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Video transcript: Creating value in FinTech deals

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56:47

FinTech Deals

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Transcript

Andrew Macnab:

Good afternoon and welcome to Creating Value in FinTech Deals panel session. I’m Andrew Macnab, PwC’s FinTech Deals lead in the UK and I will be your host for today along with my colleague Alan. Just as a quick background to myself, I am a strategy consultant providing commercial diligence and value creation planning in pre- and post-deals situations, and my clients are typically private equity and other financial sponsors and also FinTechs - and that’s the large legacy financial technology businesses, all the way down to the smaller financial FinTechs that are growing and based across the UK and Europe. Just to provide a little bit of context for this session, I mean if you look at FinTech and financial technology, it has been around for decades and so have deals in this space. However, over the past ten years we have seen this deal market grow rapidly both in terms of deal volumes and in deal values. And if you look at the market there are thousands of scaled FinTechs across the globe and tens of thousands of smaller start up businesses and I think FinTech has rightly become an industry vertical in its own right. Aligning to that growth in deal volumes and values we have seen an increased appetite from investors for FinTech and that increased competition between the people providing the capital - they have to show the differentiation in skills that they can bring to the FinTech to try and help create value; and then on the flip side it’s brought greater scrutiny to the FinTechs themselves and these investors are spending more time and have greater rigour around assessing the opportunity. But at the heart of all of this it is the ability to create sustainable value and growth that really matters. Through all the deals situations that we have worked on in the past few years, and we’re talking about nearly 250 FinTech deals we have worked on, we’ve consistently seen the investing in FinTechs can create substantial value for both FinTechs and the investors, and that there are a number of value creation characteristics which have underpinned many of these deals and that really is the focus of what we are trying to get to today. Some of the value creation characteristics that we consistently see are around: professionalisation of the business; around client account management; sales; developing a clear product roadmap - that’s another key one; building technology to solve use cases rather than building technology for finding the use case to solve; successfully working through partners to build scale and acquire customers. As a FinTech matures addressing a shift from a slightly customised solution to a more scalable solution and successfully leveraging technologies, for instance, AI and ML either through building them yourselves or, with partnering, develop broader solutions in the market. So we’ve assembled an excellent panel today who can share their experience of creating value both as an investor and from a FinTech standpoint and can bring these characteristics to life. Let me just let the panel introduce themselves and let me turn to Ludovic first.

Ludovic Blanquet:

Good afternoon everyone. I am Ludovic Blanquet, I’m the Chief Product and Technical Strategy Officer for Smarttrade. Smarttrade is a 20 years old FinTech focusing on electronic trading for the capital market mostly for foreign exchange and fixed income. I used to work for Finastra before SmartTrade and I have been involved in a numerous number of transactions where we had to restructure the company and transform the company to accelerate the growth of both the revenue and profitability of the company. Very happy to be here with Andrew and Alan to share my experience around creating value.

Iana Dimitrova OpenPayd:

Andrew, Alan, very good afternoon to you both and to our audience. It is a pleasure to join you all today and thanks for having me and OpenPayd. My name is Iana. I am the Chief Executive of OpenPayd, and let me tell you and our audience a little bit about OpenPayd. We are in a really exciting space right now. We are a banking service for the digital economy and I guess the exciting part is that pretty much everything today is or is getting digital. To make things simple, what do we do? OpenPayd helps FinTechs, helps marketplaces and digital asset trading platforms - or now more commonly referred to as crypto - to move money around, so that’s what we do for our customers. Now that all sounds very simple but let me maybe just say for the more tech and regs savvy part of our audience that OpenPayd is a API-driven open banking platform. We are backed by several financial services licences both in the UK and in Europe and today we are servicing more that 200 corporate customers doing very close to 10 billion of transaction volume a year. Now I am particularly excited to be joining the panel today because OpenPayd actually sits in both camps - we are both on the investor side and also on the side of looking for investment. We very recently, actually as recently as last month, completed a deal to acquire a bank in the UK and - subject to naturally the relevant approvals from the regulators - we are working through the process of integrating the bank as well as its team into the core OpenPayd business. I guess equally, in the same time we are considering for the very first time as a business, as we are now scaling the growth, what is the type of partner and type of investment that we have to bring to the table in order to generate sustainable value, so from that perspective I’m really looking forward to today's discussion and thank you for having me again.

