DECEMBER 2016

FINTECH
A N A LYS T RE P OR T

PA R T 3

AS SE T
M A N AGEMEN T

Including data from the PitchBook Platform, which tracks more

than 33,000 valuations of VC-backed companies.
Contents
Analyst Note 3
CREDITS & CONTACT
PitchBook Data, Inc.
Overview 4 JOHN GABBERT Founder, CEO
ADLE Y BOWDEN Vice President,

Recent History 4 Market Development & Analysis

Portfolio Theory Concepts 4 Content, Design, Editing & Data

E VAN B . MORRIS Analyst
The Millennial Investor 5 NIZAR TARH U NI Senior Analyst
G EORG E GAPRINDASHVILI Managing Editor
Market Applications & Segments 6 J ENNIFER SAM Senior Graphic Designer

Robo-Advisors 6

Retail Investment 7 Contact PitchBook

pitchbook.com

Alternative Investments 9 RESE ARCH

reports@pitchbook.com

Private Equity 9 EDITORIAL

editorial@pitchbook.com

Real Estate 10 SALES

sales@pitchbook.com

Social Investment Research 11

Institutional Capital Markets & Risk Mgmt. 12

Private Investment & Corporate M&A 13

Deal Flow & Capital Invested 13

COPYRIGHT © 2016 by PitchBook Data,
Inc. All rights reserved. No part of this
publication may be reproduced in any
Investor Types 15 form or by any means—graphic, electronic,
or mechanical, including photocopying,
recording, taping, and information storage
Top Investors 16 and retrieval systems—without the express
written permission of PitchBook Data, Inc.
Contents are based on information from
Active & First-time Investor Growth 16 sources believed to be reliable, but accuracy
and completeness cannot be guaranteed.
Nothing herein should be construed as any
Institutional Involvement & Moving Fwd. 17 past, current or future recommendation to
buy or sell any security or an offer to sell, or
a solicitation of an offer to buy any security.
Company Profiles 19 This material does not purport to contain
all of the information that a prospective
investor may wish to consider and is not to
be relied upon as such or used in substitution
for the exercise of independent judgment.

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Analyst Note
The asset management industry has begun to adapt as millennials
begin to represent a substantial portion of investors. Just as boomers
ushered in the era of discount brokerages and gen x-ers dabbled in
online day-trading, millennials will leave their own mark on how the tens
of trillions of dollars in global assets are managed. In this report we
examine the technologies and business models positioned to attract
millennial investors, as well as the technology tools and platforms asset
management firms have used to improve their offerings, as economic
and regulatory conditions have placed increased pressure on fees.

Banking and financial services have been among the last industries to be
disrupted by technology due to substantial regulatory and other barriers
to entry, yet the industry continues to carry with it numerous pain points
for both consumers and enterprise customers. We believe that the asset
management segment within fintech provides numerous attractive
opportunities for private investors to generate strong returns as the
innovation in the industry will become inducive for all types of buyers.
This report was written for professional investors, but holds broad
applicability to investors of all stripes. Furthermore, consumers will also
derive value as a number of the companies mentioned offer consumer
mobile and web-based platforms for investment management.

Evan B. Morris

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Overview
RECE NT HISTORY

The global asset management industry has custody of $69 trillion in

assets, according to Citi, or $87 trillion including insurers, according
to the Bank of England. Much of this wealth is currently controlled
by the post-WWII baby boomers. As the oldest boomers turn 70, the
generation’s wealth is peaking. Baby boomers have witnessed a massive
reshaping of the asset management industry over the course of their
lives. They inherited a world where expensive stockbrokers touted
Baby boomers have lived through a rapid
single-name securities and generated fat commissions competing on
decrease in brokerage fees over their
high-touch service and quality of research. As recently as the mid-70s,
lifetimes.
one-way transaction costs exceeded 1%, e.g. a broker would charge
a client over $1,000 to execute a $100,000 buy order, and another
$1,000+ fee to exit the position. Brokerage houses would tout expensive
research, which promoted an active strategy of buying and selling shares
in order to churn portfolios and rack up substantial fees.

