| |
Headline: Web Monitor
Source: Euromoney
Date: June 2000
LATIN AMERICAN E-FINANCE
The MTV of finance
Patagon.com has moved ahead at a bewildering speed. The three-year-old brainchild of an Argentine college student, Latin America's leading financial portal was bought by BSCH earlier this year valuing it at $700 million.
The changes the internet has brought to daily life in the US and other developed countries are tiny compared to the revolution in store for emerging markets. Getting on-line in Manhattan brings to the fingertips services that were previously either a phone call or a block away. In the Chiapas or the Amazon it may be the difference between having a bank account or keeping your money stuffed in a mattress.
With less than 5% of Latin Americans having cheque books or credit cards, the scope for internet banking is many times larger than in the US. Just as for many Latinos the first telephone they ever owned was a cellular one, so their first bank account is likely to be on the internet.
One of the first people to be aware of this potential was 26-year-old Wenceslao Casares, one of the entrepreneurs behind Patagon.com.
It is easy to understand how he reached his conclusions about the internet's future. While US internet entrepreneurs spent their formative years playing around with computers in New Jersey and San Francisco, Casares did the same but in Patagonia, in the remote south of Argentina.
It's a wild and windswept part of the world which takes 30 hours to reach by car from Buenos Aires. Casares was the son of a sheep rancher and grew up on a farm, 40 miles from the nearest neighbour and 100 miles from the closest town, without mains electricity or a telephone. He was educated at home by his parents and only got his first computer in 1988 at age 14. Maybe it was during those long waits for the farm's generator to switch on at night - providing the power for his computer - that Casares figured out that the point of the internet was not for nerds to trade cryptic messages but to enfranchise a whole continent of consumers.
"When an Argentine house gets connected to the internet you can sense the revolution that is taking place. It makes it possible to leap frog many stages of technology whereas in the US it's only a marginal improvement in the quality of life," he says.
Yet starting out with this conviction as a fresh faced twenty-something, it was difficult for Casares to convince his elders of the strength of his vision. His mentors at business school at the Universidad de San Andres in Buenos Aires were sceptical and he dropped out of college to pursue his own direction.
Casares and a group of colleagues set about putting together Argentina's first internet service provider in 1994 which was later sold to make way for Patagon.com. The strategy was to buy a brokerage house first in Argentina and later in Brazil and Chile as the quickest way of plugging into the financial world even though on-line share trading is likely to be only a small part of total business.
Such an ambitious plan needed proper financial backing and a great part of Casares' achievement has been his dogged pursuit for investors. Casares claims he only made $20,000 out of the ISP sale so there was a great need for cash. The financier Zsolt Agardy backed Patagon in its purchase of the Argentine broker InvestCapital and Chase Capital Partners and Flatiron Partners injected $8 million. A second round of financing late last year raised $53 million from backers such as Goldman Sachs, General Electric Capital, Reuters, Fenway Partners, Telmex, Inbursa-Mexico, Banco Santander, Quantum Dolphin and GP Investimentos of Brazil.
"Patagon is three years old and half of that time was spent searching for the seed capital. That has taught us how to pitch to investors," says Casares.
The funds enabled Patagon to expand, move its headquarters to Miami and bring in professional management. It bought Brazilian on-line brokerage NetTrade as well as financial portal Finanzas Web in Mexico and an offline broker in Chile.
A big push forward in building up Patagon's management depth was the appointment last September of Daniel Canal as president and chief operating officer. Canal has worked in the emerging markets division at several leading banks and from January 1987 to June 1995 was the managing director of emerging markets and head of fixed income trading and derivatives at JP Morgan.
Then in March came the real coup for Casares when BSCH purchased 75% of Patagon.com. Patagon has in turn bought BSCH's on-line bank Open Bank and the plan is to combine Spanish banking resources with Patagon's media expertise.
"We are like the MTV of finance," says Casares. "We understand that to be successful on the internet you have to think as a media company."
