As Global Business Gets Serious about Sustainability, Research Is Ready for Its ESG Moment

As Global Businesses Get Serious about Sustainability, Research Is Ready for Its ESG Moment

By | General
There are few certainties in the world, especially these days, but some things we can always count on: death and taxes, for one. Also, corporations exist to maximise profit and serve the shareholders.

Or do they? As much of a staying power as Milton Friedman’s credo has had in the modern world economy, it might be time to rethink things.

At least, that was the message coming out of the latest Business Roundtable a couple of months ago, where US business leaders came out with a timely message for sustainability. 

Some choice quotes from key people included JP Morgan boss (and Business Roundtable Chairman), who said “The American dream is alive, but fraying… Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.” 

Tricia Griffith, President and CEO of Progressive Corporation, added that “CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value.”

ESG Buzz

Now, if we’re feeling cynical, we could say this is just paying lip service to current buzzwords like sustainability and environmental, social, and governance-focused investing. You might know that last part as ESG.

And it’s true that this has been an issue for ethically-minded investors. It’s all well and good to have a clear conscience and invest in good causes but, at the end of the day, investments need to generate returns. If ESG-focused investments aren’t paying off, should investors keep pursuing them just for the sake of ethics? 

Similarly, if businesses generate profits despite sticking with shady practices, anti-environmental policies, and no regard for the social impact of their practices, is there a practical reason for them to lean into ESG? In fact, aren’t they in breach of their fiduciary duties to shareholders if they do and profits plummet as a result?

The Business Roundtable’s announcement is important, even if it’s just grandstanding, because it seems to be willing to break that particular taboo. The message is clear: shareholder interest should not be the only Northern Star a business follows. It’s good, then, that there is data that seems to reward this mindset.

According to Allianz’s ESG Investor Sentiment study, published last year, two-thirds of millennials stated that ESG considerations were important to their investment decision-making. More than half of their Generation X counterparts said the same, whereas only 42 percent of Baby Boomers agreed.

Source: Allianz ESG Investor Sentiment Study

It’s clear that for the new crop of investors and shareholders, sustainability is a concern – and this means that businesses also take notice. 

It certainly seems to be in their best interests to do so: Investments with a sustainability mandate were more than US$30 trillion in 2018, a 34 percent increase from the two years before, as per a report from the Global Sustainable Investment Alliance.

ESG Research Comes of Age

Where does that leave research? ESG-focused research has been the subject of much eye-rolling, as the buy-side seeks to separate the objective, substantive wheat from the marketing and ideologically-driven chaff.

“A major source of frustration for investors is that out of the vast corpus purporting to be ESG alpha research, only a fraction: 1) is actually about alpha even when it thinks it is, and 2) can pass for real research based on objective, analytically-rigorous methods,” writes Kyle Rudden, an independent analyst focusing on “alpha-centric” ESG research.

Rudden, who recently started publishing on Smartkarma, is confident that ESG research can be objective, generate sound investment ideas, and put data ahead of ideology. He should know – Rudden cut his teeth working on the sell-side for JP Morgan, where he managed the Global Energy Research Team. 

There, he encountered a spate of ESG failures in the market, from governance failures like the Enron scandal to environmental and social debacles that evaporated billions of dollars in shareholder value.

Read Kyle Rudden’s full Insight: ESG Alpha: Fluff or Stuff?

“All this time, I was doing ESG research without knowing that’s what I was doing,” he recalls. “When ESG entered the zeitgeist, it provided a framework that cast earlier experiences in a brighter light.”

This taught him the importance of ESG research based on hard facts and data, without the ideological baggage and other biases that can sometimes come with this line of thought. These can skew research, especially when it promises alpha – the industry shorthand for when an investment idea has managed to beat the market return for a certain period. 

That’s what makes Rudden’s approach to ESG research alpha-centric: deriving alpha from ESG, focusing on the causal relationships between the two, rather than alpha with ESG, which just seeks to generate alpha while also adhering to ESG principles.

Of course, there’s a reason why this isn’t more common in the industry. Not only is it a lot of work, there are unique challenges inherent to ESG. Limited data, inconsistent reporting cycles, and expensive integration make things harder.

Some of these factors have been highlighted elsewhere, such as BNP Paribas’s ESG Global Survey earlier this year. 

Barriers to ESG adoption

Source: BNP Paribas ESG Global Survey

Read our blog: Why ESG Investing Is No Longer the Buy-side’s Top-Performing Cliché

Ultimately, demand – itself a powerful market force – will determine the future of sustainable practices in business, investment, and research. 

Speaking on the sidelines of Institutional Investor’s inaugural ESG Investing Summit in New York, T. Rowe Price’s Director of Research for Responsible Investing, Maria Elena Drew, said that companies the asset management firm invests in have started disclosing more information on ESG issues, because more of its clients ask for it – which then sheds more light into those companies’ practices.

“As companies disclose more data, it makes it a lot easier for us to analyse how they operate from an environmental or social or ethical perspective,” she noted.

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The Direct Listing Has Shaken Up Public Markets. What’s Next?

The Direct Listing Has Shaken Up Public Markets. What’s Next?

By | General

Spotify ushered in two revolutions in its young lifetime. It popularised streaming, radically changing the economics and distribution models of the music industry. And then, in 2018, it sold its shares on public markets through a direct listing, bringing into the mainstream an alternative way for a company to go public.

Spotify’s listing didn’t exactly open the floodgates, with tens or hundreds of companies immediately getting on the direct listing bandwagon – Slack, the widely-used workplace messaging service, is the other well-known tech “unicorn” to do so, having gone public early in 2019. 

But it was enough to get the conversation going. Besides Barry McCarthy, Spotify’s (now former) CFO and prominent evangelist of the direct listing, investment industry notables such as Benchmark’s Bill Gurley and Sequoia Capital’s Michael Moritz voiced their support for the new model. In fact, all three of them appeared at an invite-only symposium on direct listings in October 2019, which shows how serious the investment community is about them.

