Weekly news up to 23/02/2024
Issue #24
Hello everyone and welcome to the latest edition of GreySpark Insights.
Please do not hesitate to contact us with any questions or comments you may have. We are always happy to elaborate on the wider implications of these headlines from our unique capital markets consultative perspective. Happy reading!
💥Top story
Private Equity Turns to New Fundraising Tactics in Turbulent Market
Image: Corporate Finance Institute
📰Newsflash
📈Buyside
Private equity turns to new fundraising tactics in turbulent market
Private equity firms are increasingly raising money to buy individual companies on a deal-by-deal basis, rather than using portfolio (grouped) investment strategies. Last year, a record $31 billion was deployed on a deal-by-deal basis by investors, which was five times higher than 2019’s figure. This change in private equity dealmaking comes after a turbulent year for private equity with high interest rates and geopolitical uncertainty contributing to declining levels of fundraising. Consequently, investors have been less compelled to lock up funds up for several years into portfolios, which brings higher fees and looked instead toward individual deal-making, which brings lower fees and the opportunity for investors to ‘cherry pick’ companies.
Goldman Sachs launches private credit fund for wealth market
Goldman Sachs Alternatives became the latest asset manager to launch a private credit fund aimed at the wealth management market. The firm’s $450bn (£356bn) alternatives platform has unveiled a new open-ended, semi-liquid European private credit strategy. The fund will focus on portfolios of directly originated, senior secured debt from medium to large size borrowers and has raised roughly £470 million to date. Asset managers have increasingly been expanding into the wealth market to diversify their sources of funding and meet their growth ambitions. Earlier this month, Carlyle launched a private credit fund for wealthy individuals, following the likes of Blackstone and Ares Management into this space.
📉Sellside
Sell side equity sentiment reaches highest level since May 2022
According to the Bank of America (BofA), equity sentiment among sellside firms is among its highest for nearly two years, although sentiment is now sitting at its 15-year average. Using a specialist indicator which aggregates market strategists asset allocation views, the BofA is able to assess equity market sentiment. With policy interest rates showing indications that they have hit their peak, and major indexes such as the S&P 500 now at all-time highs, it appears that equity markets may be on course for a robust 2024.
CME to offer trading in Micro Bitcoin Euro and Micro Ether Euro futures
CME Group, the world's leading derivatives marketplace, this week announced plans to further expand its cryptocurrency derivatives offering with the addition of Micro Bitcoin Euro and Micro Ether Euro futures from March 18 2024, pending a regulatory review. Designed to match their U.S. Dollar-denominated counterparts, Micro Bitcoin Euro and Micro Ether Euro futures contracts will be sized at one-tenth of their respective underlying cryptocurrencies. The launch of these new Micro Euro-denominated contracts will provide clients with additional products to efficiently hedge bitcoin and ether exposure, as the popularity of cryptoassets, at a retail and institutional level, rises once again. At the time of writing, Bitcoin is trading $51,200, its highest level in more than two years.
✴️Digital transformation
Monzo poised for £4 billion valuation in new funding round
Monzo is closing in on a new funding round that could value the fintech at £4 billion. In doing so, Monzo is set to become the UK’s largest challenger bank. The Financial Times has reported that Monzo could finalise a deal within the next two weeks to secure up to £350 million from a combination of new and existing investors, one of which being Alphabet's investment arm, CapitalG. Prior to the funding round, Monzo was valued at approximately £3.6 billion. An increase in Monzo’s valuation will signify a more favourable environment for fintech startups after a phase of instability due to high interest rates and heightened regulatory oversight. In recent years, investors have become cautious about rapidly expanding, capital-intensive firms, leading to a decline in venture capital funding for startups in 2023.
JonesTrading deploys FlexTrade Systems’ FlexOMS to power its sell-side trading desks
JonesTrading has deployed FlexTrade Systems’ FlexOMS as the new sell-side trading platform for its equities and electronic trading businesses. JonesTrading partners with more than 1,500 institutions and hedge funds across the globe and its offering includes a wide range of liquidity sources, electronic trading and execution management services. In Q3 2023, JonesTrading stated the need to replace its incumbent sell-side OMS solution which led to the selection of FlexTrade’s multi-asset sell-side trading order management solution, FlexOM. In fact, you can see our recent post which outlines key reasons why financial institutions may look to change OEMS provider.
📱Technology trends
Revolut plans crypto exchange launch for advanced traders
Revolut has caused a stir in the fintech world this week by announcing the inception of a cryptocurrency exchange for its 30 million users. Revolut already offers basic crypto services to customers via its app, allowing users to transact in cryptocurrencies such as Bitcoin and Ether. However, the launch of a crypto exchange represents a new paradigm for Revolut and its customers, with one hallmark of this offering being a low fee structure. Trading fees have been set between 0% and 0.09%, while also providing market and limit order executions, with the later having zero fees.