Richard Watts:

I’ll go next, thanks Iana. I’m Richard Watts, I’m Head of Strategy of UK mid and small-cap investing at Chrysalis Investments and Jupiter Asset Management, formerly of Merrian Global Investors that Jupiter acquired in July of last year. So I come at it from an investment background. So what do we do? We currently manage £7.5 billion of assets (Sterling) today and just under £6.5 billion of that is in listed equities so we’ve been investing listed equity money - well I’ve been doing it for 20 years now in the UK mid and small cap market. We’ve backed numerous IPOs over the years so we are very active in the IPO market in the UK. We have invested in businesses like Just Eat for instance that we cornerstoned. We are one of the cornerstone investors of THG that IPO-ed last September, Doctor Martens later on this year, so we are very active in that space. Two and a half years or so ago, November 2018 we launched a vehicle called Chrysalis, or what is now called Chrysalis Investments. It was called Merrian Chrysalis back then. What Chrysalis does is invest in private companies - we had dipped our toe in private investing in October 2017 when we made that investment in THG. We quickly followed up that investment in Transferwise, or now Wise and then we quickly realised that we probably needed a dedicated permanent capital vehicle to do more investing in the private space. It all came about from our frustration, really, that as one of the largest investors in IPOs in the UK, we were increasing realising that more and more of the fastest growing most innovative disruptive companies that we were coming across were actually private businesses that were exploring the potential of an IPO but were ultimately choosing to stay private. And finally I think we decided we needed to do something and Chrysalis essentially was the response. Chrysalis invests in private companies as I said so currently today the vehicle is £1.1 billion in size. We’ve scaled it rapidly. We launched it as I said in November 2018 with a £100 million. We have done 5 fundraisers. The latest one that we closed out four / five weeks ago when we raised £300 million, so in terms of investments, a lot of exposure to FinTech. If we look at our FinTech companies that started with TransferWise, Klarna, FeatureSpace, and German business insurance technology business called Wefox. We are very exposed to the FinTech space, we like it. It has grown very quickly and I think for us we offer something that I think goes across the board. It’s very compelling, we invested in listed equities, we cornerstoned IPOs and now we have got a scale vehicle that can support private companies as well.

Alan Rennie:

Thanks Richard and good afternoon everyone. I’m Alan Rennie, a deals Director at PwC focused on financial due diligence and I work alongside Andrew to head up our dedicated FinTech deals business. As Andrew mentioned over the last few years we have worked on around 250 FinTech transactions providing core diligence services including financial, commercial, IT and Tax work as well as lead advisory, fundraising and structuring advice. Historically we are much more focused on the larger parts of the market so FinTech’s with positives of EBITDA and proven economics and this is still the core of our business today. However, as venture capital firms have stepped up and private equity houses have stepped down into the growth equity space, we are increasingly working on investments with FinTechs that are at earlier points in their life cycles and obviously diligence is more expected from these investors as a result. Our work completed a lot of interesting deals on behalf of the members of our panel today and I hand back to Andrew to kick off a discussion on those deals and how you have created value.

Andrew Macnab:

Just to say that there is a chat box on your screen and you can submit questions as we go along and we will try and pass on some of these to the panel to get their views. Feel free to send in questions.

Turning to our first topic and Ludovic I’ill turn with you. From your experience what are the typical value creation activities that you have utilised in either in your role as a FinTech investee or a business or as an investor, if you think of your time at Finastra.

What were they? What made them successful? What were the challenges involved, and how did you mitigate those?

Ludovic Blanquest:

Thanks Andrew. I have been on both sides of the equation as you said both as the acquirer as well as the one being acquired and I have been working with a number of private equity owned businesses. I think there are three characteristics which are summarised in one word, all of them come with a playbook for creating value. So each of them are going to have their own views of how you create value in a company but it comes down to essentially three dimensions: a super performing sales and marketing automation engine which is made up of people and systems and we will come back to that in a minute if you want; a product organisation that is very well disciplined, kept under tight management in terms of delivering the right product at the right time, for the right market segment being identified by the first component - the sales and marketing team; and then the third one is having the right tools to support all of that and seamless delivery of a product or a service whether you are on SAAS or on premises it doesn’t really matter but you need to have the tools to make that delivery. It seems to be easy when you say it but it is very complicated to implement. The sales and marketing automation, it's about getting two sides of a business to return to compete with each other to work together in a seamless integrated way. The new tools that are delivered by the likes of market outreach, Salesforce etc. are helping but that is not sufficient. You really need to have clear processes and people who believe and then follow those processes and make sure you can repeatedly sell the same product and the same services to your client in your chosen customer segment. On the product you need to make sure that the product people and the technology people deliver a product that serves the needs of your client. Again easier said than done because how do you manage to collect the needs of your clients to make sure that you serve them. In a B2B environment, its difficult to manage, to run surveys or have customer test groups like you can have in the consumer environment, so what you do is you create a customer advisory board, you have a roadmap that you share to give a degree of transparency and you need to monitor your competition which seems to have intensified dramatically in the FinTech space in the past few years with so many innovators all over the place.

Finally all the tools which is the infrastructure of the company around implementation, running smoothly your data centre, your operation.

All of that under tight cost control because that delivery needs to be really a factory. And that body of processes, procedures, discipline and tools is difficult to fine tune to the point where you deliver that value. But it can work. I do believe personally that the biggest factor of success to make all of those dimensions to work all together seamlessly is other people. You need to make sure you have the right people who believe in the same story and have the same future of working together and share the same discipline in the long run because it is not something you implement in six months time - it’s a two to three year journey before you get to that inflection of the curve that is then becomes sustainable as Iana said earlier. Delivering that sustainable value of a long period of time is the challenge. Doing it over 12 / 18 / 24 months is not easy but feasible. It is managing it for 3, 4, 5 years during the life of the investment of your investors. It is very important and projecting it into the future can only be done with those dimensions I think. So sales and marketing automation, strong product delivery and all of the tools and infrastructure around it to support in terms of operations and implementation and support.

Andrew Macnab:

Okay, thanks for that Ludovic. Iana, do you just want to provide your perspective also.

Iana Dimitrova:

Sure, more than happy to and I guess that to me it is very interesting to actually listen to Ludovic because he is definitely one step ahead of me in terms of the actual integration of two businesses and he is covering it from an operational day to day business as usual running. So hopefully Andrew, next year, same time we can sit here and have that same discussion and I will come back with the lessons learnt. But until then let me maybe take back one step and give you a slightly different view which is the thought process before the acquisition and maybe tell you a little bit about how we approached that. So I think, a very important step before actually any transaction is to pause and identify the strategic gaps and benefits ahead of actually any acquisition, any integration. So for example in our world, the banking as a service world, we actually start backwards. So we look at our corporate customer and we look at where do we have to create value for the customer, and work backwards from there. So I guess in our case we looked at the ecosystem and we looked at the needs of our corporate customers and what we identified is that there is a core capability that is missing in our offering and that is preventing us from generating more value for the customer and respectively more value for our business and that was a core banking capability. So I guess if I had to give a piece of advice it is doing that gap analysis in a very thorough manner, making sure you have the right level of support at that point in time be it in terms of regulatory analysis or financial analysis so that you identify really where the gaps are before you go for an acquisition. Now of course there can be a very burdensome process of finding the right target because that is not an obvious exercise either but once that is done I guess other than the operational planning of the integration there is one very important aspect that people may often underestimate, and I am saying this based on my own personal experience. And that is bringing the vision to the conversation early enough, and bringing that vision both within your own team but also for the team that you are looking to acquire because if both teams don’t have an intimate understanding of what is the value that will be created at the end of that deal you are risking of going in to a very heavy and burdensome exercise without the buy-in and the support of your people. So again bringing that vision, bringing the synergies, the added value of the combined businesses is absolutely critical to have that advocacy internally but also the buy-in within the team that you are acquiring. Now I am going to go through the integration process and the importance of having a very lean roadmap and prioritising, but it is absolutely essential and I guess we are experiencing this now first hand. There are 15 different workstreams. Of course we can’t capture everything in the same time with the same breadth so making sure that you as the acquiring business understand well the priorities that have to be completed in order to go to market, so I guess in our particular case that was twofold or that is twofold, it is getting the regulatory coverage in place, making sure we have the right sign offs because that is the only single barrier to go to market, of course sitting at the very double barrel list and then making sure that the technology work is on the way because we want to make sure that we start capturing the revenue opportunities right away. And I guess finally, echoing what Ludovic said is a word of caution in all that project planning and strategising is - really not losing sight of the people, because they are absolutely central to the success of both the transaction but then for the scaling and growth of the business. So in any transaction inevitably you are putting together two different cultures so having that awareness of the cultural differences and putting that to the table and working through it is absolutely fundamental and I think when approached with awareness and understanding is always very helpful.