The Future of IPOs

Why is the direct listing making such waves? It has a lot to do with independence – a bit of a theme here at Smartkarma. Direct listings free issuers from being beholden to underwriters and the fees they charge, as well as lengthy road shows to woo investors. They also liberate shareholders from lock-in periods, during which they can’t sell their stocks to investors.

Those were some of the main points McCarthy emphasised in a blog post after Spotify went public. “Avoiding the lock-up period was a very important part of our decision to list Spotify directly, but there were also clear financial benefits,” he wrote. “First, we saved on the underwriting fees, which range from 3.5 to 7 percent of the money raised. But the bigger cost-saving was avoiding the IPO discount.”

Spotify’s example was important because it succeeded in breaking Wall Street’s “hammerlock” on public listings where even Google could not. In his piece in the FT, Moritz cites the Silicon Valley giant’s failed attempt to get investment banks to run an open auction to determine its eventual price. 

But times have changed since then, and dissatisfaction with investment banks has only grown, he argues. Spotify’s direct listing is a signal that some in the market have had enough.

“These direct listings, largely controlled by the company that is selling shares, occurred because the shrewd and the brave caught on to the idea that, for stock offerings, investment banks occupy the same position in the investment universe as a scalper does in the theatre world,” Moritz writes.

“No actor, theatre owner, producer, or audience member enjoys knowing that a ticket tout has run off with money that should belong to them. The same goes for the people involved with private companies.”

Direct Results

Enthusiastic observers are hailing direct listings as the evolution of the IPO. This might well be the case, but not enough of them have taken place so far to have a verdict. 

Neither Spotify’s nor Slack’s stock price has exactly been a rocketship, with the latter especially facing a disheartening drop after its 2Q2019 results. So in terms of a direct listing being more successful than a traditional IPO, we don’t know enough yet.

Regardless of their stock performance, both Spotify and Slack managed to complete their listings on their own terms. It helped that neither company needed the extra funding an IPO usually brings in. Spotify’s total revenue rose 31 percent year-on-year in 2Q2019, hitting €1,6 billion, while it hit its expected Q3 revenue target with €1.7 billion. 

Slack didn’t fare as well in its first earnings report after listing, as the stock price took a dive after outages during the second quarter shaved some US$8.2 million (given in the form of credits to customers affected by the downtime) off its revenue of US$145 million.

“Though the company performed above market expectation at its direct listing, the company’s share price has continuously declined since then,” wrote LightStream analyst Shifara Samsudeen in an Insight on Smartkarma. Slowing revenue growth and an unclear path to profitability make it “difficult to understand if the company’s operating efficiency is improving or not,” she noted.

Read Shifara Samsudeen’s full Insight: Slack’s First Post-DPO Results Reaffirm Our View on the Company; Growth Is Slowing Down

While revenue jumped back up in 3Q2019, hitting US$168.7 million, the company’s share price has still been taking a hit over concerns of competition from the likes of Microsoft.

“Microsoft is negatively impacting Slack’s growth, but not because it’s a better product,” wrote Aaron Gabin in an Insight on Smartkarma. “The reason is the existence of Teams increases the barrier of adoption for Slack within large organisations – lengthening sales cycles – thereby slowing Slack’s potential growth rate.”

Read Aaron Gabin’s full Insight: Slack: Microsoft No Longer Cutting Them Any, Flipping to a Short.

Slack direct listing on NYSE

Photo credit: NYSE

Straight to the Source

It’s too soon to tell if others will follow down the direct listing path these companies carved out. Some of 2019’s highest-profile IPOs, like Uber’s, followed the traditional road to public markets. On the other hand, Airbnb seems a prime candidate for a direct listing, now expected in 2020. And the less said about WeWork’s IPO-that-almost-was, the better.

It’s not surprising that tech startups would be the ones to break new ground with direct listings. Nothing says “tech” more than eliminating the middleman, after all. And when it comes to rules, tech startups are the ones that famously “move fast and break things” and “ask for forgiveness, not for permission”.

They also have loads of private market investment to play around with, making a public listing less pivotal to their continued growth. With an abundance of venture capital available to them, they can go on for years without the added scrutiny that public markets regulations impose. Left to its own devices, WeWork could have probably continued bleeding money and raising new funding from SoftBank for a while yet.

Ironically, having a strong brand name like those “unicorns” as well as a full war chest makes a direct listing a lot more feasible. 

“The success of Spotify’s direct listing was due in part to Spotify being a well-capitalised company with no immediate need to raise additional capital, while also having a large and diverse shareholder base that could provide sufficient supply-side liquidity on the first day of trading,” writes Latham & Watkins, the law firm that advised the Swedish startup on its listing, in a case study on the Harvard Law Review.

So what’s the way forward? While it’s certain that more companies will try the direct listing approach, it’s unlikely it will become the norm in the short term. However, its prevalence is a sign of the inefficiencies and grievances of issuers with the traditional model. Perhaps a hybrid form will be the way forward – combining elements of the direct listing and the traditional public offering, as described by Axios

What’s certain is that the evolution of capital markets will continue unabated, and this includes IPOs.

Lead image by dnorton

This post was updated on 22 January 2020 with new developments and details.

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Digital Banking Licensees in Singapore Are Uniquely Placed for Regional Opportunity

Digital Banking Licensees in Singapore Are Uniquely Placed for Regional Opportunity

By | General

The Monetary Authority of Singapore (MAS) announced in June 2019 it would issue up to five new digital banking licences, aimed at non-bank entities. Singapore’s Central Bank set off a flurry of interest and speculation with the announcement, as a number of financial hopefuls expressed the desire to snatch one of them. 

