Today’s trading days are the middleman’s realm, where platform-based business rule exchanges and trade, removing much control from businesses and investors; but it hasn’t always been like this. Below Finance Monthly benefits from expert analysis from Sascha Ragtschaa, CEO and Co-Founder of Chainium, on the matter of trading control.
Pulling the Trigger
Sourcing information on a global business takes seconds. In fact, the ubiquitous Google now processes over 40,000 search queries every second. This equates to over 3.5 billion searches a day and an almost inconceivable 1.2 trillion searches per year worldwide[1]. However, pulling the trigger to invest in a global business is a whole different ball game.
Expensive, intricate and restricting, buying and selling shares between businesses and investors has significantly fallen behind advancing developments within the wider financial sector. Especially when you compare it to the latest cryptocurrencies, with the famed Bitcoin hitting a high of close to $20,000 in December last year, prior to its recent readjustment.
Disruption of the Status Quo
As one of the most vital areas of the market economy, it is essential the equity market drags itself into the 21st century and puts its businesses and investors in complete control. The simple truth is that when the global equity market was created two hundred years ago with the founding of the London and New York Stock Exchanges, the world was a very different place. Whilst middlemen can help investors identify the most cost-effective option, they can severely lengthen the exchange process and be expensive.
To become relevant for the modern investor, a certain amount of disruption of the status quo is required. The sector needs to ensure that trading becomes a more seamless experience and is put back into the hands of businesses and investors for full control.
Regaining control
The solution for this could well be the blockchain. The technology that underpins the main cryptocurrencies such as Bitcoin and Ethereum has the advantage of being transparent enough to ensure democracy and visibility, whilst being secure enough to protect businesses and investors alike. The technology is an enabling force for removing the middle layers, administration and reconciliation steps required in today’s global equity market solutions. This means that businesses and investors can be connected directly, leading to a rise in empowerment and the eliminating the need for middlemen.
To become truly transformative in 2018, any new equity market solution needs to be built with business and investor control at its core. The recent string of high profile data breaches – coupled with the impending Global Data Protection Regulation (GDPR) which comes into force on 25th May – have heightened the awareness among consumers regarding information security; especially when payments of any kind are involved. Blockchain can not only protect the individual, but also allow for enough transparency to ensure equity decisions, voting and resolutions are fully transparent in the process.
Removing the shackles
In order to be fully accessible, a modern equity network must be well tailored to suit the needs and interests of both investors and business owners. By democratising equity, it can bring influence and power back to the individual investor through de-centralisation, blockchain technology and crypto payments. Meaning the network becomes entirely distanced from traditional stock exchanges, government regulation and the institutional and corporate stranglehold.
Back to basics
This back-to-basics approach to raising capital reduces bureaucracy; with blockchain technology removing duplication and eliminating errors. This allow investors and businesses to exchange digital share certificates for fiat or cryptocurrency in a transparent, tamper proof and immutable distributed ledger. No intermediary or other reconciliation steps are involved in transactions, cutting through hundreds of legacy systems and solutions from the old world.
Business owners, of private and public businesses, can now sell shares directly to investors. Cutting out the middlemen in issuing and trading shares helps to give complete control back to the businesses and investors alike and help them become indelibly linked.
A transformation is needed
Giving trading control back in the hands of the companies and investors utilising the equity market is essential when it comes to promoting innovation and reinventing the processes involved in trading shares. No more trading through banks, brokers and intermediaries. No more share registrars, transfer agents or middlemen.
We have seen AirBNB, Ethereum and Uber all become the pinnacle of digital transformation in their very own industries and with the help of new technologies, we are now seeing the same beginning to happen in the global equity market too. By removing the multiple barriers to investment means that the next Apple, Google or Microsoft won’t be left on the scrapheap, but receive the investments they need to thrive.
[1] http://www.internetlivestats.com/google-search-statistics/
Like the digitisation of all things, challenges will be faced and there are benefits to reap, but often such progress doesn’t take place because the correlation between the two isn’t a positive or favourable one. Below Gemma Young, CEO and Co-Founder of Settled, discusses with Finance Monthly the future of digital in the property sector.
