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When Origin, a fintech start up led by a former bond and derivatives trader, Raja Palaniappan – who worked through the financial crisis at Lehman Brothers, Nomura and latterly Credit Suisse – appeared in the middle of last year, it was the investment banks’ worst nightmare.
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Raja Palaniappan |
Palaniappan had been a close witness to the inefficiencies of the primary debt markets and to the information asymmetries between issuers on the one hand, investors on the other and the sell-side banks in the middle that matched them up.
He and former Nomura colleague, credit derivatives trader Robert Taylor, reasoned that the same technology-led transformation that had delivered the secondary bond markets from an insiders’ club for a few specialists dealing on the phone to a more automated, open, transparent and efficient marketplace must surely soon disrupt the new-issue business.
They conceived and started to build an online platform for issuers of private placements to post desired sizes, terms and maturities for new offerings directly to the 50 biggest investors that are the regular providers of such funding, without going through the bank arrangers as usual.
“We thought that the workflows around primary issuance were quite archaic and could be made much more efficient to save money for issuers and investors,” Palaniappan tells Euromoney. “And we had seen how electronic trading in the secondary markets had really accelerated the push of price transparency from the sell side to the buy side.”
The two developed their thoughts over the second half of 2014, seeking validation from mentors on the vibrant and fast evolving London fintech scene at the start of 2015. In March last year Origin was accepted, after several rounds of pitching and interviews, into the Barclays Accelerator programme, where it received funding to augment the start-up capital provided by some angel investors and a small US-based venture-capital fund.
“I think it is full credit to Barclays that they accepted into their accelerator a firm that was seeking to disrupt their business model,” says Palaniappan. “And we spoke to the Barclays treasury people that issue debt for the bank as well as to the capital markets teams and syndicate professionals.”
The founders had always known that they were not the first entrepreneurs to have the idea for a direct-issuance platform connecting issuers to investors. The notion of those 50 large investors seeking to lend directly to borrowers rather than pay intermediary banks brings back memories to Euromoney of conversations with investment bankers in the late 1990s, when rapid consolidation among asset managers first led some to fear the emergence of so-called super investors that might pull borrowers into their orbit and disintermediate the sell side.
What happened next at Origin offers a fascinating insight into the workings of the London fintech scene.
Changing tack
Origin proceeded to build its platform and prepare for full launch – imminent as Euromoney went to press – but its founders refined the business model. Instead of linking issuers of private placements directly to investors, it changed tack and decided to invite sell-side banks onto the platform to pick up borrowers’ indicated terms and distribute these potential deals to investors.
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It seems a small example that shows the reality behind the hype of fintech innovation and the oft-touted story of renewal of financial services through a new tech-savvy breed unsullied by the sins of the recent past. In fact the big banks are determined to control emerging fintech threats to their business: catching it in the nets of their accelerators and venture capital funds that will either own the disruptive technology or re-wire it to better suit the incumbents.
However, Palaniappan has a subtler take on how this big change to the business plan came about.
“In trying to build out the original business plan we discovered two things. First, we faced major infrastructure obstacles that would take a large amount of time and capital to overcome. We are a start-up that has raised £790,000 of capital. There are things that are essential for such a business that would be very expensive to acquire, such as a Euroclear settlement account, as well as the ability, explicitly or implicitly, to underwrite transactions on settlement day.
“Secondly we found that the big banks we had set out to disrupt are now finally going through the massive and radical restructuring process that seemed inevitable in 2008 and 2009 but that was somehow delayed. They are now much more open to sharing infrastructure and working with new providers rather than seeking to own every leg of the transaction over its life cycle. There exists now a much bigger opportunity for new firms to work with banks rather than work against them, as banks review every aspect of their cost base, their business models and their revenue potential.”
He describes the business the founders are now are building as “a tool to connect borrowers to a platform that automates many of the manual processes that each participant in the new-issue market had to pay for and which now frees up banks’ expensive front-office staff from order-taking type functions and allows them to engage in more value-added conversations with clients.”
Origin is taking as its launch product private placements issued off medium-term note programmes by 100 or so of Europe’s most frequent borrowers: mostly sovereigns and supranational agencies, FIG issuers and some corporates. These placements can be as small as $25 million, but in aggregate they account for up to 30% of investment-grade issuance annually. It’s a big market of small transactions.
Palaniappan says: “Today you have SSA and FIG borrowers sending emails and spreadsheets out to up to 30 or 40 banks each week, each containing funding level targets on standard structures ranging over maturities from one year to 20 years, saying that if the banks can come back with any investor that will lend at those levels, the issuer will borrow.
“We are creating one platform for issuers to post those terms and they can control which banks on the platform have access to that information. Banks can see the names of every issuer on the platform but only view terms from borrowers that approve them to see that data.”
In March, Origin was soliciting launch partners, having received encouraging interest from 50 potential issuers and half the top-15 bank dealers. Palaniappan says: "We have spoken to most of the Street and find banks are much more receptive to this kind of approach today than they would have been one year ago.”
He adds: "What we’ve found is that it is very difficult to disintermediate incumbents in any but a very few markets. But you can still build a valuable business. Think of the London property market. Zoopla is now a FTSE250 company but neither it nor Rightmove disintermediated Foxtons. If anything, they may have empowered Foxtons, even while bringing transparency that drives some inefficiency out of the market.”
He says: “One thing that really attracts issuers we talk to is the chance, on an anonymized basis, this platform offers to benchmark their borrowing curves against peers.”
Origin is soliciting banks to join the dealer panel for a proof of concept over the summer to design and iterate the product and the functionality they agree is useful for such a market utility. It will refine its revenue model through that proof of concept phase.