The list includes both local and international names, like ride-hailer and SoftBank portfolio company Grab, major telco Singtel, gaming hardware stalwart Razer, internet group Sea, and Ant Financial, Alibaba’s powerful payments arm. 

In all, 21 companies are now known to have applied for one of the five licences, which are set to be announced later in 2020.

It’s not hard to see why they would be interested. Anyone even tangentially connected to finance has witnessed the impact of technology on their sector in the past five years.

Singapore is by no means the first country to introduce digital banks, but it will hold a large piece of the pie. For one, it’s geographically well-placed to reach a number of important emerging markets. Secondly, it is home to ideal conditions that can help new ideas flourish, both in terms of infrastructure as well as support and resources.

Emerging Opportunities in Digital Banking

Anyone looking into digital banking in Asia probably has their eye on either Hong Kong or Singapore. In fact, Hong Kong announced a total of eight new digital banking licensees in May, including units of Ant Financial, Ping An, and Xiaomi.

Even as Hong Kong’s plans for digital banking are on hold because of the general unrest, Singapore offers a different perspective to digital banking than its rival financial hub. As the most prominent and developed nation in Southeast Asia, Singapore has long been a gateway into the region’s developing economies, like Indonesia, the Philippines, Vietnam, and more.

What many of those markets have in common:

  • large numbers of unbanked populations
  • high smartphone penetration (mobile-first markets)
  • lack of legacy infrastructure

Singtel is hoping to capture some of that market potential with a mobile payments offering, through a partnership with Grab. This is still a green-field opportunity in many Southeast Asian countries, with several players battling for dominance. 

In an Insight on Smartkarma, independent analyst Valerie Law explored the telco’s continuing venture into the payments landscape. “The huge growth potential is what draws Singtel and other e-wallets to consider forays into financial product distribution and/or banking,” she wrote. 

As she pointed out in her Insight, research by Euromonitor projected mobile payments in Southeast Asia to be worth around US$32 billion by 2021. “[It is] a tenfold increase from 2013 as smartphone penetration increases,” Law pointed out.

Read Valerie Law’s full Insight: How Singtel Could Succeed as a Digital Bank – Part 1

Gliding on such tailwinds, Grab has been ramping up its efforts to provide microlending services in Indonesia. Singtel, meanwhile, could be a serious contender in remittance services for unbanked segments like migrant workers who need to send money to their families abroad.

The Time Is Right

It’s a great moment for a lot of those companies to enter the digital banking fray. Technologies like cloud storage and processing (processing and storing data in clusters of remote servers that can be activated or deactivated as needed), artificial intelligence, mobile connectivity, and so on, are advanced and mainstream enough that both startups and large institutions can benefit from them.

The so-called digital transformation is affecting players of all sizes, whether they are adopting it or not. According to Deloitte’s 2019 Banking Industry Outlook, this is the best time to be undergoing this transformation.

“Economic fundamentals are strong, the regulatory climate is favourable, and transformation technologies are more readily accessible, powerful, and economical than ever before,” is the report’s opening message.

Successful transformation will depend on how effectively banks are able to combine data management with modernising their core infrastructure, embracing AI, and migrating to the public cloud. These should be a priority, the report insists, dubbing this “a symphonic enterprise”. 

Fertile Ground

Singapore occupies a uniquely strong position in this fintech universe. The city-state enjoys benefits like stable governance, business-friendly regulatory frameworks, and forward-looking institutions. 

For example, MAS took the prescient step of advocating the release of open banking APIs (application programming interface) to help software developers create improved banking and financial applications. “New virtual banks can tap on [such resources] easily to launch their banking propositions,” Law wrote in her Insight.

In addition, Singapore has seen higher adoption of fintech services compared to other countries, which makes it fertile ground for more such solutions. 

According to EY’s Global Fintech Adoption Index 2019, fintech adoption in Singapore consumers has almost tripled in the space of two years, going from 23 percent in 2017 to 67 percent this year. That surpasses the global as well as Asian average of 64 percent and 63 percent respectively. 

Digital Banking Licensees in Singapore Are Uniquely Placed for Regional OpportunityMobile payments and peer-to-peer money transfers form the bulk of the adoption worldwide – which, in turn, leads to further advances in technology and products. “Most Asian markets benefit from a powerful ‘fintech feedback loop’, with the increased adoption driving increased innovation – and vice-versa,” says Varun Mittal, EY Global Emerging Markets Fintech Leader. 

Rapid growth in mobile payments in China, with platforms like WeChat and Alipay that dominate the market, inspires similar solutions in Southeast Asia, Mittal argues. 

“This influence can be seen in the response of incumbent institutions seeking to build out their own fintech-inspired propositions, as well as increased regulatory support for non-traditional challenger players across banking, insurance, and wealth management,” he adds.

A wealth of private investment in fintech is another factor that makes Singapore particularly attractive to players interested in new financial solutions. 

Fintech investment ballooned in the first half of 2019 to US$453 million, up from US$118 million for the same period last year, according to a report by Accenture and CB Insights. 

The growth comes even as global fintech investment has slowed down, mainly due to the decline of mammoth deals within China. Hong Kong is no slouch in this area, however; fintech investment there grew from US$23 million to US$152 million, albeit across far fewer deals than in Singapore.

While the five digital banking licensees won’t be announced until next year, the potential opportunity for the entire ecosystem will certainly not stop there.

Lead image by Jonas Leupe

This post was updated on 6 March 2020 with new developments and details.

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What You Need to Know About Asset World, Potentially Thailand’s Biggest-Ever IPO

What You Need to Know About Asset World, Potentially Thailand’s Biggest-Ever IPO

By | General

Most investors probably don’t get to learn much about IPOs in markets like Thailand, unless they have experience in the region or access to reliable sources of information. So when an IPO like Asset World Corporation (AWC) comes along, which is sure to attract interest from outside the country, it’s useful to have visibility on the ground.

