How Fintech platforms are creating new, highly lucrative investment markets in a low yield world and driving exponential ROI in the process.

In a volatile (and extremely fluid) investment market, finding companies that show predictable growth has never been more important. Traditional investment products - previously the hallmark of predictability - have recently been hamstrung by a decade’s worth of crisis-driven financial policy that has combined to push interest rates to near zero (or, in the case of the EU, into the negative). The net result has been a deep cut into ROI across most traditional investment vehicles. In this environment, investment products that can drive real, credible and repeatable returns have become extremely desirable and expensive.

Enter Fintech platforms, which are transforming investment risk to return profiles through the securitization of assets with best in class data. They're allowing LPs (and anyone else) the ability to invest in alternative asset classes that drive high rates of return without having to plunk down correspondingly exorbitant monies to participate. By democratizing investment, financializing “everything” and demystifying process through data and transparency, the investment ecosystem has been fundamentally transformed and likely won’t revert back to “normal” even after rates eventually climb.

Pre-pandemic negative yielding debt was already an estimated $17.0 trillion USD. Unprecedented global fiscal & monetary stimulus packages designed to buoy struggling economies combined to drive those numbers even higher. The Fed, BoJ, Swiss National Bank, BoE, ECB all had balance sheets expanding by $5.5 trillion YTD from $16.0 trillion to $21.5 trillion. Unsurprisingly, this was the biggest shift since the crisis of 2008.

Fed Chair, Jerome Powell, recently said the Fed was “not even thinking about thinking about raising rates.” They also recently released a statement noting that, “the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”

ALTERNATIVE INVESTMENTS

This commitment from the Fed has put the onus on investors to reassess portfolio allocation & search for alternative sources of return. That’s where Fintech platforms are stepping in to fill the gap by utilizing technologies like blockchain and machine learning to securitize assets and democratize capital formation. Primarily, these Fintech platforms now enable every class of investor the opportunity to invest in everything from Art and Farmland to Automobiles and bulge bank products such as large, securitized private debt.

AcreTrader is one such example. They’re an alternative investment platform that allows everyday investors the opportunity to invest in farm assets. CEO Carter Malloy has described the platform as the Robinhood of Farmland, providing access to an asset class - long the sole purview of big banks and institutional investors - with 30 year returns of around 11-12%.

These platforms are clearly proliferating as the “finalization of everything” becomes more commonplace. The company Alt, which just raised $31MM in funding, allows people to buy, sell and store sports cards. Masterworks.io allows investors to purchase "shares" in a painting for as little as $20. Rally lets anyone buy or sell ownership stakes in rare items like the 1937 Heisman Trophy or a 1955 Porsche.

Cadence has also emerged as another type of Fintech platform taking advantage of this unique investment environment by targeting the private debt markets. By streamlining the securitization process, Cadence can dramatically increase the access to securitized products and increase the speed at which transactions take place while also decreasing fees at the same time.

All of these these platforms offer safe, reliable and efficient investment products. In an investment environment where their risk to return profile is comparable (or superior) to traditional investment products, it’s little wonder they’re experiencing unprecedented growth.

DATA AND DEMOCRATIZATION

One of the more interesting secondary effects of this current situation is the disintermediation occurring in the financial management market. Fintechs are effectively obviating the “experts” in these markets through higher or equal-to yields and lower fees while also effectively eliminating institutional opacity through data, speed and scale.

Buckzy is one such platform. They enable capital to move across borders and around the world in real time while providing corporations tremendous savings on fees. Previously, old school banks and financial institutions took advantage of the inefficiencies in the cross border/currency markets to provide the kind of services Buckzy now offers. Platforms like Buckzy are making the market more efficient, driving better corporate or personal use of balance sheets and liquidity as well as forcing traditional banks to adjust or partner. Imagine, it normally takes 2-3 days to move money internationally across currencies yet now a company or person has access to these funds instantly - effectively freeing up 10% of your capital.

In a blog post from John Street Capital they noted that BlackRock, Fidelity, Federated Hermes, and J.P. Morgan Asset Management have all recently had to waive fees on the $5.0 trillion of assets held in money market funds to keep yields that investors earn from dropping below zero, with the seven-day net yield for the average money fund hitting 0.05% in July down from 1.31% at the end of 2019.

The problem banks and financial institutions are now facing now that what was previously their unassailable advantage - namely access and expertise - cannot overcome a fintech platform’s primary advantage - namely, democratized data and real time systems connectivity. Human skilled bankers simply can’t compete with real time data platforms, in this sense.

It’s just hard to trust your bank when they’re making (in some cases) 25% of the return off their fee structures. It’s also increasingly hard to justify and/or avoid the perception that they are inherently looking out for their return above all else. Bankers and advisers now seem more like sales tools rather than capital protection tools.

WHAT’S NEXT?

There is a school of thought that suggests that COVID-19 - as the spur that drove markets and investors to embrace alternative investment platforms in the first place - could similarly drive investors back into traditional investments when the pandemic recedes.

Yet, as the John Street Blog further notes, “the aftereffects of the pandemic will certainly not vanish over night and as these platforms go from hundreds of millions of dollars of issuance a year to billions of dollars per year the maturation process that will develop as it pertains to issuance, distribution, and secondary trading should provide a degree of insulation.”

Ultimately, there has always been a significant opportunity around the “financialization of everything” and the economic policies enacted in the wake of 2008 and COVID-19 have simply helped see this idea to fruition The growing acceptance of and, indeed, preference for alternative strategies & funding mechanisms for blank pools of capital, early deployment, and seasoned portfolio means, in short, that the horse has left the barn and it’s now incumbent upon banks and traditional financial institutions to learn the hard lessons being taught right now and, perhaps, get on that horse to try and catch up.