What Casares means is that surfers can access the site, get financial prices, look at the news, chat with each other and generally be entertained, only moving on later to open a bank account and buy products such as mortgages, insurance and mutual funds.
In Latin America only 0.03% of the population has ever bought a stock so the market is not going to come from stock trades but from using the internet to pay bills - instead of standing in line. Since Patagon became part of BSCH Casares has become a little shy about giving out growth numbers but he says that the operation should be profitable by the end of 2002.
Brian Caplen
TRADE FINANCE
Trade finance in the internet age
Trade finance debt is worth $3 trillion a year. But institutional investors largely ignore it. Complicated, non-standardized documents that require physical delivery are enough to deter all but the most dedicated specialists. Now three former Deutsche bankers have re-emerged from obscurity to break that trend, with the world's first internet trading platform for this asset class.
This time last year, if Richard Tull invited you round to his office, you could be pretty sure of getting a tasty gin and tonic in the plush surroundings of Deutsche Bank's Bishopsgate office in London. His colleague, Luigi La Ferla, was a dab hand at offering round the cigars after lunch.
For 10 years, Tull, La Ferla and James Parsons were three of the best known senior trade finance bankers in London. They made a profit during the Asian downturn of 1998. La Ferla is just as well known for his booming Italian voice and 20 years in the UK have done nothing to soften his accent.
But then the three of them disappeared. Rumours that they were not happy with the new structure after Deutsche bought Bankers Trust proved to be true, and they quit. Deutsche Bank was red-faced and silent.
And now the trio is back, with an internet venture. LTPtrade.net may not be the most imaginative name for a company, but it is the world's first internet dealing system for trade finance paper. The first internet-based trade finance offering, a $25 million short-term import promissory note for a Croatian oil company, went into online syndication on LTPtrade.net on May 24. Not bad for a platform that was set up six months ago.
When you go to Richard Tull's office now, you find a completely different set up. La Ferla, Tull and Parsons are not quite archetypal internet entrepreneurs. They and their colleagues don't wear the signature dot com combat pants and fiercely angled glasses. They are not under 25 years old. And they don't all work with tiny lap tops and tinier mobile phones. But the ties have gone, along with the vast works of art in the entrance to the building. The three founders, along with three colleagues, now occupy an L-shaped temporary office space, about 15 feet by 15 feet, surrounded by piles of paper and left-over promotional bags. Still, the view is impressive, and James Parsons is said to keep a pair of binoculars in his desk for checking on comings and goings at Buckingham Palace.
LTPtrade expects to move out of its temporary office soon. If its progress goes according to plan, it will have hired too many people to fit in the small space. Tull confidently predicts that from these humble beginnings, LTPtrade will recreate trade finance debt as an asset class, hauling it into the modern age from its conservative outlook and setting it alongside bonds and equity as an investment choice.
The reasoning behind their venture is simple. The trade finance market has always lacked an electronic trading and clearing system, for example like Euroclear for bond settlement, and this has made the market illiquid and lacking in transparency. The way La Ferla and his colleagues tell it, the market risks drying up altogether as large finance houses turn their back on a capital intensive market. "Trade finance is going through a difficult period," says La Ferla almost wistfully. "There is little liquidity and no transparency. And if the market doesn't update and get more liquid, it will lose further ground."
Six months after leaving, and after extensive beta-testing of the software by market participants, the team are delighted to be launching their first online trade finance syndication. Last month, LTPtrade.net broke new ground when syndication commenced on its maiden deal - a $25 million tranche of a $300 million deal to finance crude oil imports for Croatian oil company INA. It was the first time trade finance has been syndicated online.
It's been tough dragging the trade finance business onto the net. The technical practicalities of posting digital documentation needed to be addressed and using the highest level of internet encryption required many trade financiers to upgrade their web browsers to handle it. Nevertheless, the growing team from Deutsche hope that e-trade finance will bring new liquidity to the market with the first screen-based trading for trade finance assets. They hope going digital will open the market for a rewarding but idiosyncratic asset class to new investors.