PORTFOLIO THEORY CONCE PTS

The lack of transparency in the investment industry persisted for

decades. Academics were the first to chip away at the monopoly on
expertise. The Capital Asset Pricing Model (CAPM) introduced in the
1960s calculated the expected return of an asset given its historical
risk. This model divorced a security’s passive return (beta) from the
The Efficient Market Hypothesis throws
active return (alpha). Burton Malkiel went one step further with his 1973
cold water on the idea that an investor
book A Random Walk Down Wall Street, which introduced the Efficient
can beat the market through skill rather
Market Hypothesis. The theory portends the impossibility of “beating
than luck.
the market” as all price information is immediately reflected in the price
of an asset, suggesting that alpha seeking represents a fool’s errand.
Finally, in 1975, the SEC unwound the nearly 200-year-old Buttonwood
Agreement, which put a floor on brokerage commissions. This change
opened the door to discount brokerages like Charles Schwab and later
online brokerages like E-Trade. Consequently, baby boomers flooded
into mutual funds rather than accounts managed by their personal
brokers, as these new regulations drove down fees.

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TH E MILLE N NIAL INVE STOR

Since millennials hold just $1 trillion in wealth, with just $250 billion
invested (and hold the bulk of the $1.2 trillion in US student debt),
traditional wealth managers continue to fight over high-net-worth
baby boomers. This represents a huge opportunity to target younger
HENRYs—high earners not rich yet. Millennial investors have shown
a strong preference toward passive investing. Having lived through
two crashes and a steady upward creep in asset prices in the recent
environment, millennials don’t believe in beating the market. These
millennial investors are tech savvy and conscious about fees. Thus, a
major theme of fintech innovation in the asset management space has
been the automated buying and selling with fees charged on an annual
basis rather than for each transaction. Further, millennial investors tend
to favor ETFs over mutual funds, due to intraday liquidity and lower
minimums. ETFs have become popular with boomers as well, having
recently surpassed $3 trillion in market cap as an asset class.

The primary downside of ETFs is their variable discount or premium to ETFs offer intraday liquidity and tax
the underlying assets. In some cases this tracking error is due to the efficiency, yet may trade at a discount or
difficulty of pricing underlying illiquid assets, which may include fixed premium to the value of the underlying

income, options or other derivatives. This may be more pronounced assets.

in periods of market dislocation, or when a number of investors rush

to sell holdings. However, they have a number of benefits as baskets
of securities actively traded during market hours. Mutual funds can be
redeemed only at the end of the day for the net asset value (NAV). In
some cases, mutual funds may make capital gains distributions when
they sell holdings, leaving investors with a large tax bill. A benefit of
ETFs remains that investors have agency over when to buy and sell, and
thus can control when their capital gains bill comes due.

Technology and ETFs have enabled a number of platforms to emerge

around the needs of consumers rather than the logistical issues of
stock trading. Most importantly, dollar-cost averaging allows platforms
to dynamically rebalance holdings according to investors’ allocation
preferences. Prior to the advent of electronic trading and order
management systems, this process would have been highly labor
ETFs have allowed fintech asset
intensive and unfeasible as each trade order would need to be entered management startups to be more
manually. Entire ecosystems have emerged around bringing these creative with flatter and less expensive
strategies to scale and allowing individuals to pursue their preferred fee structures.
strategy while allowing asset managers to cut costs. While many of the
platforms that have emerged around these technologies have modest
AUM compared to the largest asset managers, the increasing shift in
assets from baby boomers to millennials should see many of these firms
continue to rapidly gain scale.

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Market Applications & Segments
R O B O - A DV I S O R S

The high fees of the wealth management industry, combined with a trend
toward passive investing and the advent of the internet, has created
an opportunity for a number of services to spring up, advising billions
in assets. Traditional wealth managers have fees around 2% (thanks to
high regulatory costs), operate primarily over the phone and offer high-
touch services for only the largest accounts. Much of the fee pays for
registered advisors and analysts to come up with custom research and
portfolios for clients, which may not materially differ from or outperform
automated offerings. Main street advisors likely lack the expertise and
products of the best active managers and largest institutions. Further,
the high spend to maintain a brick-and-mortar business model can take
the focus away from a high-quality online user experience for account
monitoring.