Andrew Macnab:

Thanks Iana. Just to say that we’ve got a couple of questions that have come in, please feel free to send in as many questions in as you want and we will try and get through them. Richard - do you want to give us your views from an investors standpoint?

Richard Watts:

Yes Andrew. From an investor perspective when we look at companies I mean firstly we are trying to identify those businesses that have got a product or a service that they can sell or rather that their customers really want to buy, and does that product or service have a very high utility value and so can it be distinctive within the marketplace and therefore obviously grow and scale and from that obviously the rest follows in terms of that is how you are going to restart part of the service that you can sell. When we think about it, when we think about some of the FinTech businesses that we have invested in, I will just give you some examples. I mean Klarna, what attracted us to Klarna was it was a product that we thought was very disruptive, it is disrupting the credit card industry. What borrower wouldn’t want to borrow money at interest free rates and it is a merchant funding model so the utility value for the consumer is very high because the alternative is borrowing money on a credit card perhaps and paying 20, 25, 30% APRs or using a buy now pay later service where it is interest free. It has a high utility of involvement for a merchant so a merchant drives increase conversion, increased basket sizes and therefore increase revenue and profit, so it is merchant funded so obviously someone is paying for it but it works for the merchant and works for the consumer so the utility value is very high. Likewise with Wise when we invested in Wise, again we have all had the experience where we were using banks and paying anywhere between three and seven percent FX fees when you were transferring money and your transfer maybe taking three, four or five days to turn up at the other side. I think we can compete on price service and convenience and price average fees, and in terms of service, 35% of transfers are done immediately, and obviously it is very convenient because you can transfer money on your app. So is the utility value very very high, and if the answer to that is yes, then it is a really good starting point. I think kind of beyond that in terms of how I think we can help, we have got lots of experience, we have invested in thousands of companies over the years and I think we can share the benefits of that experience with our investee companies and try to help them shape the business as they grow. I think that is a real challenge, I think lots of these companies they are growing very very quickly and there are lots of choices to be made and I think it is very important that companies make the right choices and not bad choices because unwinding or turning back the clock can be very difficult and I think we have got a good sense of what we think good looks like and I think that is a very unique perspective particularly coming from a listed world where many of these private companies are on a journey towards an IPO at some point in the future. So I think we provide that type of insight and I think some of our invested companies and the private ones find that very very helpful. We also provide capital. Again, capital is very important because you need the money to grow and scale. It is about improving people and the quality of the people that you hire along the way, because good people make good things happen so it is about us supporting founders, entrepreneurs on that journey and the reality is when you provide capital it just means you can increase the quality of everything that you are doing and so for us our side of this really is very simple. I think we’ve created a proposition where we can provide a lot of capital and we can provide the mechanics to a lot of our private companies. I think a good example of this was last year. You talk about value in creating activities, what do your investors do in a difficult period? If we go back a year or so at the start of the pandemic that was a very difficult period for lots of companies generally, but private ones in particular, where funding for a period of time for a few months did dry up and I think in terms of what we did, we provided more capital to our companies so alongside other major investors in Starling Bank, we injected £100 million into that business across 2020. We invested more capital into Wefox to allow Wefox to keep on growing very rapidly and we also made an investment into FeatureSpace as well so a lot of things really Andrew but that’s my perspective anyway.

Andrew Macnab:

Great, thanks for that. Can I ask just one question on that point Richard, do you think you increasingly have to differentiate as an investor, it’s a competitive game out there and just previously providing capital you need to provide more than that to be able to win from your standpoint.

Richard Watts:

Yes Andrew, that is absolutely core to what we have been doing, or trying to do and to develop. It isn’t just about providing capital because there are a lot of investors out there that can provide capital - it is about providing other things, I would say that the one thing that we can do we have always viewed ourselves as long-term investors, even in the listing world, is that ultimately that you find that a lot of the capital and private market is looking for an exit on IPO, and for us an IPO is just a stage in the journey. We have got investments in the portfolio that we invested in at IPO six, seven, eight, or nine years ago and we still own those companies today. So for me it was about engaging in these companies earlier, investing in their support and growth when they were private and helping them to transition to public market but it is a long term relationship and I think that really matters to founders and investors because they want the confidence that as they go along that journey that they have got a supportive investor base and not someone who is looking to sell out on an IPO.

