Part of the fun of having friends in the investment industry is learning about their take on pertinent topics. This month, we conversed with Kelvin Lee – CEO of Singapore-based private investment platform Fundnel – on all that has made news in the past year.
Fundnel is a private investment platform that enables our network of accredited investors to invest in growth and pre-IPO stage companies and funds. Kelvin is responsible for driving growth and initiatives in every facet of the business.
A former investment banker turned entrepreneur, Kelvin was previously in J.P. Morgan covering clients in North and Southeast Asia and has raised over US$20billion for clients to date.
Prior to J.P. Morgan, he was with Standard Chartered working on leveraged and acquisition finance, balance sheet & capital structure optimisation, and other alternative structured capital raising solutions such as the securitisation of receivables and the provision of sale and leaseback structures.
Below is a QandA with Kelvin and our CEO, Asheesh Chanda, where we asked them both six of the hottest questions about all things investments and finance in 2019. And even asked them their crazy-egg predictions for the coming year. Happy reading!
For you, what were your key highlights of the year 2019? Everyone has been talking about the Trade War and its implications on the financial world, but are there other market undercurrents that missed the spotlight and which investors need to be aware of?
While the trade war and other political events have unfortunately impacted numerous economies, the focus of many large conglomerates has shifted their attention to Southeast Asia, much to our benefit.
Securities that are issued by companies not listed on the stock exchange are termed unlisted securities, which can be further divided into two categories of deals: in a primary deal, investors are purchasing shares directly from the issuing company, on the other hand, in a secondary deal, investors are purchasing shares from other sources, typically the employees, former employees, or investors. From our vantage point, the secondary deal market has been growing steadily, parallel to that of unlisted securities in general.
The impetus for growth, similarly, is due to the extended period of time in which companies remain private, prompting employees, both previous and current, as well as early investors to sell their shares in the secondary marketplace.
There has been much talk of recession, but there is also an undercurrent of stoic optimism in the markets. With tariffs on China, exports from Vietnam have already grown by an additional 2.3%, and Malaysia, Thailand, Bangladesh and the Philippines may soon come out as winners too. Amazon – the biggest name in e-com has already made India its home base. Sustainability and impact investing have also been major talking points in the market this year, and will continue to do so.
Fiscal policy has been in the limelight this year, and investment-led stimulus could be an appropriate action to restart growth in stagnating advanced economies. We’ll see policies that prioritize investments in infrastructure, human capital, R&D and green initiatives, complemented by structural reforms that enable responsible and inclusive businesses to thrive.
I can see the APAC countries leading the world in finding a balance between technology integration, human capital investments, and the innovation ecosystem. I don’t think this has been highlighted much, but the future is definitely Asian-flavoured. I can imagine the biggest CEOs soon coming down this side of the ocean, and talking business over sake and satays.
According to reports, seventy-one per cent of Gen Zers, 66% of millennials, 42% of Gen Xers, and 43% of baby boomers align their spending with their values. The ‘aspirational class’ as they are called, spends more on brands whose values they respect, and may stop buying products from companies whose values are fundamentally in conflict with theirs. How do you see this reflect in the investing world, and how do you solve for this requirement?
At Fundnel, we take pains to understand every investor on our platform intimately. We take into account each investor’s investment mandate and supplement that knowledge with recent activities, crawled from verified news sources. Through the means of a proprietary algorithm, our system generates a list of prospective investors for every deal on our platform. This targeted approach increases our odds of closing the deal by 2-3 folds. Additionally, our sector, stage and geography agnostic approach to curating investment opportunities allows us to amass an array of deals for our network of investors with varied preferences.
We also offer a unique revenue sharing structure, C.LEVER (a portmanteau derived from “crowd” and “leverage”), to suitable fundraisers. C.LEVER is a scheme which allows a business to receive investments from a group of investors, and the business, in return, commits to sharing a portion of its revenue. The payouts to investors encourages brand loyalty; investors become ambassadors, advocating the products and services to their friends and family.
Beyond Meat is an excellent example of how the aspirational class chooses to invest. Recently, we had an investor have us customise their portfolio and steer away from certain sectors like tobacco and cannabis; even though they are high-growth stocks. And we were obviously happy to do that! Customized Kristals are an easy way for our investors to create portfolios which align with their worldview and value system.