Property is our most important asset class, it's also our most emotional asset. Therefore, getting our home sale or purchase right is not just a big deal for consumers, it's a big deal for the wider UK economy.
Unlike other industries (travel, music, taxi services to name but a few), the real estate model has clung to its traditional roots. Even with the advent of “online” estate agents now in existence for the majority of this past decade, the industry has been slow to adopt the opportunities a digital revolution presents. It’s therefore unsurprising that we're still seeing the same issues; typical property transactions take over 3 months with 1 in 3 transactions breaking. This drives consumer losses in excess of £250m each year.
Looking forward, is 2018 going to be the year for true transformation? Will ‘proper’ property technology companies make a dent in the things that matter?
What drives transformation?
Technology
The emergence of truly disruptive technologies including artificial intelligence, virtual reality, blockchain and drones all hold their potential disruptive keys to a more progressive future. Not only are technologies proliferating, consumers also have easy access to them from their smartphones.
Empowered individuals
Tech-enabled consumers search for greater transparency, more control and ultimately more progressive solutions to age-old problems. Their quests for modern, digital solutions provide exciting opportunities for change.
Investment
2017 saw the most significant investment in ‘proper’ proptech to date, with a new and forward-focused collective attracting financial backing from VCs and traditional property players.
Regulation
Central and regulatory initiatives represent a particularly exciting shift. The latest Government call for evidence “Improving the home buying and selling process” and the HM Land Registry’s Digital Street scheme look towards a future where technology (including blockchain) will make the transfer of property ownership much more fluid. Such initiatives shine a light on the underlying problems apparent in the UK property market and signal a commitment to a more open and less guarded future.
How does this future look?
As we see this convergence in consumer, regulatory and technology worlds, this more futuristic property market is well within reach. So who wins? The opportunity to embrace and adopt new technology is open to all, however, historically, traditional incumbents have been slow to move in many sectors. They, therefore, get left behind or quite simply, left out. We don’t have to look far to see examples; Blockbuster and HMV are businesses which didn’t, in time, connect to the opportunities of the next generation. As a result, nimble and forward-focused entrants Netflix and Spotify won the respective leading positions in the new world. Much like in the movie and music sectors, forward-focused businesses tend to win in other worlds.
Settled.co.uk is one example of a real estate business that is connecting across these converging elements at quite a unique time in real estate history. Settled’s unique technology has significantly increased the likelihood of completing on a home and has cut the time it takes to sell and buy in half. It presents the hope that, in the future, its technology will enable people to buy and sell properties in moments, not months. This is the kind transformation this sector needs.
Spread across social media sites and uttered consistently by the leader of the United States, Donald Trump, on several occasions, the term ‘fake news’ has seriously caught on. It has affected the way media platforms operate, the way the public perceives information and even how governments confront the spread of extremism. Below, Finance Monthly hears from Lyric Jain, CEO and founder of Logically, on the widespread economic impact of fake news.
Named word of the year in 2017, fake news has dominated both media and politics, shaping campaigns and influencing votes. However, while the conversation has been focusing on the implications it has on politics, many have failed to take into account the impact fake news has had on the wider economy. Not only do these misleading and misinformed pieces affect business and consumer confidence in products and companies, they can also lead to uncertainty and fallout from ill-informed political decisions.
Event driven trading algorithms act on information extracted from newswires and social media. The presence of fake news in these pipelines means the algorithms act on bad information. The larger operators in this market are aware of this vulnerability and have addressed them by making changes to their algorithms. Adversarial algorithms have sought to take advantage of these systems by publishing falsified information on social media and across the internet.
Fake news is not a new phenomenon, with evidence of it impacting the stock market dating back to the 1800s. In 1803, Britain was looking to declare war on France, but the Lord Mayor of London received a letter supposedly written by Lord Hawksbury claiming that the dispute had been settled amicable. This letter was taken to the stock exchange and subsequently led to the stocks rising by 5%. However, the validity of the letter remained under suspicion and was later found to be a forgery, forcing the Treasury to issue a statement to the press. By the time the hoax was noticed, stocks had changed hands, and it became impossible to track who had gained from the fraudulent letter.
