In the last week of February, Euromoney sits down with a veteran equity capital markets banker to discuss innovation in that business.
It is a short chat.
“I have been doing this since the mid 1990s and we still execute deals in much the same way today as we did 20 years ago,” he tells Euromoney. “In fact, it’s pretty much identical. This remains an analogue business in an increasingly digital world.”
Suddenly, he looks anxious. “The whole financial ecosystem around us has evolved. Change has to come to primary capital markets. But though we have our own initiatives under way, I’m just not sure what form that change will take.”
The very next day, Nivaura – a fintech company aiming to automate the entire middle- and back-office processes for issuing new debt and equity deals – offers a clue.
It has closed a $20 million seed funding round, an unusually large amount for such early stage capital, with backing from the London Stock Exchange Group, law firms Allen & Overy and Linklaters, leading fintech venture capital fund Santander InnoVentures and Transamerica Ventures, a subsidiary of Aegon.
Avtar Sehra, Nivaura
“Big picture, we are using technology to make capital markets more efficient and, more specifically, we are focused on the primary issuance and administration of financial instruments,” Avtar Sehra, chief executive of Nivaura, tells Euromoney.
“Nivaura’s platform streamlines and automates the entire end-to-end process of issuing financial instruments and their ongoing administration and lifecycle management. The technology has already been deployed across multiple asset classes including private placement vanilla bonds, more complex structured products and equity.”
The company aims to provide this technology to investment banks and other financial institutions and dealers in order to streamline their processes and reduce legacy infrastructure costs in primary markets.
The firm has previously worked with JPMorgan on early prototypes but has since stepped away from that relationship, wanting to be a neutral provider of technology to banks, issuers and exchanges.
Gavin Youll, chief financial officer of Nivaura, says it has progressed stealthily. “This is a big piece of kit we have built, and to date we have concentrated on getting that right and not wanted to make much noise about it until we had full confidence in the product. Having now validated our platform technology, executed commercial transactions both inside and outside of the FCA sandboxes, and obtained our Mifid and Cass regulatory permissions, we are now embarking on our journey to market.”
Gavin Youll, Nivaura
Nivaura hopes large banks will white-label its kit, having come far from the days when they weren’t interested in working with it.
“When we applied to the FCA to participate in sandbox 1, we were so early stage that it was difficult to get traction with authorized firms, so we set about working to get the Mifid and Cass regulatory permissions ourselves,” recalls Vic Arulchandran, chief operating officer.
Getting those helped the company deepen its knowledge of capital markets regulations and compliance, and it was able to structure its testing and use of technology in FCA sandboxes 1-4 in a methodical way.
Arulchandran says: “The first bank willing to provide us with client money accounts was Metro Bank. Since then we have been able to open client money accounts and custody accounts with Santander and Bank of New York Mellon. That took a lot of work, but to have client money and custody accounts with tier-one banks is very additive to our business.”
Nivaura was founded in 2016 and made a particular breakthrough with a general-purpose legal mark-up language (GLML) developed for lawyers to use in their existing legal documents. GLML makes those documents machine-readable, thereby allowing the Nivaura system to provide transaction parties with an easy step-by-step automated process to execute the financial instrument underpinned by the marked-up document.
Sehra says: “Companies and banks have document deal rooms for new issues but no one has achieved this degree of automation in a vertically integrated system. It is cloud-hosted and modular, which makes it easy to plug into and banks and issuers can use the whole workflow from front to back for a deal, or just select whichever components they want.”
Vic Arulchandran, Nivaura
One of the benefits is that preparation of legal documents and price discovery and negotiation of deal terms can proceed in parallel rather than sequentially.
“Say a company is issuing a fixed-rate bond. It can take template documents and customize them via a library of standard terms and covenants provided by a law firm,” Sehra says. “The platform also features a bookbuilding module offering various models of syndication which can be used by itself or can integrate with existing market standard software, such as that offered by IPREO, to orchestrate the entire issuance process.”
He continues: “An issuer can either elect to allow open access to the deal to all onboarded investors so that they may coordinate legal terms as well as pricing, or it can admit only certain cornerstone investors to negotiate on the legal structure and present the deal to others on a take it or leave it basis.”
Nivaura brings together classic efficiency plays. “Trade fails often arise from mismatched settlement instructions caused by fragmented processes and data flows between counterparties,” Arulchandran points out. “Automating data flows and feeding digital legal documents directly to clearing can help minimize those fails."
Taken all together, it makes the new issue process faster and cheaper. “It collapses both the fixed costs and the timeframes for doing new issues by 60% to 80% for standard debt deals, for example, as well as providing greater liability and exception management for settlement instructions,” Youll tells Euromoney.
Spencer Lake, a veteran capital markets banker from HSBC, is coming onto the board of the company. Lake tells Euromoney: “This is much more than an automated workflow tool. It is next-generation capital markets.”
He explains: “What’s not often appreciated outside the leading banks is that their capital markets businesses are usually hybrids or joint ventures between banking and markets. They outsource a lot of the work around new issues to the legal firms. And there is rarely a head of capital markets who also owns the middle- and back-office infrastructure required for doing deals and its associated costs.”
That’s one reason why automation in primary markets has been such a challenge. “Nivaura has attacked the pain points and manual steps in what is a very linear process, starting with software to handle the legal documentation and going all the way to a tokenized custody proposition,” Lake says.
He adds: “Even for frequent issuers, DCM has worked on T+ 3 to 5 days and for infrequent issuers on T+10 or more. Nivaura’s digital platform system will take the most frequent to T+1, and when securities are fully tokenized we will be at T+0. And for all the back end of coupon payments and redemption will be seamless and fully automated.”
That speed may become more important as borrowers seek to manage increasingly unpredictable new issuance windows, which slammed shut last December and sprang open at the start of 2019.
The lower cost of processing new deals – assuming banks who take the Nivaura system share those savings with issuer clients – may attract more SMEs to launch bonds and open up new sources of non-bank capital to them.
This is much more than an automated workflow tool. It is next generation capital markets- Spencer Lake
While it is not a blockchain company, Nivaura has already done deals on distributed ledger. Back in 2017 as part of the FCA sandbox, LuxDeco, an online retailer of luxury furniture and home decor accessories, issued two bonds using Nivaura’s platform. One was a traditional sterling bond and the other was an ether-denominated bond that was structured, executed and administered through the Nivaura platform and cleared and settled on the ethereum public blockchain. This was the world’s first legally compliant cryptocurrency denominated bond.
“It was an interesting deal,” Youll recalls. “For us, our work with different technologies such as the blockchain is a way to future-proof our business. We believe blockchain has great potential to provide more efficient clearing and settlement over the medium to long term, but we’re not proactively advocating this in the present day.”
The company has connectivity to clearing systems such as Clearstream and Euroclear and to issuing and paying agents, and can also connect to whichever blockchains its clients may request.“The key game changer in our solution is the vertical integration,” Youll says, “which alongside the automation, facilitates a seamless flow of data throughout the entire end-to-end process of onboarding, legal formation, syndication and bookbuilding, execution, all the way to settlement and then post-trade, even flagging up cash flows so treasurers at issuers can make sure they have the right funds in the right accounts to meet coupon payments and automate certain corporate actions."