Axial

Nov 24, 2023

Privé sees path to multi-manager dominance Views: 0 Privé Technologies, a Hong Kong-based fintech, has ambitions to dominate the wealthtech industry outside of the United States by combining robo-advisory with operational expertise. Charles Wong, chairman and co-founder of the company, wants to build it into the non-US version of SEIC, also known as SEI Investments Corporation. SEIC is based in the US. It combines an asset-management business with a technology service to make clients’ operations and data management more efficient. The firm began life as a traditional money manager but in the 1970s developed an automated accounts-management system for trust banks. In the 1990s it expanded its technology to include a wealth-management platform for independent financial advisors. Today SEIC advises, manages and administers $1.3 trillion for hedge funds, private-equity funds, mutual funds and separate managed accounts. Of that, $342 billion represents its own AUM, running manager-of-manager portfolios, which seek to actively select various strategies from a pool of managers that can be customized for a client. The clients can be private banks, consumer banks, IFAs, brokers, or others providing investment products to their end customers. US versus the world While this is an interesting business, SEIC has no on-the-ground footprint in Asia; it runs the region as part of its London-based international arm. Like many large US financial businesses, it has been able to scale very well at home (where it is a big player in the US defined-contributions industry), but its products don’t always translate. Wong wants to build Privé into the non-US version of SEIC. He thinks he can accomplish this, over time, because of two factors. One is that big US companies are built for their domestic market and don’t have foreign-currency products or capabilities. Two is that the kind of products that SEIC specializes in, particularly separate managed accounts, are only now gaining traction in Asia, thanks to fintech. Wong’s bet is that if he can add enough bank customers – the company now has Bank of East Asia in Hong Kong and CIMB In Malaysia using its various services – he can build Privé into an SEIC-like entity, but one that is built to scale across fragmented markets and multiple currencies. In other words it might take a fintech in a region such as Asia to recreate the SEIC model for the rest of the world. (Multi-managers in Europe have the same issue as SEIC, in that they are primarily euro-based.) B2C roots This is now how Privé began. The company was launched in 2011 as a consumer-facing robo-advisor, then called Privé Management. The pitch was standard for B2C robos: use technology to cut through asset managers’ high fees, directly own the underlying assets, choose your own strategy based on your risk appetite and let the system choose the underlying fund managers. Like most players in B2C robo, Privé soon worked out that the cost of customer acquisition was too high, and that there wasn’t demand in Asia anyway, because retail investors have only been exposed to mutual funds sold through banks. An SMA is an investment scheme overseen by a broker, IFA or other professional who customizes a selection of third-party asset manager portfolios on behalf of their customer. The idea of separately managed accounts, popular in the US, never caught on in Asia because banks have the luxury of controlling funds distribution and they resist open architecture, which may not favor their in-house asset management unit. Also, the complexity of SMAs means a lot of cost and a lot of administration, which requires the scale of a market the size of the US to justify. That is now changing, as digitalization makes SMA processing cheaper and more efficient. But this type of customization still requires a lot of implementation complexity. Bigger partnerships Even the biggest private banks struggle with this: they have a chief investment officer who provides clients with a house view, but very rich clients insist on customization – that’s why they go to an upscale bank – and so the firm sets up sub-accounts for them. The CIO’s office ends up in an operational and administrative nightmare to track it all, unless this is completely automated. The SMA idea was beyond Privé’s capabilities to manage. Like other wealthtechs, it pivoted to B2B, developing robo capabilities that banks could use in-house to capture more of their deposit base. But B2B sales cycles are long and onboarding a financial institution is difficult. This too requires scale, and Privé was floundering with small IFAs in the region. Privé’s first success was landing a pilot with Citi, which was difficult and drawn out, but exposed the company to a wealth manager of global size and sophistication. Even so it has taken nearly a decade to gain traction with more banks. In 2018, Privé raised money from Credit Suisse and Samsung Ventures. It’s done two more rounds, including a 2021 Series B with Network VC. Having Credit Suisse on the cap table was useful because it was entrée to another global private bank – but the relationship turned out to have an even more useful outcome. Axial Partners Credit Suisse was a backer of a Hong Kong SMA startup called Axial Partners, along with BlackRock and Morningstar. Axial was founded by American bankers who saw the opening for an SMA platform in Asia. But they lacked the technology for it to be efficient. “They were selling SMAs by PDF,” Wong said. The business lost money, suffered management turnover, and was moribund. Wong saw an opening. Axial had the manufacturing: it brought the investment strategies to the table. Privé had the robo-based wealthtech that faces the end user and the relationship manager. Axial’s shareholders integrated the business with Privé and took equity in the combined business, so now BlackRock and Morningstar also have stakes in the business. Now Privé offers its bank clients either the SMA platform or the front-facing robo, and tries to upsell them to the other service. “Privé is the visualization, the look and feel of the investment journey,” Wong said. “Axial is what you use to implement that.” For example, if a customer wants to buy TSMC stock, do they buy the ADR in New York, or the original share on the Taiwan Stock Exchange? If a customer wants exposure to Indian equities, how do they achieve that, given India’s capital controls? This is the kind of nitty-gritty execution work that helps make the front-end user experience practical. “By combining manufacturing and robo-advisory, banks can now serve the mass affluent or the high-net-worth segment,” Wong said. “Smaller banks can leapfrog the big private banks.” After Credit Suisse The shareholder structure faces its biggest test with the collapse of Credit Suisse earlier this year and its takeover by UBS. Wong says UBS has yet to decide whether to keep the stake in Privé or sell it. UBS has its own technology vendor, UBS Partners, which sells the software behind its own portfolio-management systems. “I don’t see us merging with them, but we could cross-sell across Asia,” Wong said. The outcome ranges from UBS selling its stake and walking away, to combining the businesses in some way – although Wong didn’t discuss touchy issues such as how much control the bank would want. He says, however, that the idea of becoming the international version of SEIC began with early discussions with Credit Suisse. There had been talk of the bank using Privé in emerging markets where it lacked a strong presence. These ideas never materialized, but it sparked the idea of bank implementations combining the SMA platform and the robo service. “If we can replicate the SEIC model in Asia, which is much more fragmented, then we can become much bigger than a generic wealthtech,” Wong said, adding he intends to expand into Latin America. “We can do this in multi-currency and US firms can’t.” New products Looking ahead he sees artificial intelligence restructuring wealthtech. Generative AI can be harnessed to make client communications easier for people to digest. Wong sees it as a tool for customers to use themselves, rather than as a tool used by relationship managers. Privé has developed a tool already. When a customer inputs their criteria, Privé generates a protocol mapping out the portfolio selection strategy. It’s not a conversational explanation but it does let Privé spit out a PDF that spells out the underlying portfolios, which it sends to both the customer and the RM, who can give the customer a call to talk it over. Axial’s platform can execute the trades to assemble the model portfolio, or the bank can do this by itself. But this won’t take off until banks are satisfied the AI can explain its recommendations. “Say I give the AI 10 requirements to build my idea portfolio,” Wong said. “There could be hundreds of portfolios that match the need, but it will recommend only one. But when I make that recommendation, I need to tell you exactly how it fits the criteria you gave me.” Other new products on the table are equity futures. Right now, Axial’s SMA platform only deals in equities, as Wong considers bonds too complex and expensive to handle because they aren’t liquid enough. But he wants to use futures strategies to create structured products that can generate premiums that Axial pays to a customer as a dividend (in return for capped upside).