Fast forward a few hundred years and you are looking at very similar events taking place surrounding the value of bitcoin. January 2018 witnessed the crash of bitcoin, the world’s most popular cryptocurrency, with the value falling by 50% in a single month. While the media is only one element in the rise and fall of market values, the development of cryptocurrencies has led to an explosion of online content criticising the most popular currencies. In the unregulated world of cryptocurrencies, many fraudsters have seen their opportunity to deliberately spread false information to affect the price of their holdings using social media, fake news sites and private chat apps, such as Slack and Telegram.
A prime example of this is the pump and dump scheme organised by a chat room called ‘Big Pump Signal’, who conspired to promote GVT through a bogus John McAfee twitter account. After sending out a tweet from the account declaring that GVT was the coin of the day, the value of coin increased by $15 in four minutes, with trading volume doubling. The chat group were able to monitor and communicate when the best times were to buy and sell the coin, before the value returned to it’s original cost 19 minutes later. The ability of these groups to communicate on private chats leave the uneducated and overeager traders at risk of falling into their trap.
We have also witnessed a rise of traditional fake news pushes targeting the financial market, creating mainstream media websites that promote false information. Most recently this approach saw a website that appeared as CNN run the story ‘Richard Branson and Elon Musk Invested $17million in a Bitcoin Tech Startup’. This simple approach led to more than 425,000 website visits between September and December.
While these examples of using fake news to exploit the market are not currently widely used, advances in NLG and further development of these schemes may lead to an information arms race between competing firms, with media consumers and targeted instruments being the likely collateral damage.
There are a few single metric tools available that attempt to rate the credibility of stories and track the implications of the story. However, we are working with partners in the financial services to build tools to specifically tackle the impact the rise of fake news has on their business. As with any fake news epidemic, it is important that people trace the origin of their articles they read before making any large investment and utilise these platforms to determine whether or not to trust the information.
Kicking off our November Game Changers feature is an interview with Dr Stavros Siokos who is the Managing Partner of Astarte Capital Partners LLP - a specialist alternative co-investment platform focusing on the real assets space, with offices in London, New York, Zurich and Sydney.
Astarte identifies and partners with experienced real asset operators to establish specialist asset management businesses of an institutional standard, in niche real asset strategies, targeting private equity-type returns. The company combines their experience of building multi-billion niche asset management businesses with the know-how of established real asset operators and a strong track record in the specific sector. Astarte targets full alignment of interests and transparency, with only success-based fees.
What have been the current trends in the real assets space?
The real assets space is very broadly defined and as a result, it includes an extensive spectrum across various different products. It ranges from large-scale core infrastructure assets, that demand a lot of capital (e.g. airports, ports, electricity plants, etc.), to typical real estate (e.g. housing, commercial), and all the way to value added infrastructure (e.g. planes, shipping vessels, mobile phone antennas, advertising billboards, etc.) that demand specific expertise according to both the asset and the local market.
Each of the above groups have their own dynamics and follow different economic cycles. Most of the large private equity firms tend to focus on core infrastructure opportunities where larger pools of capital can be deployed. Astarte focuses on value added infrastructure prospects in areas and products that are supported by global megatrends such as demographics, digitalisation, the need for energy and the management of natural resources (e.g. water, waste, etc.).
An obvious trend is how affluent ageing populations in the developed world are generating a demand for retirement housing. Astarte is evaluating investment in high-end retirement accommodations in the United Kingdom, Spain, Portugal and Switzerland. Digitalisation offers enormous potential. However, industries such as advertising billboards in the UK are only just waking up to the trend, with only 5% of UK advertising billboards being digital. Astarte is also attracted to complex areas, such as acquiring aircrafts to dismantle them and resell the parts. I believe Astarte will see potential to pick up quality assets at distressed times in very cyclical industries, such as the shipping sector. Currently, we’re on the lookout for opportunities in renewable energy and industrial assets.