When customer financial affairs are simple, a new breed of web-

based “robo-advisors” can allocate funds based on risk tolerance
to a pre-determined diversified strategy. This approach has allowed
robo-advisors to operate with annual fees below 0.5% of AUM with
much lower account minimums. Their lack of brick-and-mortar costs
allow them to prioritize online user experience with slick websites and
smartphone apps, alongside over-the-phone customer support for
those who need it. For taxable accounts, these platforms can leverage
the intraday liquidity of ETFs in order to maximize tax efficiency. This
can be achieved through tax-loss harvesting, which automatically sells A new wave of investment advisors
underperforming holdings for a loss while simultaneously buying a use algorithms, ETFs and mobile apps

comparable ETF in order to maintain the same exposure. This allows the to manage client portfolios with fees
generally <0.5% of AUM per year.
investor to offset capital gains with realized losses in order to minimize
tax burden. This has long been a strategy used by investors, but only
available to the highest net worth accounts and not done with much
frequency due to the labor intensity of manually combing through
holdings. According to Wealthfront, daily tax loss harvesting adds
around 1.55% in annual return, while conducting the process just once
a year like a manual advisor would adds just 0.58%. While all tout the
benefits, one should be aware that tax loss harvesting merely defers
taxes into the future, as it can open the opportunity for future gains. In
general, the practice works best when predicated upon short-term-long-
term tax arbitrage, as losses are written off at the higher short-term rate
and gains are taxed at the lower long-term rate.

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The market structure in the current environment has compounded
the network effects of passive investment vehicles that dynamically
rebalance portfolios. For one, ETF liquidity has improved due to
increased interest in those securities. Secondly, as more and more
assets flow into strategies that automatically rebalance each month, The current macro environment has
volatility becomes dampened across all public asset classes due exaggerated the relative merits of
to overperforming allocations being sold off as underperforming passive investing.

allocations are bought up to maintain portfolio weightings. This further

impacts the ability of active managers to generate outsized returns
by buying high quality and selling short low-quality stocks as a rising
tide lifts all boats, further reinforcing outflows out of active strategies
and making fees more difficult to justify. The phenomena creates a
hollowing out of the asset management space with assets flowing into
certain hands-on private strategies open only to accredited investors,
as well as passive strategies made more and more accessible as some
nontraditional asset managers gain scale. We have seen an ecosystem
emerge around both ends of the spectrum in order to streamline the
investment process for investors of all stripes.

The largest robo-advice startups, Betterment and Wealthfront (see

page 19), have each grown to over $1 billion in AUM with similar business
models based on fitting clients to a basic risk profile, minimal fees, great
UX and a few advanced automated features. Betterment’s fee structure
starts at 0.35% annually and declines to 0.15% for larger accounts, while
Wealthfront operates a more progressive model with fees waived for the
first $10,000 and 0.25% annually on balances in excess of that. These
fee structures do not include ETF fees, which tack on at least a dozen
additional basis points per year. The third major player in the robo-
advice space is Personal Capital (see page 20), which combines the
automated model with advisors available to consult with on the phone,
albeit for higher fees starting at 0.89% for less than $1 million, and
declining to 0.49% for accounts over $10 million.

R E TA I L I N V E S T M E N T

Retail investors had not seen much in the way of innovation from
brokerage houses since the advent of online trading in the 1990s.
Existing platforms typically charge commissions on a per-trade basis
in the $10 range, creating high frictions for smaller investors. If an
individual wishes to withdraw funds, one must figure out which holdings
to sell, making it costly to rebalance portfolios. Furthermore, generally
poor user interfaces make platforms difficult to use.

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Since the financial crisis, a number of platforms have emerged to offer
lower costs to investors while removing some of the other pain points
around portfolio management and facilitating more complex strategies
for smaller investors. Many of these platforms are targeted toward
millennials who may be relatively sophisticated investors, but typically
lack the capital to scale strategies at a cost that is justifiable.

Many of the opportunities for disruption in the retail investment

management space come via changing the established pricing model
used by retail brokerages. The high fees per trade come as a major
pain point, particularly for smaller investors. Pricing models for fintech
retail investing platforms range between no direct costs to clients,
fixed monthly fees, traditional per-trade commissions and an annual
percentage of AUM. Platforms can offset these low fees by generating
revenue from collecting the interest rate float on uninvested funds Increased competition has driven down
execution costs, making it possible for
and by collecting interest on margin accounts. Furthermore, execution
platforms to offer extremely low fees.
of trades tends to be quite inexpensive, as an increased number of
exchanges has made the market highly competitive, with retail trades
subsidized by high fees for data to high-frequency traders and other
market participants.