The listing in question has a lot going for it; not only does it promise to be the largest-ever in Thailand at US$1.6 billion, with investors including Singapore’s GIC, it is connected to one of the country’s most famous businesspeople. 

Charoen Sirivadhanabhakdi casts a long shadow in Thailand’s business landscape. Besides the TCC group, he also controls Thai Beverage, Thailand’s top brewery.

Independent analyst Athaporn Arayasantiparb hammered the point home last year with a joke commonly told among Thailand’s business circles: Charoen and his wife open a map to figure out what to buy next. She points to an area and Charoen goes: “We can’t buy that, dear!” His wife asks: “Why not? How much does it cost?” to which he responds: “It’s not that; it’s already ours.”

Real Estate Boom

AWC is part of Charoen’s TCC group, and includes retail, hospitality, and office space businesses. In an Insight on Smartkarma back in July, he outlined the different sides of the business, laying out all the brands comprising the group. 

Read Athaporn Arayasantiparb’s full Insight: IPO Radar: AWC (Part I), Possibly the Biggest IPO in 2019

From its hotel business that features names like Plaza Athenee and Okura Prestige, to commercial property like Panthip Plaza and business real estate like the Empire Building, the analyst broke down financials and performance for the past few years.

Notably, he highlighted the office space side of the business as a particular strength. “While the other two businesses may offer some growth for the company, the office business offers them unrivaled stability and brand recognition,” he wrote.

This side of the business is facing competition from co-working space providers – Regus leads the market in Thailand, with WeWork rising fast. But AWC’s clients tend to be more established blue-chip companies, that favour the location and status of AWC properties, Athaporn noted in a follow-up Insight.

Read Athaporn Arayasantiparb’s full Insight: IPO Radar: Asset World Corporation (Part 2) – Valuation and Risks

What You Need to Know About Asset World, Potentially Thailand’s Biggest-Ever IPO

The Plaza Athenee in Bangkok – AWC’s flagship hotel (left). Image by Mark Fischer on Wikimedia Commons


In his valuation analysis, Athaporn identified that the largest value in the group comes from its hotel segment – which also show the greatest potential for growth. “It is not uncommon in Thailand for hotel stocks to trade above 30x PE, while normal property stocks will trade at single-digit multiples,” he wrote.

Because of the competition in the market, AWC’s prospectus also highlights this segment as the one facing the most risks. But AWC continues growing in that segment and Athaporn expects capex to drop after 2020.

In his notes, the analyst derived an equity value of US$2.6 billion or a price target of THB 3.3 per share. According to the latest news reports, however, AWC is targeting a share price of THB 6 per share. The analyst finds this significantly higher than comfortable. “We will be sitting out this IPO,” he comments.

Do you want more IPO coverage you won’t find elsewhere? Read it on Smartkarma!

Lead image by David Berkowitz on Flickr

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What Can We Learn About WeWork's Listing from This Year's SoftBank-backed IPOs?

What Can We Learn About WeWork’s Listing from This Year’s SoftBank-backed IPOs?

By | General, WeWork

Here’s a non-controversial statement: No one seems to be very fond of WeWork’s upcoming IPO.

When a company goes public, it’s usually a cause for celebration. Private investors are getting a successful exit; founders and employees stand to make a lot of money; and investment banks make a hefty profit. 

It’s understandable, then, how a bearish analyst can be somewhat of a “spoilsport” if they identify potential deal-breakers in high-profile listings. Why let independent, objective analysis get in the way of a good story (and some perfectly good profits)?

As it turns out, some companies and the markets around them need that reality check. WeWork (or The We Company) is an extreme example: One has to put serious effort into finding anyone who believes the firm, mostly known for its stylish co-working spaces and communities, can go public at its planned US$47 billion valuation.

Negative coverage has focused on the firm’s dubious part to profitability, as well as multiple governance problems. The latter, especially, are so severe as to prompt NYU professor Scott Galloway to dub the company “WeWTF“.

They also prompted the company itself to perform token moves like appointing a woman to its board or its CEO returning money to WeWork that it paid him so it could use the “We” trademark that he owns (yes, things get complicated fast here).

Read our blog: WeWork’s Problematic IPO Has Analysts Seeing Red

Public Market Realities

But less extreme examples have not fared well either. This year alone, ride-hailers Lyft and Uber went through with their long-awaited listings.  

Both companies saw their stocks hit record lows this week, both over 30 percent down from their IPO price. While nowhere near as nebulous as WeWork, neither one seems to have an easy road to profitability.

Read our blog: Lyft’s IPO May Be Oversubscribed but Investors Are in for a Bumpy Ride

Slack was another tech hopeful that drew attention by opting for a direct listing. Following Spotify’s daring steps, the work messaging app maker skipped the traditional approach of going through underwriters and issuing new shares. 

While Slack’s financials look a lot better, its stock bottomed out this week after its first earnings report. It closed at US$28.76 on Tuesday, around 25 percent down from its listing price. 

Amongst increasing competition from players like Microsoft, Slack is reporting slowing growth on the one hand, but strong metrics and high user engagement on the other. This makes its story a bit more optimistic than its fellow “unicorns”.

Read our blog: 5 Takeaways from Slack’s Direct Listing

Markets Might Have Had Enough of Unicorns

By now, it looks like a pattern: company beloved by private investors achieves sky-high valuation, dominates the zeitgeist through aggressive growth, goes public. Then, reality and market forces take over.

Following that pattern, we can probably read WeWork’s public market fate in the entrails left behind by its compatriots. 

“Public markets are not really falling for the tech-platform-wrapping on these new spins on very traditional (and low-multiple) businesses,” says Mio Kato, an independent analyst publishing on Smartkarma. “Revenue growth alone will not cut it, and the lack of a sensible path to profitability will not be forgiven easily.”

