This week I got to attend and sit on a panel at FinFair 2015 and it was really awesome. I learned some very cool stuff there that will help retail and individual accredited investors (meaning most of you reading this) and I thought I'd share a couple of these things.
The Current Market Needs democratization
Starting with organizer Dara Albright's opening keynote, there was a focus on Investment Banking and bankers. The most striking slide showed how much a recent IPO, Ali Baba, raised $25 billion while one of the market darlings of the last 30 years, Intel raised only $6.8 million based on a $58 million valuation in the early 1970's.
What's so striking about this is not just the size difference of the offerings but that a company of Ali Baba's size stayed private for much much longer meaning only a very small group of early investors and VCs got to participate the huge early stage profits they generated. Intel, on the other hand, went public and the public got to participate in the company's growth from $58 million up to its nearly $138 billion today. Nearly everyone who has money in the market by way of their 401(k) has some money in Intel thanks to its widespread purchase among mutual funds.
Ali Baba is not the only one. All IPOs are larger now and instead of representing the raising of capital for a growing company, now it is representing an exit for the VCs and early investors in the company. More potential profits for fewer investors this way as opposed to the older way of doing business where the Intels of the world let the public really join in.
Veteran Bankers favor Democratization too
My favorite panel at FinFair was the very first one titled 'Icons of the New Issue Market'. These icons of the investment banking world, most of whom are still in business and in their 70s or 80s, traded awesome war stories on the underwriting, issuance and sale of IPO stock in companies like Intel and Genentech. These icons included Andrew Blum (former Chairman of CE Unterberg Towbin), Richie Friedman (Chairman of RFRF Investments and Nasdaq market maker from the 1960s), Humbert B. Powell (managing director at Wunderlich Securities) and Andrew Malik (Chairman of Needham & Co).
Investment bankers for the last 10-20 years have gotten a worse and worse reputation with the rest of the nation, and for good reason. They are greedy and selfish and great at making money for themselves many times to the detriment of their clients. In fact, I'm concerned about their entry in our peer lending markets and that they will screw them up in the long run.
These icons are different.
The underlying theme from these great stories was that Wall Street used to help companies raise capital and everyone knew each other. They built long lasting relationships where they helped each other to finish a subscription of stock or temporarily hold onto some excess shares for a day or two. These are things that do not happen today. The icons stated directly that Wall Street firms today are too greedy, selfish and non-collaborative, not like the competitive but still collegial environment they remembered and grew their own businesses from up until the early 80s.
The icons favor democratization of the markets too as they think it takes us back closer to the pre 1980's days of how Wall Street used to work to help grow companies and investor accounts. I found this very refreshing that they want more stock and more influence to be spread out among more people. It would be great if FinTech companies and some of the new regulations can help make that happen.
Reg A+ was the star but its still early
SEC Regulation A exempts small offerings of stock from full SEC registration but has only been available to accredited investors, just like how some of you reading this (accredited) can invest in Funding Circle loans but all of us including retail non-accredited investors can invest in Prosper and Lending Club.
Thanks to Title IV of the JOBS act being implemented, we now have Reg A+. Reg A+ came into effect in June and allows both accredited and non-accredited investors to invest in an offering of up to $50 million in securities. Reg A+ both eases investor requirements by letting non-accrediteds invest AND increases the offering amount allowed under the exemption from $5 million to $50 million.
Reg A in its previous form was rarely used as there have been less expensive and more efficient ways to raise capital but this will change with Reg A+ as Candace Klein of Dealstruck and her panel on Successfully Raising Capital Thru Online Finance discussed in some detail. Online Real Estate platforms seem to be in a unique position to benefit as investors are already comfortable with public stock for real estate through their investments in REITs (RE Investment Trusts) many of which are public. Also poised to benefit are earlier stage companies like the Intel IPO for $6.8 million discussed earlier. It is still early having only had the A+ for a couple months to see how often and how effectively it will be used.
More Investment Options are coming
Two closed end mutual funds have already filed for registration and with managed accounts for investing in peer loans we only see more potential investment options. These are options for the entire public now available as opposed to primarily for institutional use. I got to add to this conversation at FinFair too where I said that I think we will have the first global/international peer lending fund launch and it may or may not be related to or include Bitcoin.
Individuals are beating Wall St in Fixed Income Returns
If you read this blog with any regularity, then you know how much I love peer loans as an investment, both in USD and in Bitcoin. Fixed Income managers are starting to notice too and want in on the action. This led to my panel 'Fixing Fixed Income Portfolios' which included some of the who's who of the industry including:
Larry Chiavaro of First Associates, the biggest backup loan servicer in the industry
Eric Thaller, VP of Investor Services at Prosper the 2nd largest US peer lending company
and moderator Bryce Mason just named Chief Inv Officer at Direct Lending Investments, a fund that purchases small business notes from peer to business lending platforms.
Our conversation was about where the markets are going, why fixed income especially gov't bonds are priced too low based on the risk in them and how the risk/reward ratio seems way off for gov't and corporate bonds alike. Bond rates are far too low for the real risks in holding them. The more decentralized nature of online lending marketplaces has led to higher than bond returns and at lower risks. Better and more established secondary markets, investment products and ability to provide liquidity are on the way and when those things happen, peer loans will become an important underpinning of building fixed income portfolios in the future. And the future is not quite now but very very soon.
Structural Changes are happening in the market
Panels covered lots of different subjects including how Community Banks are working to collaborate with online lending platforms, how to wade through all the new regulatory changes, how community based investment will change thanks to Reg A+ and creating secondary markets.
Fundrise, an online real estate lending platform, and its CEO Dan Miller had a particularly interesting take since they wanted locals in the neighborhood to be able to invest in one of their flagship projects in Washington, DC. They actually did it through the old fashioned Reg A. They were the first but they won't be the last. Fundrise has alot of other cool stuff going on, much of which is the focus of another post in the works.
FinFair helped to reinforce what many of us already think that it's an incredibly exciting time to be involved in peer lending. After years of laboring in total obscurity, the public is starting to notice and now the bigger more centralized financial infrastructure is noticing too. Crowdfunding for debt and equity for companies is going to get easier, cheaper, smoother and more transparent while investors will have more and better options to invest their own money and grow their own portfolios with fewer restrictions. It was an amazing conference and there's great energy in the industry. I'm looking forward to next year. Great work, Dara.