Retail investment platforms also compete on the product front with

superior user interfaces and more choices for more esoteric strategies to
retail investors. These platforms make accessible the types of investing
pursued by sophisticated closed-end funds. Motif (see page 24) offers
investors tradable thematic lists of securities to mimic the strategy of
global macro funds, as well as automated rebalancing and allocation.
Folio (see page 24) provides a similar offering with more customizability
around user-selected lists of securities, but with fixed monthly pricing.
M1 Finance (see page 21) offers a hybrid between robo-advisory and
online brokerage. Investors pay an annual 0.35% fee to set up an account
with allocations toward individual stocks, ETFs or preset templates with
different risk profiles. Any deposits or withdrawals are automatically
taken from the entire allocation so the investor doesn’t have to sell
individual securities or wait for trades to settle. These strategies can
be implemented for even the smallest accounts through the holding
of fractional shares that can be allocated among multiple clients. The
platforms will typically hold the full shares on their own balance sheets
in order to hedge exposure to clients’ gains.

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We believe that legacy retail brokerages would be wise to improve their
UX offerings, and to align fee structures with what is in their clients’ best
interests. Typically, retail brokerages offer fee breaks only for the most
active traders. However, statistically, the most active traders lose money.
Fintech competitors may in the long run push legacy players to improve
their offerings, even as all may not survive the scale required to make
the economics of flat fee structures.

It makes sense for these companies to collaborate. Acquisition of these

product-based startups will be a successful strategy for legacy firms
in the future in order to drive inorganic growth and as portfolio churn
slows with investors making fewer trades. Traditional brokerages may
look to acquire platforms in order to combine their scale with superior
VC-backed products. Upstart platforms will look to take on strategic
investors once AUM growth plateaus, which for simple demographic
reasons will take some time to play out. Many of these platforms provide
attractive offerings that can easily compete with the commoditized
offerings of existing online and traditional brokerages.

Alternative Investments
P R I VAT E E Q U I T Y

Gobs of money have poured into private equity in recent years, hunting
for the outsized returns witnessed in the 1980s and 1990s when
Returns from PE buyout funds have
pioneers like KKR, Blackstone and Apollo were able to lever up cheap
failed to match the 80s and 90s bull
companies with cheap debt. These early pioneers of the asset class
markets due to increased competition for
were able to source attractive opportunities given the abundance of
deals and capacity constraints.
proprietary deal flow. Once investors of all stripes began to see the
huge returns generated by LBOs, PE became a standard allocation
across all institutional portfolios. Given the chase for yield in the current
environment, returns have gone down and multiples have increased as
there has been greater competition for the same deals.

Historically, private equity firms have pointed to the illiquidity premium,

operational expertise and extensive due diligence as driving outsized
returns. In the paper “Leveraged Small Value Equities” by Brian
Chingono of The University of Chicago Booth School of Business, and
Daniel Rasmussen of Stanford GSB, the authors identified quantitative
factors that can more efficiently replicate private equity’s secret sauce
by using leverage to buy underperforming small-cap stocks. Rasmussen
went on to found Verdad Capital Advisors (see page 26) in 2014, a
Seattle-based hedge fund that uses an algorithm to identify undervalued
and out-of-favor small-cap stocks based on size, value and leverage.

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Traditional private equity investors have also turned to technology and
Platforms like our own offering at
data to source deals. Though we’re biased, SaaS platforms like our own PitchBook include comprehensive
at PitchBook—recently acquired by Morningstar—include comprehensive datasets of deals, investors, companies
datasets of every potential target, showing financials, private and service providers to aid in every step
transactions, service providers and investors, as well as fund returns and of the deal process.
performance metrics for LPs. Dealmakers can augment their personal
networks with these datasets to uncover more opportunities to generate
returns and evaluate even more deals.

R E A L E S TAT E

Investors collectively hold 49% of global wealth in real estate. While

much of this includes single-family primary residences, investors have
long sought out income-generating properties as an asset class. Real
estate also offers a way for investors to diversify globally in a market
less correlated to stocks and bonds. High barriers to entry given the
capital intensity and asymmetrical access to dealflow have closed the
largest and most profitable private real estate investment to all but the The high barriers to real estate investing,
largest institutional platforms. Publicly traded real estate investment such as access to capital and deal flow,
trusts (REITS) have enabled retail investors to gain exposure to the asset have only recently begun to come down.

class and have historically outperformed, but their liquidity comes at

the expense of mark-to-market volatility. LPs are limited to REITs and
real estate private equity funds unless they commit to the time intensive
process of sourcing deal flow and due diligence.