“Investors are willing to take a positive view of these tech-related companies despite losing money, as long as the amount of operating losses is not too excessive,” says independent Insight Provider Douglas Kim. WeWork, he argues, might be leaning too far towards that “excessive” side.

Read Mio Kato’s full Insight: WeWork IPO: Governing With Elevated Consciousness Not The Lease-T of Their Problems

Private Market Refuge

Problematic tech IPOs have raised the question of whether such companies should stay private as long as they can. Private fundraising is less of a problem than ever, after all. There are plenty of venture capital, private equity, and corporate investors that are happy to keep businesses going for as long as possible by throwing money at them.

Of course, they have to make a return on their investment somehow. Plus, some scales are too big to achieve even for the amounts of private money available out there. 

For WeWork, “that supply is being cut-off,” thinks Sumeet Singh, Head of Research at Aequitas and Smartkarma Insight Provider. “They are too big and have too many investors who want liquidity.” Mighty SoftBank itself had to downsize its last investment in WeWork in early 2019, after their actions faced questions from investors.

“The question is probably whether private markets have the appetite to continue funding this unprofitable growth,” Kato adds. “It appears that many of the new offerings could simply be an attempt to take advantage of high valuations while markets are still in a relatively forgiving mood. Whether that will continue with these high-profile IPO flops remains to be seen.”

Read Sumeet Singh’s full Insight: WeWork Pre-IPO – Even US$15bn Seems Optimistic

The SoftBank Bump

Speaking of SoftBank, its mammoth US$100 billion Vision Fund is, of course, the common thread running through WeWork, Uber, and Slack. Venture capital investments from it have attracted a lot of attention during the past two years. SoftBank has been generous, bold, and diverse. Investments include US9.3 billion in Uber, US$5.5 billion in Southeast Asian counterpart Grab, US$250 million in Slack, US$502 million in gaming company Improbable… the list goes on.

But with two of its highest-profile portfolio companies going public and WeWork gunning to be the third, observers are starting to wonder whether the SoftBank connection is an asset or a detriment to public market investors.

What Can We Learn About WeWork’s Listing from This Year’s SoftBank-backed IPOs?

Excluding majority stake acquisitions. Amounts in US$ billions.

“If investors don’t warm to Slack in the next six weeks, then SoftBank and its Vision Fund are set to bear the downside when it tallies up at the end of September,” writes Bloomberg columnist Tim Culpan in a recent analysis

“While venture capitalists like the Vision Fund are all too happy to invest in big unprofitable businesses with the promise of future growth, such as Uber and Slack, public shareholders are likely to be a little more discerning,” he adds.

With WeWork generating even more losses and being a lot murkier in its governance structure, SoftBank might have more to worry about when (if?) WeWork goes ahead with its listing. “There is no magic number on this, but WeWork would be too much risk to take for most investors, having generated revenue of US$1.8 billion with operating losses of US$1.7 billion in 2018,” Kim muses.

Read Douglas Kim’s full Insight: WeWork IPO Valuations Range Slashed – What’s Next? An IPO or a Capital Infusion from SoftBank?

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More Demand for Regulation and Transparency in the Cards as MiFID II Heads into 2019-20

More Demand for Regulation and Transparency in the Cards as MiFID II Heads Towards 2020 and Beyond

By | General

More than a year into MiFID II’s lifespan, the market hasn’t really decided whether it welcomes or hates the directive. In some ways, it’s not hard to see why.

Legislators envisioned MiFID II as a way to usher in more transparency in the investment industry, preventing practices like opaque trading and cryptic fee schemes. But as time has gone by and the impact of the legislation has properly hit the ground, it seems the unintended consequences keep battling the intended ones for supremacy.

With this in mind, what does the short-term future look like for MiFID II and any potential successors? It’s always tricky to break out the crystal ball – the markets are an unpredictable beast at the best of times, and one could say the current times are far from the best.

With that said, we can perhaps attempt to highlight some trends to keep an eye on for the rest of 2019 and going into 2020.

Regulators Will Keep Digging into MiFID II

While several member states in Europe have yet to incorporate the directive into their national legislation, some regulators are examining MiFID II’s effectiveness in its stated objectives.

Most notably, French watchdog Autorité des Marchés Financiers (AMF) has launched an investigation on the directive’s true impact on small- and mid-cap research. Depending on who you ask, research coverage of such firms is either dwindling or gaining ground. It seems the AMF wants to finally figure out what’s true.

“The coverage of listed companies by independent research is an essential component in ensuring that prices are properly established on the market and to guarantee liquidity,” the AMF’s announcement reads. 

“While the large listed companies are widely covered, small caps are traditionally less followed by analysts. The implementation of MiFID II, which requires research to be billed separately, seems to have both accentuated this trend and modified the market economy of research.” While the authority is yet to produce any concrete findings, the need for continued scrutiny is clear.

On the other side of the Atlantic, the US has launched its own probe into investment research on small issuers. The House of Representatives recently passed the Improving Investment Research for Small and Emerging Issuers Act.

Under the bill, the SEC must study the current investment research market for small-cap firms. This includes size and concentration of fund managers, impact on demand, and how the market prices research. 

If it sounds very similar to what MiFID II is trying to accomplish, that’s because it is. It has been clear for a while that the US would take measures to accommodate repercussions of the European directive.

The SEC, for example, started out by granting temporary exemptions to US brokers and investment advisors dealing with European clients, so they would not fall foul of regulations. Then it decided to kick the ball further down the court by extending the exemptions to July 2023.

Read our blog: The SEC Hands Out MiFID II Lifelines, But US Firms Are on the Clock

The backlash from markets has prompted the European Commission to reexamine parts of MiFID II, through what seem to be very targeted and granular tweaks. But this has added to voices and speculation about an eventual MiFID III needed to address the current fallout.