Almost half of major firms rely on outdated spreadsheets for ESG reporting
According to a study by KPMG of 550 executives from major firms across the US and Europe, nearly half of the surveyed companies admit to still using spreadsheets as their primary tool for managing ESG data. Given the spate of ESG regulations being rolled out across several different jurisdictions, with the EU arguably spearheading the ESG regulatory transition, this data is worrying, and suggests that firms may not be keeping up with more nuanced ESG regulatory reporting requirements. This data may also be reflective of the muddled and confused ESG regulatory landscape in the capital markets space, which we cover here, where firms are unsure of what in-house ESG reporting changes they should make.
🧑⚖️Regulatory developments
ECB warns banks on outsourcing risks
The European Central Bank (ECB) is warning banks that their management of outsourcing risk must improve, with a stringent focus on the processing of personal data. In particular, the ECB has stated that institutions need to tackle vulnerabilities stemming from their increasing operational reliance on third-party providers. Despite a growing number of external providers offering their services within the EU, more than 30% of the total outsourcing budget of major banks is concentrated on ten providers, most of which are headquartered outside the EU, causing some third parties to not achieve compliance. In fact, worryingly, the ECB found that more than 10% of contracts covering critical functions are currently not compliant with the relevant regulations.
EU adopts new verification requirements to combat greenwashing
The European Union (EU) has revealed new standards that are designed to combat greenwashing by adopting new rules aimed at ensuring the accuracy of environmental marketing claims made by companies. The standards will require companies to undergo a verification process for their environmental assertions before publicising them. Greenwashing is the process of conveying a false impression or misleading information about how a company's products are environmentally sound. Studies show that 50% of companies’ environmental claims are misleading. Failure to adhere to these regulations could result in severe penalties, including fines amounting to at least 4% of a company’s annual turnover.
📊Chart of the week
The above model from BlackRock shows the technologies that will be needed to successfully develop AI applications. Each layer builds on the one preceding it as technologies get “stacked” on top of one another, enabling further innovation.
At the bottom of the model is the hardware required to build the devices used for AI. One such example is the semiconductors and chips, with companies such as Nvidia playing a pivotal role in their development. Then, cloud infrastructure is used in the AI technology stack help ensure the performance of AI algorithms down the line, through providing data extraction and storage capabilities. This then allows foundation AI models such as ChatGPT to be built, which are trained and fed with data, while also being used to create synthetic data sets used for machine learning algorithms (i.e., that help traders to detect market trends and predict future market sentiment). This data used then needs to be managed and maintained using appropriate infrastructure, which also ensures that the quality of the data is maintained and not cross-contaminated or erased inadvertently. The final step in the model is the application, which can be accessible by several different financial firms. Examples are chatbots and trading applications.
🐤Tweet of the week
This week, the poster child of AI, Nvidia, released blow out earnings figures that once again highlight the size and conviction of the AI trend. For the fourth quarter ending January 28, 2024, Nvidia recorded revenues of $22.1 billion, reflecting a whopping 265% increase on the same period in the previous year. Nvidia recorded record 2024 fiscal year revenues of $60.9 billion, up 126% year-on-year.
Following the results, Nvidia’s share price jumped more than 16%, adding a record-setting $277bn to the company’s market capitalisation, and brought its gains for the year to date to roughly $740bn. The move means Nvidia has leapfrogged Amazon and Google parent company Alphabet to become the third-most valuable US-listed company after Microsoft and Apple.
📄GreySpark insight
Still confused about blockchain, with all this crypto talk flying around? Don’t worry, we’ve got you covered…
Simply put, a blockchain is a digitally distributed, decentralized, public ledger that exists across a network and underpins cryptoassets. A blockchain can be either public or private. Public blockchains grant any actor permissionless access to the distributed network. Thus, full visibility of the ledger and the ability to process and validate transactions is unrestricted and achievable by any member of the network. A private blockchain accepts only screened actors into the blockchain network that have permissioned access. In this case, the visibility of the ledger and the ability to process and validate transactions is restricted to only authorised members of the network.
Most public blockchains, notably Bitcoin, use a consensus mechanism, which is known as proof-of-work. Computers in the Bitcoin network – referred to as miners – compete with each other to process new transactions, by expending computing power to solve complex mathematical problems. Upon solution, miners must prove their work to the network in order to attain approval, sequentially earning them the right to commit a block of transactions onto the ledger-chain. Approval requires 51% of the nodes in the network to deem the miner-proposed blockchain as being valid. When a miner succeeds in adding a block onto the blockchain, it is rewarded with newly issued bitcoins, generating profit by creating bitcoins that are worth more in value than the computing power expended to create them. Each transaction on the blockchain is referenced with the balance received from a previous transaction, and it is signed cryptographically by the verifiable owner of the account by obligation. Over time, the linked transactions form a chain of title, forming an irrevocable history of exchange.
Discover more here.