These inefficiencies have attracted entrepreneurs leveraging technology

to disrupt the way buyers, sellers and investors connect. Software
platforms have emerged to allow qualified investors to “cherry-pick”
attractive deals sourced from partners with local expertise on the
ground. Some platforms have even begun implementing blockchain
technology to verify transactions with an immutable distributed ledger.
Cynics might characterize blockchain as a marketing ploy, as the buzzy
technology generates consistent headlines. In our view, the utilization of
blockchain technology stands as an example of fintech developing as an
ecosystem that utilizes a core set of tools to build out next-generation
financial services.

One promising real estate fintech startup is CADRE (see page 25),
founded with a focus on the New York metro area, which has expanded
to major national markets after raising a total of $68.4 million from
investors including Thrive Capital, General Catalyst, George Soros
and Goldman Sachs. Another notable platform, Wealth Migrate (see
page 25), has expanded from South Africa to operate nine offices on
six continents in only six years of operation. Founder and CEO Scott
Picken recently announced that the company would be using blockchain
technology to offer an immutable record of every transaction, providing
additional peace of mind for cross-border investors.

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INVESTMENT RESEARCH

Fintech has begun to change the workflows of financial professionals

even at traditional firms. Institutional investors have long relied on
investment bank sell-side research analysts for trade ideas and financial
models. However, Wall Street has long come under scrutiny for the
conflict of interest between research and trading desks. While banks
in the US have been required to maintain a Chinese wall between
investment banking and research since the great depression, during
The MiFID II is a set of regulations in
the 90s tech bubble superstar equity research analysts received eight-
the EU that governs a range of financial
figure bonuses based on the revenue from other divisions driven by their
services from derivatives trading and
glowing promotion of stocks. In Europe, this model will soon come under
volatility hedging to conflicts of interest
increased scrutiny due to the Markets in Financial Instruments Directive for advisors.
II. Among other directives, the MiFID II requires asset managers to break
out research-related costs from management fees.

For active managers reliant on research for trade ideas, the current
conflict of interest baked into the system has obvious drawbacks.
Fintech startups have begun to leverage technology to drive actionable
research for investors without the substantial high-cost structures
of traditional Wall Street research groups. One startup, Estimize (see
page 22), has built an entire platform that offers earnings estimates for
thousands of securities based on the aggregated analysis of thousands
of users. The company offers quantitative research suggesting that
the platform’s “wisdom of the crowd” proves far more accurate than
those officially offered by bank employees on the street because
crowdsourced estimates can more quickly incorporate new information
toward the end of the quarter. Quantopian (see page 27), a platform
allowing users to build and test trading algorithms, has identified
Estimize’s crowdfunded estimates as a source of alpha. Quantopian
has itself generated a lot of excitement, recently raising a $25 million
Series C from Point72 Ventures and Andreessen Horowitz. The company
offers a platform for individuals to create and test their own proprietary
trading algorithms, with Point72 Asset Management allocating $250
million to fund the best ideas.

While not traditionally the first thing that comes to mind as fintech,
social media technology has changed the way that money is managed Social has been an understated aspect of

by traditional active mangers as well. Social tools allow analysts to share fintech, impacting investor information
flow.
their best ideas with one another and network. Professional investors
can share more detailed ideas and strategies on the SumZero platform
(see page 23). Founded by early Zuckerberg rival and ConnectU co-
founder Divya Narendra, the platform allows hedge fund, mutual fund
and private equity analysts to submit and share their best ideas. The
platform has moved into promoting member research to facilitate career
advancement and fundraising opportunities.

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Nepotism and inefficient hiring practices have long been identified
as a problem for both investment banks and buy-side shops. Alexey
Loganchuk, a former JP Morgan prop trader, founded Upgrade Capital
(see page 22) to create a platform for undergraduate and MBA students
to demonstrate investing talent, as well as offer mentoring opportunities
and provide firms a better way to recruit. Asset management firms also
have Harvest Exchange (see page 23) to promote their ideas. Pitched
as a marketing opportunity as much as a social network, portfolio
managers from registered firms can distribute investment notes, while
credentialed readers can subscribe to various channels. However, one
caveat may be that these platforms exacerbate the crowding of trades
into “hedge fund hotels,” as pockets of illiquidity develop around the
most popular ideas. In recent market dislocations, certain names have
been short squeezed for reasons beyond fundamentals.