Alan Rennie:

There’s an interesting question has come in which is “In the SME space how much do you foresee the use of AI by FinTech for value creation compared to being used by banks in the UK”? Iana do you maybe want to address that question?

Iana Dimitrova:

Yes absolutely, sure this is something Alan that we are very actively thinking about actually because if you look at the ecosystem in the space that we are in right now, I’m referring to banking as a service for the digital economy. Now what we have seen in the last couple of years especially accelerated by COVID over the last 12 - 14 months is the trend of remote service delivery and digitalisation of new industries. Now what that means actually in practice is that the demand for embedded payments and banking services has soared massively. Now I guess the knock on effect of that is that it made us to pause and think about the future of banking as a service and I am absolutely convinced that the future of banking as a service and embedded finance is very similar to that of the cloud, okay? So banking as a service is going to be omnipresent, it’s going to be invisible and it is going to be readily available with any product or service that is being consumed. So if I had to make a comparison in the same way that you would get your laptop or your phone Alan today with an operating system on it, that is going to happen with payments and banking and this is how deeply embedded they are going to be embedded and integrated. Now there is a fundamental challenge to that however, I will come to your question about AI. The fundamental challenge is regulation and anyone in payments knows that onboarding means very burdensome compliance, very burdensome risk assessment. Now how do we break that in order to get to the market instantly. The only way that we can do that is through AI. I am absolutely convinced that in the future of both compliance and risk assessment. Why? Because today we are going through very manual and burdensome processes that are prone to human error in terms of verifying customers. Yes in the consumer the retail space that is being solved through technology. When you look at onboarding corporates however especially large corporates that trade across borders touching multiple jurisdictions you simply cannot automate that yet. Neither can you automate all the risk-based decisions so the only way to do that is to be able to tap into a pool of data to make those decisions. So again going to the KYC AML and transaction monitoring all of that is going to be done through AI so is going to be the risk assessment and the credit based decisions. I will just give you one example and I will stop there. If I look at our transaction volume over the last year, we have had more than 10 billion of transaction volume. I don’t have the exact breakdown of transactions but I can absolutely guarantee you that the quality of the fraud and the AML rules that we can get on the basis of those transaction volumes and numbers are always going to be superior than even the best credit risk and compliance experts. So to me AI is absolutely the future of banking as a service and it is AI that is going to ensure that it is readily accessible to everyone and is embedded in every digital product and service on a go forward basis.

Andrew Macnab:

Thanks Iana. Ludovic, we have a question that has come in about partnership’s and just the role of partnership’s in helping FinTechs accelerate their own scale whether that’s access to customers leveraging technology. How important do you see partnerships in terms of delivering value creation and growth for FinTechs?

Ludovic Blanquest:

They are absolutely critical Andrew, because if you think about it, as a FinTech, even large ones nowadays, you remain a SME compared to the clients you are serving, especially if you are serving very large banks, so you remain a small entity and you have to be very very clear about the sort of segment of clients you want to serve and that by default defines what is your core business. Is my core business to be in an electronic trading transactions like we are at SmartTrade? Is it including, I don’t know charting, chatting capabilities or even some banking on embedded finance as Iana just mentioned? Clearly not. I am a technology provider that is providing technology around electronic transactions across mid tier assets but not necessarily the financing of the infrastructure that I am running. So to do that and it is very theoretical I could then join into a partnership with Iana’s company to enrich my valuable position and benefit from a network effort of having more partners around me. This is something that has proven to be very successful for a lot of companies where you know what is your core business and everything that is adjacent or on the fringe of your own core business, you go and partner with a leader in that segment and together your value proposition is stronger. It is not easy to implement, it is not easy to run, but when you do it right it delivers absolutely tremendous more value. Partnering with the bank and having your bank’s customers help you design your product is also something to create tremendous value because that is something that is a know how and an experience that you cannot really build inhouse and having that imported from the client into your product creates better value. So those two dimensions, partnering with your client and partnering with your best in class adjacent to your value proposition creates amazing value.