Continued Challenges in Research Pricing

As the unbundling of research costs from service fees proceeds, market watchers have noted that traditional sell-side provide their research at extremely low prices. This disproportionately affects independent research providers who cannot hope to be sustainable by racing larger providers to the bottom.

“Sell-side firms continue to under-price their research. The backdrop for independent research providers is tough against this practice,” says Said DeSaque, a macro analyst who publishes on Smartkarma.

With more and more independent analysts coming to the market, such practices could put a damper on the diversity and quality of available research. “Perhaps regulators will need to get involved,” DeSaque adds.

France’s AMF makes a similar point in its aforementioned announcement. “The fall in prices of invoiced research, coupled with the streamlining of investors’ budgets, has had an impact on the number of analysts and the coverage of firms,” the regulator says. It further notes that sponsored research is on the rise, which raises the spectre of conflict of interest issues. 

“Lower levels of compensation will mean analysts of lower caliber and hence research of poorer quality,” warns DeSaque. “Sell-side research has been poorly priced for years and the current environment suggests this will not change anytime soon.”

Increased Demand for Transparency

Part of the European legislators’ mandate was shedding more light on trading. For example, we have mentioned before how trading ETFs would traditionally happen over the phone before MiFID II came into force. 

Read our blog: 3 Ways MiFID II Has Helped Boost Europe’s ETF Market as Passive Investing Rises

The legislation also targeted “dark pooling”, a practice where investors trade without disclosing information about those trades. The directive imposed a cap on the practice, in order to encourage more trading within “lit markets” such as exchanges. 

Observers warned of the possibility of trades shifting to Systematic Internalisers (SI), investment firms dealing on own account when executing client orders over the counter on an organised, frequent systematic, and substantial basis.

The concerns seem to have justified, with the AMF noting last year that SIs had multiplied as a result, and that MiFID II had not been successful in its mandate for transparency.

Recently, the European Securities and Markets Authority (ESMA) has been publishing more data on equities and equity-like instruments SIs trade. It also updated information to improve supervision and adherence to regulations. ESMA’s efforts will continue through 2020, with publication of non-equity instruments and derivatives, as demand for transparency gains more ground.

Lead image by Erich Westendarp on Pixabay

This blog post has been updated on 8 January 2020 with the latest developments on this topic.

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WeWork’s Problematic IPO Has Analysts Seeing Red

WeWork’s Problematic IPO Has Analysts Seeing Red

By | General, WeWork

WeWork, which moved one step closer to IPO last week, touts creativity and inspiration as part of the intangible value that supposedly makes the co-working company stand out from the crowd.

It’s definitely providing some creativity and inspiration to analysts who are looking over the IPO. Some choice examples come from Insight Providers publishing on Smartkarma:

“We cannot even fathom the contortions that would be necessary to articulate a path to profitability here,” writes Mio Kato in his quantamental analysis.

“To pull off this IPO at the most recent private market valuation (US$47 billion) would be like a 90-year granny trying to catch a live, lightning-quick chicken with her bare hands within 60 seconds,” says Douglas Kim, painting a vivid picture in the first of two Insights on the WeWork IPO.

The consensus is clear: WeWork (or The We Company, as they like to be called these days) does not seem like it will be profitable anytime soon, nor does it seem like its lofty private valuation can pass muster in the public markets.

But so far, so Uber (and other tech or tech-related “unicorns”). What makes this particular IPO so problematic?

Read Mio Kato’s full Insight: WeWork IPO: A Quantamental Analysis Aka Hey Uber, Hold My Beer!

The Power of We

The co-working, co-living, just generally co-everything company’s impending listing has eyebrows everywhere raised in disbelief. This Verge article (with an equally creative headline) does a good job of outlining some fundamental problems with WeWork. 

Examples include its labyrinthine org chart, the tangled web between the company and its founder and CEO Adam Neumann, which would make any ESG-minded investor gasp, and its reliance on key shareholder SoftBank for its war chest.

WeWork’s spending has also been highlighted by the media, with Reuters highlighting how the company burned through US$2.36 billion in 1H2019.


Various sources that track private startup funding have pegged WeWork’s valuation at US$47 billion, as of its most recent funding round. With SoftBank as key shareholder, it’s obvious the company has some deep pockets to dig around in for petty cash. But many think the valuation is disproportionately inflated because of the Japanese mega-investor’s involvement.

In a follow-up Insight, Douglas Kim provides estimates WeWork’s revenue in 2019 to be up 87.6 percent year-on-year, at US$3.4 billion, and operating loss at US$2.7 billion. Kim further estimates the company’s revenue to increase by 66.1 percent CAGR and operating expenses to increase by 46.1 percent from 2018 to 2023.

Read Douglas Kim’s full Insight: The We Company (WeWork) IPO Valuation Analysis

Kim’s base case valuation of WeWork is around US$24 billion – quite a bit less than its current private market valuation.

Kirk Boodry also points towards the valuation at which the company did most of its fundraising, i.e. at US$17 billion to US$25 billion. “It seems clear the actual range has not strayed far from US$20 billion, which we think is high but not as unreasonable as the [US$47 billion valuation] implies,” he writes.

Read Kirk Boodry’s full Insight: Initial Thoughts on WeWork’s IPO Filing Aren’t Supportive of a Higher Valuation

Competition Rising

As much as WeWork likes to trumpet its unique mission of “elevating the world’s consciousness”, the fact remains it is mostly a real estate operator specialising in communal use of work and living space. And it’s far from alone in that game.

Besides major competitor IWG, WeWork faces competition from a number of businesses in global markets. In Asia, for example, Sumeet Singh singles out JustCo, a rapidly growing Singapore-headquartered operator of co-working spaces that has been expanding across Southeast Asia and Australia, and UCommune, a co-working space company that has dominated China, where it was born, and now is spreading throughout Asia-Pacific.

