One of the City's biggest independent brokers is betting the house on fintech
The £2.9 billion City of London dealer-broker announced a deal to sell its global broking division to rival Tullett Prebon last year. But on Monday the company, which buys and sells things like derivatives and swaps, revealed it will also sell its brand name, ICAP, with the deal and reinvent itself as NEX Group.
CEO Michael Spencer, a major Tory party donor, says NEX Group "intends to lead the market in technology innovation in global financial markets." As part of this shift, Spencer says: "Euclid Opportunities, our early-stage fintech investment incubator, which finds these new investments will play a bigger and more important role as we become NEX Group plc."
ICAP needs to reinvent itself because its traditional business of brokering exotic products for clients is the toilet. In the post-2008 worlds, bankers and finance workers are looking to de-risk their businesses, not indulge in the complex bets that characterized the City in the decade before the crash.
So Spencer wants to transform ICAP into a venture capital firm to help it find the products and services that finance workers do want now.
Fintech, or financial technology, is the name given to the wave of startups that have sprung up since the financial crisis that are aiming to refine or reinvent finance using technology. Faster and cheaper tech has made businesses that would have been unthinkable even 5 years ago relatively cheap and easy to do.
ICAP has been making strategic investments in technology startups since the early 2000s but it has recently been stepping up activities, investing in the last year in:
- Abide Financial: A regulatory reporting platform;
- Digital Asset Holdings: A startup building new market infrastructure based on blockchain tech, the underpinning of bitcoin, and run by former JPMorgan banker Blythe Masters;
- Cloud9: A cloud-based communication platform for trades;
- Duco: A data control service;
- AcadiaSoft: An industry collaboration platform to automate collateral management.
In April ICAP also acquired ENSO Financial Analytics, a portfolio analytics provider to asset managers and hedge funds. Through deals like this ICAP, or NEX Group as we should now call it, hope to "create the world's leading multi-product global electronic transaction network for OTC products and post-trade services."
You can already see a theme emerging from ICAP's investments so far - compliance and regulation. These are the watchwords in the City after 2008 and technology offers a way to do smarter and cheaper analytics and recording of what it is you are holding and just how risky it is.
ICAP announced its plans to bet big on new products and services alongside a set of full-year results that show just why it needs to reinvent itself. Here are the key figures:
- Revenue down from £1.27 billion to £1.20 billion;
- Pre-tax profit down from £95 million in 2015 to £89 million;
- Profit margin down from 20% to 18%.
Spencer says in the results statement:
Trading conditions continue to be challenging as a result of the macro economic environment, historically low and negative interest rates and continued bank deleveraging. These headwinds have naturally impacted our performance during the year. In the US in December 2015, we saw the welcome first step in raising interest rates but in what is likely to be a long and slow journey towards more normal market conditions.
ICAP's deal with Tullett has faced some regulatory scrutiny in the US but Spencer says the deal "remains on track to complete later this year." In 2013, ICAP was fined $87 million (£59 million) for its part in the long-running Libor manipulation scandal by the US Department of Justice.