Iana Dimitrova:

Andrew, if I may just add one thing here. I couldn’t agree more with Ludovic and I believe that the increasing market cap and market size of embedded finance is a testament to that. Because embedded finance is all about partnerships and if you look at companies, there’s just one name that comes to mind now - Grab for example is a marketplace, their revenue coming out of their embedded finance proposition is now actually exceeding twice I think the revenue that they generate from their core products and services, so that must tell you something about the value of partnerships.

Andrew Macnab:

I just want to just turn, we touched a little bit around creating alignment and it seems critical to any deal, that first of all within the FinTech you need to create alignment throughout the business so that you are all pulling in the same direction - and Ludovic you touched on that a little bit maybe you would like to explore that a little bit more - but also you have to think about how do the investors and the FinTechs create alignment so that they are all pulling in the right direction (a) within the timescale that the investors are there, but fitting that within a longer term growth ambition for the business. Ludovic, if you think about that question of alignment, how do you deliver that alignment both internally within the business and between the investor and investee?

Ludovic Blanquest:

Let me state the obvious - first listen to your shareholders and your investors. It is a tough job which Richard mentioned earlier. It is very important that you listen to them and because they can bring a wealth of experience, that you cannot build only in one company. When Richard invests across 20/25 different FinTechs, and he and his team are sitting on the board of all of these FinTechs, they learn tonnes of things on the market that can bring back to you without breaching any secrets obviously, but they can bring back to you best practices and share those best practices. So your alignment is created very often by your operating arm of your investors who bring that best practices, helps you develop and blends your own best practices to a wider body of knowledge for implementing that value creation. I would also be very transparent with your investors of self-rating and assessing where you are stronger versus where you are not so strong, so we can bring you the expertise because they have across their investment cycle, they come across some many businesses so many different experience, that they might be the one that may open the right door at the right time and that will make you turn an area for improvement into a strength. So really listen to them, get their access to their operating partners and operating arm because they can really give you access to best practices that you can learn from and then lastly share your areas for improvement with them as they might be the one that unlock the right door to get you to the next stage. I have seen it time and time again happening within the companies I have worked for that the investors are just the one that I got to unlock that door that gives you more stability and more value.

Andrew Macnab:

Thanks Ludovic, I mean Iana - you are living this life just no. Do you want to bring us your view and status?

Iana Dimitrova:

Absolutely, probably Andrew, if I were sitting in your chair I would have loved to ask the question in slightly a different way which is - how to choose the right investor? For us for example now we are in this position whereby our business is entirely self funded. We have managed to get a number of licences to get the business to over £10 million of revenue and the businesses are entirely self funded backed by the founder, so it the very first time in our growth journey that we are actually thinking about bringing external people to the table. And I guess capital being the obvious one, we are looking beyond that and thinking about the areas where we need improvement as Ludovic said. There are three areas that immediately come to mind, one is the access to talent and access to a pool of talent that we don’t necessarily have that access to today. The second one is help with prior experience from a broad range of companies in terms of scaling the sales and business development function to get to that iteration and growth scale and the third one is strategic partnerships, so ideally partnering with someone that can bring new used cases, new industry verticals from their portfolio which we will have an immediate synergy with. I guess this is how we think about the process, at the very early start of the process and honestly I would very much welcome thoughts from both Ludovic and Richard on that too, how to select the best partner.

Richard Watts:

I will probably jump in there, Iana. I think from our perspective, it is about having a partnership with a company and their management team and it is about creating alignment and obviously the obvious way to create alignment is equity participation or incentive packages. And quite simply we want to be in a position where if we do well, company management and employees do well and vice versa. It’s got to be proper alignment of interest that you know - we can’t be doing well out of the investment at the expense of other people. It is just not going to work and we know that it just creates tensions, problems down the line. I think though it goes beyond that for us, it is not just about equity participation, incentivisation and making sure that people are aligned with us. It's about being successful with it as well because recognise that things change as companies grow and develop. If you look in the private market you get this preference equity structures and in a way it helps because it allows investors such as ourselves to commit capital and lowers our downside risk - I get it, I understand it. We are not used to that in the listed world frankly so we have probably got more appetite for risk and I think for us if we have got high appetite for risk, it shouldn’t come at the expense of other people. So what if a business that we invest in wanted to do some strategic M&A, and if you think about it you increase risk in the short term and seems unfair to us that employees and management and the people who need to drive a positive outcome from doing some strategic M&A for instance, actually take on more risk because in the way equity capital stack works. We are very flexible around incentivisation structures because we want everyone to be aligned and so I think for us it is about a partnership that is flexible and again that goes a long way because it is not about us investing and making great returns at the expense of everyone else - we recognise that you need to share the benefits with everyone that is actually driving that value.