Read Sumeet Singh’s full Insight: WeWork Pre-IPO – In the Business of Providing Flexibility by Being on the Hook for US$47.2bn

Singh points out that such competitors will be more appealing to price-conscious startups and freelancers for whom WeWork’s pricing appears just a little too far on the pricey side. 

WeWork might have decided to focus on larger corporate clients lately, but such customers generally have better bargaining power and can command lower prices in return for more members and lower churn. 

“While they will improve the revenue backlog, which was only at US$4 billion as of Jun 2019 (a little over one year’s worth of revenue), and probably help to keep the churn low, that will come at a cost of foregone revenue, in terms of higher discounts,” he writes.

Read Sumeet Singh’s full Insight: WeWork Pre-IPO – Problems with the Company’s Profitability Metrics and Evasive Profits

WeWork’s Problematic IPO Has Analysts Seeing RedReality Check

As lofty as WeWork’s stated vision is, it’s not hard to see reality quickly catching up. “Effectively a low price landlord, WeWork deals with brutal freeholders who demand long-term contracts while its clients are short-term and low-paying with exacting standards,” Rickin Thakrar points out. Its capital-intensive model does not align with any kind of sustainability, he writes.

Read Rickin Thakrar’s full Insight: WeWork IPO Preview: WeNeedCash?

Kato drives the point home when it comes to WeWork’s expenses, which include operating its various locations, general and administrative expenses, and depreciation and amortisation. 

If the company keeps growing quarter-on-quarter at about 10 percent, as it did during the first two quarters of 2019, and maintains its current burn rate, it would burn through whatever cash it raised from an IPO within four quarters. That time frame would be even narrower if WeWork grows by about 25 percent a quarter.

Kato does not mince words: “This should not be a listed company.”

Lead image: WeWork

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3 Ways MiFID II Has Helped Boost Europe’s ETF Market as Passive Investing Rises

3 Ways MiFID II Has Helped Boost Europe’s ETF Market as Passive Investing Rises

By | General

Of all the changes that the investment industry has undergone in recent years, the rise of passive investing is probably one of the most drastic ones. This has coincided with the waves created by unbundling and MiFID II, which has also marked the rise of the ETF market in Europe.

Observers have noted for a while how passive investing has overtaken active in terms of assets. Two years ago, Warren Buffett famously won his US$1 million bet from 2008 that the Standard & Poor’s 500 stock index would beat the average of five funds that Protégé Partners chose within a decade.

They don’t call him an Oracle for nothing, it turns out.

Read our blog: Has Passive Investing Peaked?

Below, we try to sum up the impact of MiFID II on ETFs and the rising passive investing market in three key points.

Transparency and Improved Reporting

Before MiFID II introduced greater accountability requirements, most ETF trades would happen over a phone call rather than on exchanges or through more transparent means. Not surprising, since ETFs were not even considered an asset class circa 2004. According to the FT, about 70 percent of ETF deals took place over the phone on the run-up to MiFID II.

After the new legislation came into force, a host of new market makers started registering with exchanges. BlackRock says that the number of registered market makers that provide liquidity for its iShares European ETF products grew 25 percent in 2018. This, according to the firm, also creates the need for better aggregation of trading data in one place. 

Europe Equities ETFsAutomation and Digitalisation

Platforms like Tradeweb, which enable online trading, have benefited as more ETF trading is moving to digital and automation. The FT reports that Tradeweb hit a high in June, with transactions surpassing a notional €28 billion. More than half of that value came through automated deals.

Market maker Flow Traders, meanwhile, has estimated that deal value on platforms from companies like Tradeweb and MarketAxess rose from €35 billion to €60 billion in 2018.

Increased Scrutiny

As passive investing is gaining over its active counterpart, questions arise over the way managers run some active funds. Earlier this year, the UK’s Financial Conduct Authority announced it would launch an investigation on underperforming active funds. The aim is to determine if those funds deliver sufficient value to investors, and the results will come out in its 2019-2020 report.

Bloomberg noted that investors reportedly took out US$100 billion from European open-ended funds in 4Q2018, citing estimates from French asset manager Amundi. Conversely, ETF trading volumes in Europe quadrupled to hit US$2.3 trillion in 2018, according to fund performance data firm Lipper.

Learn more about the ways an online investment research network can make a difference in the market. Get started with Smartkarma.

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Large Investment Banks Will Keep Dominating, so Innovation Must Happen Around Them

Large Investment Banks Will Keep Dominating, so Innovation Must Happen Around Them

By | General

Investment banks have had a hard time of late. From Deutsche Bank’s woes to UBS downsizing and Citigroup cutting hundreds of trading jobs, the news has been dire across the board. 

Despite that, these established incumbents will most likely keep holding a large share of the market. For smaller players in the research space to survive and grow, they must innovate by running circles around the behemoths rather than try to take them head-on.

Investment Research Shakeup

The onset of MiFID II has been a watershed moment – the regulation that unbundled research and analyst costs from trading fees exacerbated an already worsening situation. As Bloomberg points out, the shedding of research analysts by investment banks accelerated after MiFID II came into force.

Many expected MiFID II to spur more transparent practices in the industry and encourage more independent research. Instead, it seems to have polarised the market, to the detriment of smaller brokerages and research providers.

Critics say that the bulk of investment research is still coming from the larger investment banking players, with little room for the smaller ones to come in. The market has complained about evaporating research budgets, a dearth of small- and mid-cap research, and a worrying drop in research quality.

Learn more on our blog: Self-reflection and Change from Within for the Investment Research Industry: the Real Impact of MiFID II

According to a survey that Institutional Investor conducted in 2019, large investment banks are still dominating the markets. When it comes to Asia, for example, Citi, Morgan Stanley, UBS, BofA Merrill Lynch, and Credit Suisse have the lion’s share of the research business.