I N S T I T U T I O N A L C A P I TA L M A R K E T S & R I S K M A N AG E M E N T

The well-known struggles of active managers in recent years have

prompted investors to adapt by adopting the tools of their rivals to both
cut costs and offer more sophisticated risk management. The financial
crisis reinforced the importance of risk management, as many high-
profile funds had substantial drawdowns. Furthermore, the post-crisis
regulatory environment has placed increased pressure on the industry.
Advancements in analytics technology has enabled the building of
tools for institutional investors to move risk management beyond
Excel. The lack of due diligence that in part caused the financial crisis
created a demand for viewing loan-level data in credit securities. In
spite of the increased wariness of certain categories of risk, the low-
rate environment has pushed investors further out on the yield curve. For more on Dv01, PeerIQ, Orchard
One example is the emergence of new asset classes like marketplace and MonJa see our previous report,
loans. Companies like Dv01, PeerIQ, Orchard and MonJa offer a way PitchBook Fintech Part I: Online Lending

for institutional investors to monitor loan performance and easily filter http://reports.pitchbook.com/fintech-
part-1-online-lending/
and sort by underlying metrics. These platforms act as intermediaries
between yield-starved yet risk-wary institutional investors and the
lenders themselves.

The desire for increased transparency has been a boon to a range

of upstarts. Among numerous other things, MiFID II has enabled the
buy side to bypass their brokers on the sell side by going directly to
exchanges. While this has enabled asset managers to cut costs, this has
created an opportunity for startups to partially replace prime brokers in
providing standalone strategic services. One example is STRATiFi (see
page 27), which provides quantitative hedging strategies for financial
advisors. Technology has allowed these portfolio tools to be adopted
by more than just hedge funds and family offices. Closer regulations
of the alternative investment industry such as MiFID II have propelled
Irish compliance software platform AQMetrics (see page 27) to help
institutions manage their communications, workflow and disclosure
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requirements. P I TC H B O O K F I N T E C H
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Private Investment
Total raised
Top companies by $ raised
($M)

Lu.com $1,695

and Corporate M&A Espeed

Eze Castle Software

$1,230

$1,000

Flow Traders $584.4

D E A L AC T I V I T Y Tradestation Group $391.3

Institutional investor interest in the asset management space has
Sophis $379.4
increased steadily since the financial crisis. The crisis revealed many
KCG Hotspot FX $365.0
flaws in the ways that money was being managed, while the ensuing
years revealed the preferences of millennials managing their personal GFI Group $333.6

wealth and opportunities within financial services impacted by the Mx360 Group $239.5
recession. Since 2010, institutional investors have made $11.4 billion
Betterment $205.0
of private investments in financial technology firms in the asset
management space, including private equity, venture capital, strategic Beacon Capital Strategies $200.0

acquisitions and IPOs. Interestingly, the peak in capital invested FutureAdvisor $173.7
occurred in 1Q 2016 when investors poured $1.9 billion into fintech asset
Thomson Reuters Portia $170.0
management firms. That quarter saw substantial volatility in capital
Personal Capital $157.0
markets, including both high-yield credit and equities.
Motif Investing $126.0

Primatics Financial $122.0

F I N T E C H : A S S E T M A N AG E M E N T D E A L F L O W & C A P I TA L Wealthfront $119.0

I NVE STE D BY Y E AR Gilliland Gold Young
$115.0
(O N LY E Q U I T Y I N V E S T M E N T S I N C L U D E D) Consulting

Chi-X Canada ATS $113.3

265 Yooli.com $106.0

Deal Value ($B) DST Global Solutions $93.9

202 Nutmeg $84.7

189
Deal Count Odyssey Group $83.5

138 Private Banking House $81.5

Gain Capital Holdings $81.0

108 Source: PitchBook
*As of 11/22/2016
InvestCloud $78.5
80
Source: PitchBook
57 *As of 11/22/2016
$0.4B
$1.1B

$2.7B

$1.1B

$3.1B

$2.5B
$0.4B

2010 2011 2012 2013 2014 2015 2016*

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P I TC H B O O K F I N T E C H
A S S E T M A N AG E M E N T
F I N T E C H : A S S E T M A N AG E M E N T D E A L F L O W & C A P I TA L I N V E S T E D B Y Q UA R T E R
(O N LY E Q U I T Y I N V E S T M E N T S I N C L U D E D)

