyone’s a winner.

Newly-ennobled Lord Michael Spencer, founder of interdealer broker Icap, through his family office, has backed a £4.3 million funding at Digital Debt Capital Markets, following a £2.5 million funding in 2019. 

Spencer’s former colleague at Icap, David Rutter, has contributed to the second round. Rutter’s role is key, as founder of R3, a developer of blockchain solutions to some of the world’s largest banks. 

Through blockchain, transactions are validated on a block, rather than recorded by an intermediary.  A later deal gets embedded on another block, and so on, to create a blockchain. In a sense, the system works like a tally stick, where notches, rather than messengers, bring news of events to recipients. 

DDCM wants to improve the plumbing in the bond market by using a type of blockchain developed by R3 called Corda, better known as a distributed ledger. Corda can be updated in real-time. It limits access to embedded data to the participants in a bond issue.

DCCM founder Charlie Berman used to be chairman of debt capital markets at Barclays. He points out bond market structures have not fundamentally changed for decades, as banks have chased business rather than investing in the future. 

By all accounts, you can still find traces of Cobol, a 60-year-old software language, embedded in its nether reaches. You still get wrangling between participants every time you want to nail down the final terms on a bond issue.

Transactions rely on communications from voice, e-mail, Word documents, Excel spreadsheets and chat rooms.  Market participants each input the same data manually, potentially creating different interactions of the same deal. All this needs to be reconciled.

Through its Agora platform, DDCM intends to offer a single record of data governing on bond issues agreed with every participant. Mistakes can be corrected, although this requires mutual agreement.  

Sums of interest payable in line with a final agreement can be calculated instantly by a machine, based on final terms. It currently takes days to reach a figure.

DDCM believes straight-through processing will save money, while helping issuers, service providers and regulators do their job. It does not rule out using AI to create an order book, as well as nailing down terms and conditions. It promises end-to-end care and maintenance for each bond issue throughout its life. 

Lord Spencer has invested in DCCM through his family office IPGL, which has backed a stream of ventures over the years. This year, as well as DDCM, it has invested £20 million in Bloc Ventures, an investor in deep tech. He sold Nex Group (previously Icap) for £3.9 billion in 2018.  

DDCM is not the only party keen to revolutionise the bond market. Rutter himself has developed and sold a trading system for Treasury bonds called LiquidityEdge. He has also launched a corporate bond system called LedgerEdge which facilitates collaborations using Corda. 

According to one bond market participant, the bond market was bound to evolve as issues became increasingly standardised. He is less certain on the role of blockchain: “Time will tell.”

UK fintech venture Nivaura sees a future where multiple inter-connected dealers using standard legal frameworks will operate alongside each other, and collaborate. 

Nivaura’s system, Aurora, is out to create a standard legal language for documents, so they can be understood more easily by participants, including machines. The initiative draws on “General Legal Mark-up Language” (GLML) backed by several legal firms.

Nivaura CEO Avtar Sehra believes cracking the legal code will help bankers to focus on value-added services, such as specialist analytics and complex hedging products.

Nivaura has a series of heavyweight backers like the London Stock Exchange and HSBC. It is advised by Spencer Lake, formerly top-rated head of global markets at HSBC, also a partner at fintech firm Element Ventures, an investor in fintech. Two other partners at Element used to work for Nex and Lord Spencer has also backed it. 

The London financial sector is a small world.

In Asia, the Singapore Exchange (SGX) teamed up with HSBC and Temasek in September to launch a $300 million digital bond for Olam International, a commodity firm. 

Digital Asset, a user of Corda, advised on the Olam transaction. It advises funding needs, recently winning backing from Goldman Sachs, Samsung and Salesforce. 

In a statement, Lee Beng Hong, SGX head of fixed income, said: “Debt capital markets globally are characterized by deeply ingrained in legacy systems and processes which can be made faster, more accurate and efficient with new technology. Our vision is to fully digitalize the end-to-end corporate bond issuance and asset servicing process.”

It may all sound awfully technical. But tech-driven disruption will be worth billions to bond investors haunted by legacy issues. 

Family offices should get ready to assess opportunities.

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