Even though competitors are getting out of the game, like BNP Paribas announcing in 2019 it would outsource its research in Asia to analyst firm Morningstar, one thing seems to be clear at this point: investment banks are not going to stop taking up a disproportionate share of the research market anytime soon.

Smart Competition

The bet for smaller research providers and for independent research is the same that fintech startups had to make a few years ago – innovate around the large incumbents. Rather than trying to upend the status quo, create a new one.

In the past decade, startups that tried to launch, say, digital wallets and payment alternatives were quickly overtaken or absorbed by incumbent financial institutions. The ones that truly made a difference offered completely new solutions to old problems.

Anyone looking to provide services in the investment research market in this environment needs to do the same. Some key areas to note are:


Independent research providers have a lot going for them: they are nimble, they are free from conflicts of interest, and they can select their coverage according to what they think is important, rather than what is popular or lucrative. However, many of them lack the resources to bring their work in front of as many people as possible. Finding the right distribution channels for their work is imperative.


In many cases, the buy-side still gets research from large, established providers in bulk and has to sift through it to find nuggets of wisdom. This is neither efficient nor kind to research budgets. Being able to ensure that investors can see the exact research they need when they need it, means improved efficiency, lower cost, and a better service overall.


In today’s tech-powered era, it’s all about being part of the right networks. One of the outcomes of MiFID II in Europe was the buy-side taking fewer meetings with analysts to avoid incurring extra costs. By offering transparent pricing and allowing the client to choose the types of connections they require, an online platform can be a more flexible and effective service provider.


Different stakeholders across the market have seen that combining efforts is the way forward. International exchanges and startups are forging mutually beneficial relationships. Independent research providers are combining their expertise to produce deeper and more well-rounded insights. And different data holders are collaborating to deliver a holistic view to users. All this is made possible by smaller players being nimble and enterprising enough to fill the gaps that giant incumbents cannot reach.

Learn more about the ways an online investment research network can make a difference in the market. Get started with Smartkarma.

Lead image by Kin Pastor on Pexels

This post was updated on 21 February 2020

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After Last Call: What’s Next for AB InBev in Asia-Pacific Following Cancelled IPO

After Last Call: What’s Next for AB InBev in Asia-Pacific Following Cancelled IPO

By | General

Investors opted for abstinence when it came to the Budweiser APAC IPO in Hong Kong – which robbed the Exchange of potentially its most valuable listing for 2019. But parent AB InBev still managed to salvage a win, selling Australian subsidiary Carlton and United Breweries (CUB) to Asahi Group Holdings.

The US$11 billion deal is worth more than what AB InBev was slated to raise through its APAC business’s listing. And the company has already hinted towards looking to enter Southeast Asian markets – which could be good news for peers in the region as well as investors.

Southeast Asia is one of the Asia-Pacific regions where AB InBev doesn’t have much visibility – and it could benefit from more. “[Southeast Asia] has a robust growth beer market spread across 10 countries with a relatively young population and rising purchasing power,” writes Insight Provider Devi Subhakesan on Smartkarma. 

Read Devi Subhakesan’s full Insight: Thai Beverage, Carlsberg Brewery & Heineken Malaysia Bhd: Budweiser APAC’s Zippy Sweet SE Asia Peers

Now Serving Southeast Asia

Beer purchasing and consumption trends in Southeast Asia vary by country, depending on cultural and religious beliefs. This makes for an uneven set of markets, where a few companies command an outsized share across countries.

Thailand, Vietnam, and the Philippines are the three major beer markets in the region. Out of those, Thailand’s Thai Beverage is the dominant player with multiple beer, spirit, and non-alcoholic beverage brands in various markets.

Thai Beverage reached its top position through a number of strategic acquisitions, such as a recent 53 percent stake in Vietnam’s Saigon Beer. 

Subhakesan’s sum-of-the-parts analysis on the company suggests it’s trading at a discount relative to its peers, with more upside found in assigning higher multiples and/or earnings growth. “It is a leveraged play on acquisition-led market share growth in the region,” she writes.

Investors looking into beer-related stocks in Southeast Asia could also look to Malaysia, as improbable as that may sound. 

Subhakesan points towards Carlsberg Brewery Malaysia and Heineken Malaysia, as smaller players that display “superior operating metrics” and a “track record trading at attractive dividend yield”. 

The Philippines, the third-largest market in the region, is basically a one-company play, with San Miguel Brewery holding the dominant position. 

After the asset sale, AB InBev has stated it is looking to accelerate its expansion in Asia-Pacific – part of this could involve acquisitions as well as a second attempt at a listing for Budweiser APAC, Subhakesan notes. 

“Regional beer companies could continue to trade at buoyant valuations given expectations on more deals/acquisitions in this space as well as the prospect of a Budweiser APAC IPO relaunch,” she writes in an Insight that looks at Budweiser APAC’s valuation excluding CUB.

Read Devi Subhakesan’s full Insight: AB InBev’s Plan B – Aussie Asset Sales Price Validates Investor Valuation of Budweiser APAC

Growing in Australia

For Asahi, the deal has been a mixed blessing so far. Its stock price saw an 8.9 percent decline after the announcement – its steepest since 2011, shaving US$2 billion off its market value. “Investors worried about the transactions’ hefty multiple, fresh debt concerns, and shareholder dilution,” writes Arun George in an Insight on Smartkarma.

However, the deal would give Asahi entry into the Australian market and a way to expand out of its home market in Japan, George notes. The country’s low-growth but high-margin beer market is set to for a 1.2 percent CAGR from 2018 to 2023, with a 4.6 percent CAGR for premium and super-premium categories, according to GlobalData.

 “The bull-case on CUB rests firmly on the potential market share gains over the coming years (reflected in revenue growth) and margin recovery through synergies,” he explains. 

Read Arun George’s full Insight: Asahi Group: The Acquisition and the Hangover

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