In all of these areas, it is critical to find strong operators to partner with. For instance, shipping, which as mentioned is a highly cyclical industry, has strong barriers to entry where a robust owner/operator makes the difference between success and failure. The Astarte model is to team up with the best operator possible and build a fully transparent platform where we, as the asset operators, together with external investors, all contribute capital, and all share in the economics of each project: both the costs, and the upside. The aim is to have all interests fully aligned and deliver the best results possible within an institutional framework.
When we last spoke, you mentioned that your goal for Astarte is to establish the company as one of the leading co-investment platforms for niche real assets. How has that been going? What have been the company’s recent achievements?
Astarte is growing its geographic reach and team to stay close to its investors, partners and deal flow. The headcount is around 15 professionals, as of November 2017. The founding team and the head office are in London, from where Teresa Farmaki, myself and Spiros Skordos are running the business. Our vision is to differentiate Astarte from other private equity and real asset managers. This is something that we have managed to achieve in a very short space of time.
We were delighted to be recognised as the “Most Innovative Manager of 2017” at the Institutional Asset Management Awards in New York earlier this month, which confirmed our achievements thus far. Winners of the Institutional Asset Management Awards were determined by votes from a selection of institutional CIOs of foundations and endowments, as well as with input from the editorial teams of Money Management Report and Foundation & Endowment Report. Criteria included information submitted with entries, as well as direct experience with the manager, industry reputation and past performance. We are very proud that in less than three years, the industry has recognised the ethos and the innovation behind our approach. Full transparency, full alignment and strict ESG compliance are the pillars that drive our growth.
We have also managed to attract world-class talent and experience in our advisory board. The advisory board currently comprises three top professionals and will soon grow to five. Phillippe Costeletos, who’s also an Astarte Investment Committee member, was previously Head of TPG Capital in Europe, and International Chairman of Colony Capital. Andrew Wynn advises family offices and has spent his career in equities, including at ADIA in Abu Dhabi and SAMBA in London. He has strong connections in the Middle East. Bev Durston (who featured in The Hedge Fund Journal’s’ 2015 ‘Leading 50 Women in Hedge Funds’ survey, in association with EY) was previously Head of Alternatives for the British Airways pension fund in London, and continues to advise many large pension funds in Australia, is an investment committee member. Another two highly experienced professionals with strong track record in the European and North American markets will join us by the end of Q1’18. All team members come from an alternative investments background, where they have close relationships with institutional investors’ demands, in terms of due diligence, reporting and governance.
How has the company grown in terms of operations or service offerings in recent times?
Astarte is aiming to close its flagship fund called Astarte Access Fund in the first quarter of 2018. At around $200m. The fund does not change any management or carried interest fees and only shares the profitability of the businesses that we build.
We have also identified the next strategies and the partner-operators that we will work with. They are in the areas of shipping, renewable energy, luxury senior accommodation in central London, and organic farmland.
For example, in the dry bulk shipping area, we partnered with the Tsakos Group (TG), a family run and owned entity with several generations of shipping tradition and a flawless global reputation. TG is one of the leading operators in the world with strong experience across different sectors and cycles, along with a long track record of successfully managing institutional capital. The Group controls a diversified fleet of 90+ vessels which includes 8 privately owned dry bulk carriers and a listed tanker entity (est.1993) (NYSE:TNP) with 2000+ employees.
By the end of 2018, Astarte is targeting assets worth $500 million, including its own multi-strategy vehicle investing across all deals, in addition to co-investments.
Can you detail any projects that Astarte Capital Partners have worked on recently and the challenges that you were faced with? How did you overcome them?
As mentioned, one of our first projects is related to dry bulk shipping. This is a highly cyclical industry that has been under extreme pressure for almost a decade. We believe that this is the right time for investors to come in, given the current and predicted demand-supply imbalance and the fact that we are close to an all-time low point on valuations. The potential for upside is significant and the key to success is based on who the operator is.