This concept of ‘value-based brand loyalty’ also goes on to prove that wealth managers cannot take a cookie-cutter approach to investment products any longer. We have recently on-boarded several strategies on our platform like the 4Sight Kristal, and our suite of water Kristals which helps investors become a part of the clean water revolution. We also have two ESG Kristals – one which is US-focused and the other focused on European markets – which invest in companies with high ESG scores. This is definitely a sector which we aim to include more offerings for in the near future.
The past 2 years seemed to many to mark a heralding of the ”death” of the IPO. We have seen instances where private companies like Slack and Spotify have opted to approach public listings directly, and where we have seen outsized returns for private investors vs their public investor counterparts. What does this mean for your investors’ universe, and is this a trend or a sign of things to come in 2020 and beyond?
The market is witnessing two trends:
- companies are opting to stay private longer and when they decide to go public, they opt for a different route, i.e. a direct listing; and
- investors, especially the younger ones, are not participating in the public capital markets. These shifts are ramifications of an antiquated system.
The journey a company undergoes to get listed on the stock exchange is immensely costly and time-consuming. It is also important to take opportunity cost into account. The management team almost entirely focuses on the public offering, with roadshows taking precedence over other areas of the business.
Considering the tremendous amount of dry powder in the private equity and venture capital space, estimated at USD 2.5tn, it is a commonplace occurrence for a company to raise hundreds of millions of dollars from the private market. For the same reason, we see a spike in the number of direct listings — it is a fraction of the costs associated with IPOs and existing investors are not bounded a lock-up period and can immediately trade their shares.
The capital markets undoubtedly function like a well-oiled machine, but it has not evolved to serve the needs of today’s companies or investors, and until it does, these trends will persist for the foreseeable future.
The wise investors must take a systematic allocation approach to investing, diversifying their portfolio with various asset classes. A notable number of research by leading wealth management and consultancy firms have recommended a 12-15% allocation to private equity. Unfortunately, opportunities are reserved for a small pool of select people in the know; smaller funds and individual investors would find quality deal flow a challenge — that is the gap Fundnel strives to bridge by creating access to PE/VC investments for the everyday investor.
I wouldn’t call it the death of the ‘IPO’ as much as a doing away of a business model that was probably not as fruitful. If I had to take an analogy from another industry, I would say companies are being very Netflix-y about their listings and choosing to go to where the investor is. There is a flux in the IPO industry currently, and it’ll take a while before it finds its footing. I think we’ll see more of the same in the next year – oversized valuations, some crash and burns like the UBER and WeWork sagas, and hopefully some surprises. A key takeaway here, however, would be not to look at instant profitability as an indicator of a company’s potential. UBER may have undergone a loss today, but as we have seen with Amazon before, companies that have made a mark as disruptors and are changing the way an entire sector operates, can just go on to become industry behemoths. As the way companies file IPOs change, investors need to change perspectives too – we cannot use traditional parameters to evaluate these new-age technology startups and disruptors as we did with industries a decade ago.
With IPOs and other such market upswings you also get drawn into the age-old trader’s paradox. If something does well, you want to have more of it and vice versa. At Kristal.AI, we always tell our clients to have a solid core to their investments and use IPOs and other personal preferences as tactical bets.
Investing in impact and sustainability has been a key theme making headway this year. The Monetary Authority of Singapore (MAS) announced that it has set up a USD2 billion green investment programme to invest in public market investment strategies that have a strong green focus. Why do you think this sector has become the forefront of investor interest, and how do you think private and public investors can leverage opportunity in their respective spaces?
The climate crisis is an accelerating and persistent issue that has plagued the world for decades. However, the rise in impact-related deals lies in tandem with technological breakthroughs and the prosperity of nations — better technology paves the way for more effective solutions to positively impact our community, while prosperous nations tend to have the capacity for altruistic endeavours.
Investors who are new to impact investing must prioritise acquiring knowledge of what the term means and entails. Impact investing is an umbrella term that encompasses an investment into any enterprise that generate social or environmental benefits, which could range from an EdTech company to a solar energy company.