Alan Rennie:

Thanks Richard. I think it is obligatory at the moment to ask about COVID. It will be interesting to ask - 1. How COVID has actually benefited you especially given these tech businesses have been a big winner out of the whole situation and - 2. How that’s either helped or hampered deal processes over the last twelve months. Ludovic, maybe we will start with you.

Ludovic Blanquest:

This is probably the most challenging question of the panel, because we refer to FinTech as one group but we serve very very different types of constituent and clients. So I am only going to stay in the B2B space where we serve banks because that’s where I have done most of my career selling software, technology and marketing technology to banks. The financial crisis didn’t, wasn’t sufficient for the bank to realise that their technology was outdated and that they weren’t embracing the new ways of working and the new ways of consuming banking services and that is true across their retail customers as well as their SMEs and multinational customers. With COVID we just realised overnight from the Friday to the Monday morning they had to have everyone working from home, all of our infrastructure being accessible remotely and on top of that scalable for some of them. So if you think about it, let me focus on capital markets for a second. A trader that used to work with eight screens ended up being cramped into his bedroom with one laptop screen, that’s not exactly the best way of delivering service if you are the IT manager of that bank. And on top of that because everyone was scrambling for information the vulnerable transaction increased and volatility increased and your little trader being cramped in his bedroom with his laptop screen was really not able to see what was happening in the market. So I think besides what we have all read and heard already which is automation, digitalisation is important - what you see is that suddenly even your internet users at banks feel as professional users of your IT infrastructure and technology infrastructure, require them to be delivered in a consumer way. I think that the next time our B2B customers are requesting us to be as good as a consumer brand when it comes to delivery, user experience, user interactions, UI etc. are just being the next new thing that we have seen been pushed onto us by our customers and to link it back to a previous theme - if you need to be able to cram onto a very small laptop screen so much information the best way to do it is to help that trader or users with new tools and the new tools are delivered by AI. Because AI can manage and deliver all of that data and intelligence for you and summarise it and sensitise it in a way that you can really make a decision and make the right next step decision. We have heard about it, digitalisation, automation all of that is happening and has been happening for years. COVID is obviously accelerating that and all the banks and all of our customers are investing massive amounts of money to do that but I think what we also see is that the emergence of new requirements saying hey I don’t know whether tomorrow I will be able to access my eight screens so make sure that to support me you help me be more productive with the right tools so that I can do it on my small laptop screen from my bedroom and that’s what we see as the second order consequences of a crisis. Personally I think we are entering the golden ages of that UI/UX experience in the professional environment and that will put tremendous pressure on the IT manager because not only they are having to fix what they haven't fixed post the financial crisis which is digitalisation automation, STP everything moving to the Cloud, security etc. etc. but on top of that they are getting a new set of requirements which are a very very high barrier and often we refer to the millennial getting into, and digital native getting into the office. Up until now that have been able to shut up and just use the black screen with the green characters but it is over because they have been working from their home for the past year and say hey, I don’t understand why I have my smartphone that has better resolution than my screen than what I get from my office and that’s over. We have to respond to that and help those people do their job better and that’s where I think we are getting into the golden ages of AI as a tool that supplements and helps people to do their job better.

Alan Rennie:

Iana, same question to you, obviously you’ve also done a deal over the last 12 months.

Iana Dimitrova:

I will be very brief. To me COVID has been a tremendous opportunity. I think for companies that are agile, companies that had appetite for risk, the number of opportunities that became available in the market same time last year I guess because traditional capital dried up or because some business models proved to be not so well thought through, has been absolutely tremendous. So if I had to sum it up the last 12 months have presented a number of opportunities for growth and I am talking here about the M&A space growth through acquisition simply because traditional capital dried up and people were sitting on the fence for a few months so the, I guess crazy, multiples that were seen just before that, there was a window of opportunity there to go and get good assets at a reasonable level. So again for those that had the appetite, the risk appetite and the ability to move quickly because either they were cash flow positive or because they had a war chest to go in that direction - I think that has been a great opportunity.