The challenge we faced was that a lot of investors have timed their entry into the sector poorly and had exposure already. This happened at a time when a lot of private equity capital was invested without the right structure in place, a few years back.
Having a great partner and investors that trust our judgement and structures is how we manage to overcome the difficulties that we’re faced with.
When working in an industry that is constantly changing, what do you do to ensure that you are at the forefront of any emerging developments?
It is very challenging to stay at the forefront of emerging developments. Especially with a model like ours, which requires reaching out to multiple industries and a wide range of jurisdictions that need local expertise and presence.
From our experience, we have discovered that it makes most sense to reach out to experts and outsource the functions and operations that stand outside our core business of investing. For issues related to investments, we follow a three-step approach, assuming that there are many things that we do not know and that we need to learn.
Our aim is to first recognise what we do know and what we can perform well. After this is established, we try to learn and use the best experts in each area where we’d like to deploy capital. Finally, we try to find the best partner we can team up with and explore opportunities together.
All of the above fall within a well-defined ESG framework. ESG is essential within our investing. Astarte and our portfolio businesses are all UN PRI signatories, applying ESG principles to their private equity investing. When directing capital, we do it to minimise side effects or complications. We address the environmental aspects early on and do not invest if the company does not have the right approach.
We place strong emphasis on governance, particularly in terms of how Astarte structures its fee model and relationships with investors. Alignment of interests is very important to us.
The private equity industry has been criticised for both the level of fees and costs, and the way in which they are apportioned between managers and investors. Indeed, there have been many public cases in the US suggesting that private equity firms did not allocate certain expenses in the past, such as broken deal costs (in the most equitable way). Consequently, every line item is now being closely scrutinised by those allocating to PE funds.
Astarte charges only success fees, with no management fees per se. Certain operational costs are transparently disclosed and shared with other stakeholders. This is only one facet of Astarte’s transparency. Co-investors also get full access to all data.
The fee structure is not the only innovative aspect of Astarte, which invests in niches that are often neglected by other asset managers. Everyone talks about real assets and understands the benefits of including them in asset allocation. Tangible, hard assets offer downside protection and a low correlation to capital markets. However, Astarte’s approach is different. We focus on less well-understood, specialist, below the radar areas that are more operationally complex and therefore face less competition from other investors.
What does a typical day look like for you as a Managing Partner of Astarte? What daily challenges do you encounter and how do you resolve them?
My biggest challenge is time. No day in the office is like any other day. We are building a business from scratch and this creates numerous challenges daily.
Finding the time between building and managing Astarte, identifying opportunities and partnerships and structure the business development is a challenge. Thankfully, my experience has helped me to be able to be multi-tasking and efficient at the same time. They key is to focus for specific amounts of time on specific tasks and make sure that priorities are right. Prioritisation is the key to success in a business like ours. This is a trade you learn through mistakes and experience. I believe the 25 years in the industry have taught me a lot on that.
The industry we are in is based on people and trust. Bringing the best talent on board and helping young people grow professionally is very important for me. It is very challenging to find the time for that but the results are truly rewarding.
If you could share one piece of advice with Finance Monthly’s readers, what would it be?
Setting up a new business is hard and no one can prepare you for this. A few people realise how many sleepless nights it takes to become an apparent overnight success. Time will be the judge of the overall success of Astarte, but our achievements so far proved to me that nothing is impossible and that the improbable is worth chasing.
The biggest lesson I’ve learned is that starting a new business in a competitive landscape is usually hugely against all odds. It takes double the anticipated time, double (or much more) the anticipated capital and most likely, losing half of the people you once thought were your friends. However, the journey is worth it and is the biggest lesson that one can learn.
What is the motivation that drives you?
In a few years, I would like to look back and be able to say that Astarte and the team brought a new level of innovation on how business is done in the private equity and real assets space. The private equity industry hasn’t changed much since its inception, almost half a century ago. If we achieve this and deliver the returns we hope to deliver, based on ESG framework, I will be a happy man.
Website: https://astartecp.com