Individual investors, in particular, tend to lack the domain expertise to make decisions. In such instances, private investment platforms such as Fundnel can facilitate the process. Majority of Fundnel’s deals are first syndicated to a select group of investors with the purpose of securing an anchor investor before the wider network is invited to co-invest in the deal. The anchor investor leads the due diligence process and prepares the term sheet for the fundraiser. This arrangement allows individual investors to co-invest alongside professionals.
Climate change and environmental issues have been buzzwords for over 4 decades now ever since Rachel Carson wrote her famous book Silent Spring. But this is the first time that the financial world is taking the lead in fighting global climate issues. As Mr Ong said, finances mobilise the world. We have already seen the European Investment Bank pull away from fossil fuel energy projects; essentially prodding companies to look for alternative energy sources. And the MAS’ decision could not have come at a better time.
There is a global consensus shift towards adopting more climate-friendly measures. The International Energy Agency (IEA) with its 2040 scenario, is pushing for a fourfold shift to hydro and other renewable sources of energy. The ASEAN (Association of South-east Asian Nations) has upped its target of deriving energy from renewable sources from the current 15% to 23%. Investing in the environment is also good for the financial industry as a whole – if temperatures rise by 2°C, about US$1.7 trillion of global financial assets — 2% of the world economy — will be at risk. It is also difficult to measure intangible risks, such as changes in property values due to changing sea levels and carbon price increase.
On our platform itself, we have seen an increased interest in ESG and environment-friendly strategies, and have been steadily adding to our repertoire of such Kristals. Though, I would like to point out that while investor interest in impact investing is a beneficial trend, we need industry-wide standards for what constitutes an “impact” investment, and for how this impact is measured. To sustain this interest, and ensure that wealth managers world over pay more attention to ESG-linked strategies, it is vital that we retain focus and not let this become another terminology in an alphabet soup.
With more opportunities for investors to access wealth management services and make investments in private companies directly, what do you think would be the next step for growth in investment independence?
Despite the number of avenues available to investors, the regulatory environment in numerous countries remains challenging. Taking Indonesia for example, the Financial Services Authority (Otoritas Jasa Keuangan) had only of late released new licenses for fintech companies. Regulatory bodies are of paramount importance to the ecosystem; it is only through favourable policies that the market can flourish.
Technology is the other crucial component that would bolster the market’s next stage of growth. The current players in the market have come a long way since the market traditional deal syndication method. However, there is so much more that can be done to make the entire process truly cost and time-efficient.
Fuelled by supportive governments and rapid technological advancement, the outlook for investments in Asia is rosy. This will open doors for companies to explore alternative financing, which would correspondingly provide more investment opportunities for investors across the region.
Yes, there is an IKEA model of investing which is on the rise, and frankly why not? At Kristal.AI, our starter account (Kristal Investment Account) allows investors to make their first investment in a DIY fashion, with the help of our AI-based curation process.
At the same time though, this DIY method has its limitations. You may not need to know the engineering of a car to drive it, but what do you do when the car breaks down and you don’t know your chassis from your carburettor? In my opinion, investment independence can come from two things:
- an intuitive and hyper-personalised technology which can almost sense your next investment idea, and
- advisors who are more financial coaches than just money managers and who can help investors learn about financial intricacies, and make the right choices.
We have always tried to provide our clients with the best of both so as to ensure a transparent model of investing where the client is in control, and all decisions are not being made in a digital black hole. We have had so many clients come back to us and tell us where to invest in – when they read up on a new trade idea, or find a good investment opportunity in a certain market. We are happy to be just executors in that scenario. Seeing our investors gain confidence about financial planning when there’s so much fear mongering all around, makes us glad as advisors and wealth managers.
Last question! The 2010s were the era of personalization, platform creation and the democratization of investing. What are your top three crazy-egg, Tesla cybertruck-style predictions for the financial world circa the 2020s? 😛
- Impact investing will take the greatest slice of the pie, with alternative proteins ranking first on the list
- Consumers will be able to scan any product available in retail stores and make an investment into the company instantaneously, via mobile
- 10% of the world’s population will own an account with a private stock exchange, trading shares private companies (as they would with public companies today)
- Gold prices in USD shooting up to the 4000s
- Trump and Xi actually signing a deal which translates into global trade peace
- US interest rates go -ve!!
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