You might think global stock markets are about as digitally disrupted as it gets. Trillions change hands daily over some of the world’s fastest networks; funds tweak hardware to shave fractions of a millisecond off processing time; black box algorithms designed by world class mathematicians trade complex derivatives. Want baskets of stocks handled by machine to meet niche moral imperatives? There’s probably an app for that.
Yet London-based PrimaryBid, a startup founded in 2016 by two hedge fund alumni, thinks there scope for more disruption, and is quietly biting a chunk out of an overlooked niche in equities; armed with nothing more sophisticated than push notifications, a clever set of APIs, and a compelling business case.
Computer Business Review sat down with co-founder Kieran D’Silva to learn more about what the business (14 weeks into a major agreement with London Stock Exchange) has up its sleeve, and why it wants to cut retail investors in to the discounted share issuances normally reserved for the big beasts of the financial world.
Cutting Retail Investors In on a Cosy Club
Sitting in the company’s Mayfair offices, D’Silva explains where PrimaryBid fits in.
“Say you’re an already listed company. You’ve had your IPO. But you want to raise some new money. You can do that by issuing new shares. Historically, those new shares are priced at a discount to the share price… but these discounts are are only available to institutional investors.
“You and I as retail investors, we can buy via a stockbroker, but we don’t get this discount deal when a company has a follow-on share issuance.
“Banks have kept this little club to themselves. There is a very lucrative fee there for them; and, as they often have an impact on the allocation, they [discounted shares] often only go to their best clients.”
There are other, more sober regulatory reasons for this as well, he hastens to add.
For an Initial Public Offering (IPO) or initial float on the stock markets, companies need to prepare a substantial prospectus for potential investors.
“This costs about £300,000 and several months to prepare; it has all the risk warnings and so on. Legally, if you have a full prospectus, you can raise as much as you like from retail investors.
“But the reality is for most follow-on issuances in the stock market are done without a prospectus and come with some restrictions as a result.” (If there is no prospectus, you can raise a maximum of €8 million from retail investors across Europe).
There’s a range of reasons for that.
Timing is one: these deals typically happen within a matter of hours.
As D’Silva explains: “The fact that a company is doing a follow-on is what’s called ‘price sensitive information’.
“If you’ve got someone working on a prospectus for months, there’s a higher chance that that information will become public. So you want to keep this process very short-dated and very tight.”
He adds: “I’ve talked about a ‘club’ and banks do enjoy those fees.
“But historically as well, without technology, you couldn’t notify reach half-a-million retail investors with the push of a button in such a short space of time.
“You couldn’t AML and KYC them automatically.” [Ed: Anti-money laundering and ‘know your customer’ regulations designed to prevent money laundering].
Thanks to ever-improving technology, that’s now changed.
And with demand for retail investors growing (sometimes, as in France, for regulatory reasons: companies are legally obliged to allocate 10 percent of shares to retail investors, elsewhere, retail allocation is driven by Environmental, Social and Governance requirements) PrimaryBid is now providing the UK’s first centralised venue for companies looking to raise capital from retail investors.
Major partners recognise the need for this. In November PrimaryBid teamed up with London Stock Exchange in a move that plugs the company’s retail investors in to potential follow-on share issuances, all the way from the junior AIM sub-market through to, in theory, the FTSE 100; giving the company access to a much broader pool of potential companies eyeing further capital raises.
(That deal was welcomed by LSE’s head of equity primary markets, Charlie Walker, as helping both “individual investors and issuers… benefit from the additional capital and liquidity available through PrimaryBid’s platform).
Now armed with a half-a-million-strong* list of prospective retail investors, when PrimaryBid has agreed to support a follow-on issuance, it can push a notification to customers via its app, handle all on-boarding online (it uses a LexisNexis platform, Tracesmart to do this: there’s no shortage of alternatives in the field) and via API integrations with stockbrokers, make sure customers get their new shares electronically settled immediately to an account they can trade them from.
PrimaryBid meanwhile takes its cut much as any investment bank would: it charges the listed company a fee for helping it with its capital raising: a company might typically pay an investment bank for the institutional part of its fund raising, and PrimaryBid for the retail side of its fund raising. The company has supported 52 transactions to-date, raising over $65 million for businesses from retail investors.
It’s a win-win-win relationship, the company thinks: investment banks don’t want to have to do the grunt work of landing and on-boarding retail investors, but do increasingly need to make sure that they are helping furnish corporate customers with retail as well as institutional capital. Banks are happy, companies are happy, and retail investors get those shares historically discounted for such wholesale share issuances.
There are many reasons why demand is growing: companies increasingly need to bring in retail investors as part of their environmental, social and governance (ESG) frameworks; retail investors also often make good “brand ambassadors”.
Do Brits Really Buy Enough Stocks, Though?
Unlike in the US, British investors are notorious for shying away from stock markets in favour of “bricks and mortar”. Computer Business Review pushes the point: is there really a deep enough pool of retail investors out there to scale the business?
PrimaryBid’s D’Silva, who is also the company’s Chief Financial Officer (CFO) says comfortably, and emphasises that the company has had to focus more on getting the right deals on the platform: something it has institutionalised by hiring the former head of small caps at JP Morgan, teaming up with LSE and other relationships.
He tells us: “There are about 4.5 million investors in the UK who invest in single stocks. That’s nowhere near the US, but it’s still a very meaningful number of people. If in terms of allocation there’s an €8 million maximum, you’re looking at about 1,000 people to fill the transaction. That, the demand side, has never been a problem.”
“Now there’s no excuse for a bank to say ‘I can’t call up 1,000 clients’ because now we give a push notification to X hundred thousand clients.
They can’t go ‘I can’t AML Mr and Mrs Smith because getting their passport and driving licence takes days’.
So why follow-ons and not primarily IPOs?
D’Silva says: “IPOs are a very cyclical business; it’s very lumpy. But follow-ons are happening throughout the year: it’s about three times bigger as a market than the IPO market and it’s just constant.”
PrimaryBid itself raised £7 million in series A round in 2019, which was led by VC investors Pentech and Outward VC. It’s early days for the company, but with other trading venues outside LSE coming knocking and it tentatively eyeing expansion in Asia as well, expect to hear more about the company.
*A combination of proprietary user base, investors brought in via adverts on dedicated digital platforms, and stockbroker partnerships.