For decades, the trade finance market has occupied a position at the periphery of the mainstream international capital markets, but even so it still accounts for more than $3 trillion in outstanding debt. La Ferla says: "Trade finance is like the antiques market - the market is there, but little is known about it." He notes that where there are more than 40 internet trading platforms for bonds, trade finance has hitherto lacked any electronic trading system.
Many interested investors have been put off buying high yielding trade paper since information on the asset class is hard to come by. LTPtrade.net aims to bridge this important gap. "Where information on the smallest bond transactions are posted on Bloomberg and Reuters, there is little information posted on trading screens on even the largest trade-related deals from issuers as important as Petrobras," says La Ferla. "This is not a new market, but the idea is to bring trade finance into the internet age by bridging the banking market with the investor market." Not only will investors and sellers be able to deal with one another directly, but for the first time trade finance investors will have access to the sort of information those in the loan or bond markets take for granted.
According to La Ferla, lack of information is compounded by non-standardized documentation and settlement procedures, which together make the asset class one of the most illiquid in the financial markets. "In trade finance, you really have to fly in the dark. For instance, documentation is often not shown to the buyer until a trade is agreed. You don't know exactly what you're buying until after you've bought it," says La Ferla.
In answer to these and other problems, the founders of LTPtrade.net created an internet-based trading platform that allows investors to download digital documents for any given deal before they buy.
LTPtrade.net is operating with conventional sales formats, such as syndications, but in time it plans to move to an auctioning system where investors can buy into new deals or trade existing paper in real time.
According to La Ferla, the lack of liquidity is forcing many of the large banks to reduce balance sheet exposures available for trade finance transactions. They are turning their back on the market at a time when there is unprecedented demand for trade related financing, particularly from emerging market countries. The result has been a shrinking market with diminishing capacity to meet demand and this has forced clients to seek alternative ways to finance large transactions, for example through the bond markets.
The lack of transparency and standardization to date have also been the chief reasons that institutional investors have been cautious about an asset class that generally yields a higher return than loans and bonds and at the same time also has a lower incidence of default in emerging countries. Historically many countries have honored their trade debts long after going into default on bonds and loans.
Further difficulties for institutional money managers interested in accessing the asset class are presented by physical delivery of debt instruments that is a feature of the existing trade finance market. LTPtrade.net seeks to address this anachronism by using State Street Bank in London to provide settlement and custodial operations for trades executed through the system. With a name already familiar to institutional investors for its custody business now delivering these services for trade finance assets perhaps a new 'Euroclear for trade finance' can become a reality. This is a key feature of the new system.
Members who bought INA promissory notes through this system had the choice of leaving the documents with State Street or taking physical delivery, which several members did at first. Promissory notes cannot be split, so allocation is on a first-come-first-served basis. LTPtrade plans to encourage investors to leave the documents with State Street, so that potential re-offerings will be simpler.
And once the investor has bought the paper online, the transaction is complete. The 'subject to documentation' clause is removed from the trade finance investment for the first time.
The trading platform carries 128 bit encryption. That means that to crack the encryption by random hacking would require a computer so powerful that there are not enough silicon atoms in the universe to construct such a device. Or, as La Ferla put it in his rich Italian accent at a recent presentation, it means that there is a little padlock at the bottom of the screen.
A few years ago it would have cost a fortune to set up a new screen system like the networks created by Bloomberg or Reuters, but the internet offers the flexibility needed to create a parallel trading system to the ad hoc way trade paper is currently processed. La Ferla stresses that LTPtrade.net is more than just a trade finance website. "This is a fully fledged trading system, not a bulletin board," he says.
LTP's service can be compared to that of a traditional exchange. "At the moment trade finance is like the equity market without a stock exchange - for stocks this would be unimaginable," says La Ferla. "Our ambition is to bring new investors into the market by giving them easy access to deals and related information on issuers."
LTPtrade.net will not underwrite or invest in any of the deals put together through the internet. LTP aims to provide liquidity in the market and it will make money from agency fees in the same way that a stock exchange charges for a new listing.