Alan Rennie:

And Richard, from your perspective, you probably have made the most acquisitions and investments out of the group. How has COVID impacted your identification and valuation and execution of deals?

Richard Watts:

I think Alan what you see is in times of stress it creates opportunity and if we go back a year or so ago there was opportunity across the board. Tech enabled are the businesses that now seem to be the structural winners here. If you go back, listed world anyway, the valuations plummeted, so there was an incredible opportunity to buy these structural winners had great valuations, and that’s what we did, so in our listed funds, we had lots of exposure to e-commerce for instance and those businesses have done very very well in Chrysalis we have a very tech enabled portfolio of assets, almost exclusively. There were one or two issues here and there, things that were travel related for instance, but almost across the board it has accelerated growth by two, three, four years in some cases. It will be very interesting I think now that lockdowns have started to ease and end but in our own view a lot of this kind of acceleration of growth will endure and will be sticky. It has accelerated everything and I think Iana made a good point for those businesses that have been able to be flexible and again coming back to having the support of shareholders for those businesses that were able to be flexible in that environment it created massive opportunity and again where we tried to do that across the portfolio by putting the money to work and it was gone pretty well frankly. It has accelerated everything. It has changed the way businesses operate with more remote working. I think that is here to stay, personally I never believed that everyone would sit at home for ever more but I fully expect that lots of people really want more flexible working. We are seeing it with recruitment companies that we own for instance in terms of hiring people, hiring people remotely, doing Zoom calls, the whole interview process is sped up and it's just more productive and actually there is a willingness from the employer that they don’t necessarily have to be located in the head office, they can work remotely so again I think that creates opportunity for those businesses that are flexible. So I think we will look back and we look at COVID as a very bad human tragedy but ultimately for tech enabled businesses it has just been a big accelerator of everything.

Andrew Macnab:

Have you observed certain consumer behaviours that have changed quite dramatically from COVID? I think people have quite seen what full gamut of change looks like and it hasn’t really bedded down but it will create, as consumers change for instance, in using cards rather than cash and the decline of cash to a certain extent has been accelerated. There will be factors that can be thought of as areas to create value around and technology enabled businesses should be the ones that can exploit that best. Iana, what do you see there for yourself and the role of banking as a service and that future landscape?

Iana Dimitrova:

Great question Andrew. As we mentioned before the trends of automation, trends of digitalisation, that was already there as Ludovic said, but the last 12 months showed that everyone needs a digital delivery channel so if traditionally we were used to seeing some sectors delivering services digitally and others say healthcare or education still being very much off line, the last 12 months accelerated that moving to a digital delivery channel. So what that means for banking as a service is that the requirement for full integration and the requirement to embed the payments in the banking services within those businesses becomes fundamental, because there is no delivery of any service unless you can find a way of moving funds around. So I guess for us the opportunity has grown tremendously in the last 12 months and we are seeing this because we are servicing some of the fastest growing industries - for instance we have presence in Crypto you can see that the volumes going in that direction are doubling incrementally every month so from that perspective, banking as service is only going to grow and the importance of having great technology, technology that is agile, very easy to integrate and also have a very broad regulatory infrastructure to cover cross border transactions globally is fundamental.

Andrew Macnab:

Thanks for that. Now I am conscious of the time and I’m sure the five of us could wax lyrical about this for the rest of the afternoon but I think we have got to wrap up at this point. First of all I would just like to thank the panel for their insight in this topic. It is fantastic to hear your experience and we scratched the surface just now and you obviously have done lots of deals and been involved in lots of situations. There is a lot more that can underpin this. In the next few weeks I am going to be relating some blogs and articles around value creation in FinTech deals and think about this more widely because there is a lot to cover in this. And as Ludovic said, FinTech is a very broad landscape made up of lots of very different businesses direct to consumer, B2B, different sub-sectors of financial services so there's quite a broad landscape around there. And finally I just wanted to thank the audience for listening in and asking questions. I hope you found it whether you are an investor, a FinTech or a market participant, I hope you have found the insight which has been shared by Iana, Ludovic and Richard helpful. Thanks then, much appreciated.

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