Asset managers aren’t done with blockchain yet

Hey Fintech Fam!

Thanks for kicking off another week with us. Today our main item is an update from London asset management correspondent Joshua Oliver on how the sector is still embracing blockchain, plus we have an interview with a CEO helping start-up employees cash out on their equity stakes in the turbulent markets and earnings recaps for some of the largest UK fintechs.

A note to our readers: This will be one of the last editions you’ll see crypto get top billing in this newsletter. That’s because we launched our Cryptofinance newsletter earlier this month, which will be your destination for everything you need to know from the digital asset world. You can sign up here.

With Crytofinance up and running, Sid and I will have more room each Monday to explore other trends driving change across fintech. Expect to see the new version of FintechFT this autumn. What fintech-related topics do you want to see us cover in the relaunch?

Share your ideas with us at imani.moise@ft.com and sid.v@ft.com.

Happy reading!

Asset managers hold candle out for blockchain

As cryptocurrency markets failed to claw back gains last week, asset manager Schroders picked up a stake in the crypto-focused fund manager Forteus. The move underscores the divergent bets on the future of the investment management sector.

Peter Harrison, chief executive of the FTSE 100-listed asset manager that oversees £731bn in assets, said the deal was meant to address growing investor demand for personalised, tangible investments as interest in traditional assets decline.

“We’ve seen peak mutual fund,” he said in an interview.

So far, the mainstream financial services industry has been spared any knock-on effects of the carnage in crypto markets. However, the blow to fund managers from failures such as the May collapse of stablecoin Luna to the recent bankruptcy of lender Celsius, has yet to be determined.

“There was very little self-regulation. There was inane risk management, where companies took massive leverage and asset liability mismatch . . . Those are the two ways people always go bankrupt,” said billionaire Mike Novogratz, chief executive of Galaxy Digital, at a conference last week.

Anthony Scaramucci, the investment manager who infamously served as Donald Trump’s communications director for 11 days, is the latest to be hit by the drop in crypto prices. His hedge fund, SkyBridge Capital, has “temporarily” halted clients’ ability to withdraw money from one of its funds, which has an 18 per cent exposure to crypto and has fallen 30 per cent this year.

Scaramucci remains bullish on crypto-long term. “I am not smart enough to time the market,” he told the New York Times last week. “But we’ve done a tremendous amount of research and we think anyone who has will see that blockchain technology is good and is the future.”

Skybridge’s woes are the latest in a line of wobbles and calamities afflicting the digital asset sector, but the full impact of the crisis on crypto start-ups and investors has yet to be felt, according to industry insiders.

“I think lots of hedge funds are out of business and they don’t know it yet,” said Novogratz. He predicts the number of crypto hedge funds, which surged from 400 to 1,400 in the last two years, may be heading back where it came from.

“It’s frustrating as heck because at times the whole industry looked like a bunch of idiots,” added the financier who got Luna’s logo tattooed on his arm five months before the crypto project imploded.

There are signs that investors are starting to cool on the sector at large as well as the currencies themselves. Global blockchain start-up fundraising in May and June was roughly the same as figures a year prior, according to Dealroom data. With one week to go in July, the funding tally of $821mn is down 75 per cent from 2021.

Still, crypto’s irrepressible boosters have continued to tout the transformative capability of the underlying technology, even as they engage in a bit of soul searching about the mistakes that led to the crash.

“Blockchain technology will help provide access to exciting, more tangible assets,” Schroders’ Harrison wrote in a letter to the FT. “The question is whether the industry can embrace this challenge.”

Sam Bankman-Fried, chief executive of FTX, said investors are still interested in the nascent blockchain sector but they have become pickier about what they look for in a crypto start-up. Though profitability became a “dirty word” among crypto enthusiasts in recent years, Bankman-Fried said investors are now asking tough questions about crypto projects’ usefulness.

“If everyone woke up one day and this thing was gone, would anyone miss it?” he said. (Joshua Oliver)

Fintech fascination

Blame it on the algos The Washington-based, computer-driven hedge fund Fort posted steep losses so far this year as its models failed to adapt quickly enough to shifting markets. Most so-called “quant” funds have been able to make hay out of the wild swings in markets but Fort’s stumble raises questions about the suitability of algorithms based on historical data for today’s uncertain times.

Inflation concerns fuel cross border boost Rising interest rates and fears of further currency volatility led to a flood of money transfers, adding a temporary boost to UK fintech Wise’s revenue in the last quarter. But executives warned the bump may be followed by a slowdown if the global economy enters a recession.

Starling in the Black British digital bank Starling’s strategy to diversify its business beyond basic retail banking operations finally has the potential to start paying dividends. The neobank posted its first annual profit last week fuelled by its move into the mortgage market. The company also said it would abandon its attempt to open a bank in Ireland and focus on its banking-as-a-service (BaaS) platform instead.

Quick Fire Q&A

Every week we ask the founders of fast-growing fintechs to introduce themselves and explain what makes them stand out in a crowded industry. Our conversation, lightly edited, appears below.

Last week I talked to Phil Haslett, chief strategy officer and co-founder of EquityZen, about why he thinks the equity rout in the tech sector will impact compensation packages going forward. His firm has helped employees at pre-IPO firms cash out their equity shares by selling them to institutional and retail investors for nearly a decade. Though he’s only raised $7mn since EquityZen’s founding in 2013, Haslett says its asset-light model has prevented the firm from being reliant on external funding.

How did you get started? We noticed there were a lot of employees that worked at private technology companies and were issued equity or stock options but didn’t really know much about what their equity was worth, or what they could do with it­­. We also recognised that there were individuals that wanted to invest in the tech companies they really believed in, but they were all private. It was really hard to write a $10,000 check to invest in Uber, DocuSign or Spotify. So we decided to build a technology platform to connect investors that wanted access to start-ups with employees and ex-employees that held shares and wanted to sell them.

What’s the revenue model? We charge between 3 and 5 per cent of the transaction size to the buyers and 3 to 5 per cent of the transaction size to the sellers, only if the transaction closes.

How has the tech rout impacted supply on your platform? The average age of a seller on our platform is between 35 and 40 years old, so a lot of them actually have never experienced any downturn in the markets. They’ve only seen the value of their ownership go up in value so there’s been a bit of sticker shock. But that’s also being met with the fact that there’s a need for cash probably more than there ever was for a lot of these sellers. We’re starting to see people willing to sell shares at material discounts that we’ve frankly never seen since we started the business — 40 to 50 per cent discounts relative to the previous funding round, which may have only happened eight or six months ago.

How has it impacted demand? Companies are still staying private longer and growing — so that narrative hasn’t changed. But certainly I think people are a little bit more conscious of the kind of investment or spend they’re having right now just given the current environment. We’re sensitive that our customers are a mix of retail investors and institutions. We have started to see that there may be a little bit of softening of demand from the retail side but institutions are still interested in making investments in this space, assuming that the price is right.