In finance, as in life, trust is key
Ten years ago, much to everyone’s surprise, tech giant Microsoft took a 1.6 per cent stake in a young Web 2.0 company. It paid US$240 million in 2007, which valued the startup at what was then an eye-popping $15 billion. You may have now heard of the company. It was Facebook, and it is now, of course, worth more than $500 billion and is among the world’s most important organizations. The investment is now considered among Microsoft’s smartest plays.
But though such deals seem like no- brainers in retrospect, in truth they were calculated risks predicated on trust: in the company, in the vision, and in the people. And it is trust that underpins so many financial decisions both big and small — everything from a retail investor’s choice to jump in on a stock all the way up to a Fortune 500 company making a big play.
But given the inherently uncertain nature of investing, how does one cultivate a sense of trust?
Fineqia, a U.K.-based startup that sources debt-backed investments, is hoping to provide some answers to that question. Its newest approach: a recent equity stake taken in PremFina, a company that provides software and financing for insurance brokers — the latter of which is among the safest and most stable types of debt around.
It’s a deal that both solidifies Fineqia’s position but also sets it up for future growth.
Through taking an equity stake in PremFina, Fineqia can access what is among the most reliable asset classes.
“The quality of premium finance debt is very high,“says Fineqia CEO Bundeep Rangar of PremFina’s business model, which essentially offers credit to insurance brokers. “And it lends itself well to future crypto currency bond offerings that we’re currently evaluating.”
Pointing to the U. K. premium financing market leader, Rangar says that their loan loss ratio is well under half a per cent — a rate that is practically unheard of in regards to other classes of debt.
“It’s an extremely desired credit quality,” he says.
While such stability is always desirable, it has particular benefits for Fineqia’s business model. Fineqia uses its platform to source funding for debt-backed securities. Projects funded through the company’s system cover a vast range: everything from companies looking to raise capital to media projects seeking funding.
The deal with PremFina thus creates a stable linkage between financing and the deals that take advantage of it. It is, in the classic sense of the term, a win-win.
“From a business model point of view, getting a close relationship with an originator gets you closer to securing the pipeline,” says Rangar.
But if that kind of synergy is one more immediate advantage of the stake, another longer-term outlook may be the upside in getting in early in a growth company.
While no longer a startup, Rangar says PremFina is both young and growing. “You get that benefit of getting equity relatively early in a company’s life,” he says. “So the upside is ahead.”
The US$36 million financing round for PremFina was a significant vote of confidence. In fact, it was three times oversubscribed.
But the eventual size of the sum wasn’t the only notable thing. Backers included Rakuten, the Japanese e- commerce giant, which also owns ebook company Kobo, Thomvest, the venture capital firm run by Peter Thomson of the Thomson family, and Draper Espirt PLC, which is backed by Silicon Valley billionaire Tim Draper, an early investor in Bitcoin, Tesla, SpaceX, Hotmail and Skype.
In the ever-difficult game of knowing where to place one’s trust, that sort of company is a helpful guide.
While that could fairly be called a nod of approval for PremFina, Rangar believes the deal will have considerable knock- on effects for Fineqia, t oo. Bolstering value by investing in earlystage companies is a tried and true move; Microsoft’s stake is but one example of a common practice. Yahoo’s investments in Google and China’s Alibaba were similar. While Fineqia’s stake in PremFina is more directly strategic and less flashy, it, too, hopes to catch a wave that is building momentum.
Part of that optimism is reflected in the fact Fineqia is also listed on the Canadian Securities Exchange ( CSE), as it looks to offer Canadian investors a way to access the fintech sector, which thus far has remained concentrated in London in the U.K. It is, in effect, a magnet for trust — and hopes its recent moves will repay that faith in spades.