The service already has around 120 participants - including US heavyweights like Bank of America and Bank Boston. La Ferla's aim is to increase this to 500 by the end of the year by targeting investors that, without the information and custody facilities offered by the net system, would not otherwise be able to consider the asset class. "Once you have 1,000 members, then you might think of creating a more formal exchange," says La Ferla.
LTPtrade.net hopes to help issuers reduce their costs by increasing transaction efficiency, so encouraging more deals into the market. Says Vedran Perse, managing director at Inter Ina, the London trading subsidiary of INA: "[Our offering] and those that follow it give us the opportunity to establish a much more diverse funding base for our trade operations." Since much of the higher spread on trade finance paper is accounted for by higher transaction costs and risks, LTPtrade.net's standard settlement and clearing facilities promise great things for issuers.
Issuers from Latin American and Asia are considering following INA and using the system. But the seller of trade paper need not be the obligor itself. The internet enables banks that buy trade receivables from exporting corporate customers to on-sell assets efficiently to other banks and investors, reducing risk and freeing up capital.
The bond market may boast of its multiplicity of state-of-the-art internet platforms, but now one of the world's oldest forms of financing can also stake its claim to a presence in the internet age.
Charles Piggott and Katie Astbury
BRAZIL
Brazil's one-stop shop
Marcelo Barboza is chief operating officer of InvestShop.com, Brazil's biggest financial services site with 165,000 registered users and two million page views a month. It's a genuine one-stop site: visitors can invest (a minimum of R$100 [US$55] in investment funds, no limit in equities - buy just one share if you want), track their portfolios, take part in the three chat sessions offered each day, read up on the latest financial news and analysis, and try their hand at investing without risking any money by playing Investgame.
"Our objective is to be the only place people need to go to manage their financial activities," Barboza says.
Barboza won't say anything about revenues, but by other measures InvestShop is ahead of the competition. It has won a string of awards and consumer awareness research put it way ahead of its closest competitors.
The site was started by executives at Bozano Simonsen, the Rio de Janeiro investment bank sold to Banco Santander of Spain in January. The Bozano group decided to keep InvestShop for themselves - "They knew one day it would be worth a lot more money," Barboza says - and spun it off into a separate company. Barboza joined in May last year aged 35. He says InvestShop's independence gives it its edge.
"We have about 1,000 different investment products offered by 27 different institutions [including ABN Amro, Lloyds and Bank of America]," he says. "Other sites run by banks and institutions will always sell their own products first, and even when they sell other people's, you never know how really impartial they can be."
That leaves independent sites as the only real competition, he says. Other Brazilian sites have a lot of catching up to do, leaving Patagon.com as its only direct competitor. Even against Patagon, Barboza claims InvestShop is out in front: "We had products like investment funds a good year before they did," he says.
He's particularly proud of the scale and speed of investment analysis InvestShop offers
"After the Fed increased interest rates in May, we had a chat session underway with Santander's chief economist within an hour of the announcement, and feedback from investment analysts an hour after that," he says.
What he will not say is how much business is actually carried out on the site. The average portfolio is about R$5,000 (US$2,775), but so far only "a small percentage" of the 165,000 registered users have become punters. InvestShop still makes most of its money from advertising, brokerage fees and commission from investment funds.
Growth has partly been led by partnerships with ISPs and other portals. InvestShop has deals with UOL, the Brazilian market leading ISP, and with Terra Networks, the number two service provider owned by Telefonica of Spain. It also provides content to other big portals such as StarMedia, Globo.com, Zip.net and Yahoo Brazil.
Barboza expects competition to get hotter, but he's confident InvestShop will stay ahead.
"It's like online booksellers," he says. "In the real world you need lots of good bookshops, but on the net one or two good ones are enough. We expect there to be three or four financial service sites for the Brazilian market at most, so that will mean consolidation down the line."
Meanwhile, his short-term target is to have 300,000 users by the end of 2000.
Jonathan Wheatley
|