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Fintech startups and investors have spotted an opportunity in the COVID-19 retail investing renaissance

Fintech startups and investors have spotted an opportunity in the COVID-19 retail investing renaissance

FILE PHOTO: The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. REUTERS/Toby Melville

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The growing popularity of fintech startups has been driven by a dislike of existing solutions and better tech.

In the UK so far, this innovation has focused on retail banking with apps like Monzo, Starling Bank, and Revolut bringing in millions of users while sectors like business banking, wealth management, and open banking/payments integration have thrived alongside them.

One area where there has been less development has been access to capital markets.

“The same innovation should be happening in capital markets,” according to Tara Reeves, a partner at OMERS Ventures. “The size of the prize in capital markets is huge compared with retail banking.”

Retail investors in the UK have always had something of a raw deal when it comes to equities. Traditionally, when a company comes to IPO, large institutional investors such as pension funds and insurers get early access to the share offering to buy at a significant discount to the subsequent offer price. The same is true of follow-on funding rounds and share issues.

In 2019, some £18 billion was raised on the London Stock Exchange by approximately 350 companies in the form of IPOs or follow-on investment, according to data by Dealogic. Individual investors held 13.5% of UK quoted shares in 2018, per the Office for National Statistics (ONS). However, retail investors tend to miss out on major gains when companies go public with analysis indicating that if individuals could buy stocks on the first day of trading they would make a 2% gain on average.

An emerging crop of fintech startups want to address this.

“We’re seeing a retail renaissance,” Vinoth Jayakumar, partner at Draper Esprit, told Business Insider. “Technology enables access and minimizes risk. Retail is getting to a place that it wasn’t before, we are now at a key inflection point.”

Accessibility is a current buzzword when it comes to capital markets. It’s not necessarily that companies don’t want to include retail investors in share issuances, but simply don’t have the tools or time to include potentially thousands of individuals in book building processes, where banks record investor interest.

One option to improve that is to bundle lots of little retail orders into a single sizeable offer, the pitch offered by London fintech PrimaryBid, which recently received funding from both OMERS and Draper.

“Retail investors want to connect fully to public markets but never had an efficient way to do so,” said Anand Sambasivan, PrimaryBid CEO. “Markets themselves are incredibly fair, but access to them is unfair and this is the issue we are fixing.”

Sambasivan compares the current situation to billionaires being allowed to purchase goods at Harrods at a discount while others wait in line outside, only to purchase the same items at a higher price. “There would be an uprising if this were the case in real life,” he adds. “This is the inequality we are fixing.”

Acceleration ahead

COVID-19 has accelerated the process, according to Reeves.

“It’s fundamentally unfair that retail investors don’t have access to advance book builds,” she said. “With more and more companies coming to market, the question to companies has to be: ‘Why aren’t you including retail?'”

Retail investing has seen major increases in recent years with the success of Robinhood in the US during the pandemic demonstrating that the access gap to public markets is shrinking.

That success ultimately saw the startup halt its UK launch plans but companies like Stash, Freetrade, and Revolut have brought trading options to the UK alongside existing platforms like eToro.

The trend is likely to continue. MiFID II, a piece of EU legislation from 2018, will increase transparency around capital raising with intermediaries needing to produce justification for share allocations.

Similarly, legislation around pre-emption rights, the ability of existing shareholders to purchase new shares before they are offered to new shareholders, is changing in the UK to allow companies to conduct new share issuances of up to 20% of existing capital without having to seek shareholder approval.

“These changes are putting trust back into the hands of the retail investors,” Jayakumar said. “The pandemic has accelerated the awareness that retail investors have of their power in markets and we are now at a tipping point.”

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