There is a well-worn theme in capital markets: at a time when trading has never been faster or more electronic, the execution of primary deals remains archaic. There have been tweaks around the edges, but the fundamental processes have not changed for decades.
Finsmart, a small outfit run by former bankers, is the latest fintech to try to address this. After initial discussions with market participants last year, as well as approaching individuals to come on board as advisers, it has now started development of a new debt capital markets platform, DealPro, and completed a first pre-seed funding round in March.
Finsmart founder and chief executive Sotiris Manderis is a former banker who was most recently a managing director in corporate and institutional digital at HSBC. He says the need for modernization is self-evident.
“I really believe that the whole space of primary capital markets needs streamlining,” he tells Euromoney. “In 2021, people are still printing stuff out or sending sensitive PDFs by email. But why? At a time when banks are looking to reduce their cost base and reduce their operational risk, there is still the risk of leaving a document on a train.”
New deals
Archaic some processes might still be, but Finsmart is far from being the first to try to tackle this. In recent years, the likes of Nivaura, Agora and the underwriting banks themselves have all been developing new ways of dragging deal execution into the 21st century.
DirectBooks, a primary deal execution platform owned by investment banks, recently welcomed RBC as its 12th participant and has just hired ex-Citi banker Duncan Phillips as its head of Europe.
But while there is a lot of interest in looking into and addressing the interaction between underwriters and institutional investors in announcing deals, getting orders or looking at legal documentation – all of which DirectBooks addresses – Manderis argues that no one has been really looking into the relationship between the underwriter and the issuer.
“At a high level, we want to create a digital channel between the underwriter and the issuer that will cover deal execution and more, including providing a marketing and analytical tool,” he says.
Deal execution is a collection of processes that needs streamlining, but once you set up a digital medium for it, there is so much more you can do
Sotiris Manderis, Finsmart
In time, Finsmart thinks its platform could be a conduit for originators to push ideas to treasurers and CFOs, even when they haven’t been mandated for a trade.
For the moment, though, the focus is on execution.
“We started there because that is where there are the most pain points,” says Manderis. “There is a lot of information that all needs to go into one place, whether it is logistical arrangements for virtual meetings, investor feedback, a live order book, allocation information and deal documentation. So why not have a mobile app that has it all?”
A key selling point for the system will be its ability for real-time updates. Issuers want to know if Pimco or BlackRock have put in an order or the balance in the book between hedge funds and real money. And they want to be able to react quickly if they don’t like what they see.
The ability to provide context is another advantage that Finsmart is pushing.
“What issuers are often missing is context,” says Manderis. “A treasurer wants to know how certain investors have been involved in its deals in the past and what feedback they have given.”
MVP by end-summer
Development started in January but will ramp up now that the first funding round is in the bag. Manderis is hoping to have reached the minimum-viable product (MVP) stage by the end of the summer.
“If we can have our first few live deals in October or November, I will be pleased,” he says.
Given that DealPro’s clients will be underwriting banks, these have been involved since the start. Finsmart is aiming to partner with a few, beginning with European houses, whose geographical location makes collaboration easier. Non-disclosure agreements are being drawn up now.
Once the functionality of the platform is in place and initial testing has been completed, the next stage will be to run dummy deals on DealPro, or even internal rehearsals on live deals that banks are working on.
We will be starting with features that are quite generic and useful to all, and then adding to them
Sotiris ManderiS
Finsmart will not be involved in trading or the pricing of securities, meaning there are no regulatory hurdles that it must overcome.
“What we are doing is facilitating the process – everything will be encrypted, the control of data will be within the banks and there will be data segregation within the cloud for each bank’s setup,” says Manderis. “It is the banks that will deploy it to their issuer clients.”
If DealPro sounds a little like something that HSBC was getting excited about a few years back, that’s no surprise, since Manderis was involved in HSBC’s MyDeal platform, which saw bankers impressing clients by showing them the progress of their deals on iPads.
Guillaume Petitgas, a director at Finsmart, also hails from HSBC, where he was head of emerging markets DCM. Bryan Pascoe, one of Finsmart’s advisers, is a former global head of DCM at HSBC.
The startup hopes that its neutrality and independence will give it an edge, as well as the fact that its platform does not need to be tied to any one bank’s legacy systems, which are often pitifully creaky, even in 2021.
For many bank management teams, consolidating the dozens of platforms that have built up over decades is a top priority – one that is painfully difficult to achieve.
Idea generation
For the moment, Finsmart is looking across the whole spectrum of DCM.
“We don’t want to fragment our approach,” says Manderis. “We want to speak to frequent and infrequent issuers, financial institutions, corporates, everyone. You need to find which features of the product will be more popular with different kinds of issuer, but this will be a modular and evolutionary product.
“We will be starting with features that are quite generic and useful to all, and then adding to them.”
Deal execution is an important part of a DCM relationship with a client, but many bankers would argue that it is idea generation that is the more important competitive differentiator. And while they welcome tools that make their lives easier, they also depend on personal dialogue with issuers to maintain and strengthen their client relationships.
Manderis says he is not looking to replace that, but rather to provide more efficient ways of getting ideas to an issuer.
“Deal execution is a collection of processes that needs streamlining, but once you set up a digital medium for it, there is so much more you can do,” he says. “It can be a way to alert clients to new opportunities.”
He envisages a CFO who is on the move when the app alerts them to a favourable market movement that could make it worth talking to the bank about an issuance window that is opening.
Give bankers half a chance to do that, and is there a danger that they might start to swamp an issuer with ideas? Manderis agrees this might need to be addressed.
“Yes, we might need to think about how to apply a filter.”