75 73
Deal Value ($M) Deal Count
64 62

50 51 52
45 56 53 47
41
45
29
Source: PitchBook
*As of 11/22/2016 28
23
$1,067

$1,370

$1,394

$1,908
$439
$139

$134

$151

$419

$167

$360

$981

$240

$256

$162

$202
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4*
2013 2014 2015 2016

The clearest trend has been the steady increase in venture capital
interest in the space. Venture made a large play in 2014, accounting
for 166 of the 202 deals. Further, VCs invested $788 million into the
space that year, accounting for 72% of all capital invested. The period
didn’t see a few outsized financings skewing figures—it was rather the
sum of a number of exciting companies raising conservative late-stage
rounds. During the year, many of the current industry leaders such as
Wealthfront, Motif, Nutmeg, Betterment, Quantopian and Orchard raised
substantial private capital.

Private equity interest in the space has also increased. So far in 2016,
private equity investors have invested 49.1% of dollars in the space,
eclipsing a previous high in 2013 when they made 37.9% of investments
by dollars. Substantial private equity investment signals a maturation PE investors have increasingly begun
investing in minority growth deals in
of the industry. Private equity investors have a different strategy from
order to generate a return on capital
venture capitalists. Historically, they purchase mature undervalued
committed.
companies, add leverage and make operational changes to improve
revenue and profitability. However, recently PE firms have been
doing more and more growth equity deals, taking a minority stake in
companies. This shift is reflective in their increased participation in
fintech deals. One prime example of this is Francisco Partners’ 2015 and
2016 follow-on investments in Betterment.

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E Q U I T Y I N V E S T M E N T I N F I N T E C H : A S S E T M A N AG E M E N T B Y T Y P E (# A N D $ B) S I N C E 2 0 1 0

(D E AL S BY #)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Source: PitchBook *as of 11/22/2016

2016*
2010

2011

2012

2013

2014

2015
Venture Private Equity Other IPO
(DE AL S BY $)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Source: PitchBook *as of 11/22/2016

2016*
2010

2011

2012

2013

2014

2015

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One symptom of the shift in investor type has been the same high levels Deal count
Top investors
of first-time investor participation in deals. Over 300 investors in the (since 2010)

>400 deals in each of the past two full calendar years were making their Spark Capital 13

first transaction in the space. These sustained strong numbers point to Y Combinator 12
continued enthusiasm for the subsector.
Anthemis Group 11

500 Startups 9

AC T I V E I N V E S T O R S I N P R I VAT E F I N T E C H : A S S E T M G M T. Union Square Ventures 8

461 Digital Currency Group 8

410 Techstars 7

Start-Up Chile 7
Source: PitchBook
*As of 11/22/2016
7
313 Social Leverage

Microsoft Accelerator 7

Canaan Partners 7
192
183 Bessemer Venture
7
Partners

RRE Ventures 6
100 101
TPG Capital 6

Startupbootcamp 6

Menlo Ventures 6

2010 2011 2012 2013 2014 2015 2016* Plug and Play 6

Octopus Investments 6

F I R S T-T I M E I N V E S T O R S I N P R I VAT E F I N T E C H : A S S E T M G M T. German Startups Group 6

322 324 GV 6

Index Ventures 6

Cabiedes & Partners 6

Source: PitchBook
*As of 11/22/2016 Blockchain Capital 6
214
Balderton Capital 6

157 Source: PitchBook

*As of 11/22/2016

151
73 79

2010 2011 2012 2013 2014 2015 2016*

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Institutional Involvement &
Moving Forward
The shortcomings of traditional asset management have been magnified
in recent years. Active managers have underperformed, and high fees
have eaten up a larger share of returns in a low-yield world. Even so,
the steady increase in global asset prices has made the global asset
management industry non zero sum, making legacy players slow to
be disrupted by VC-backed upstarts. The massive scale of legacy
institutions has given them the clout and assets to derive extensive
economies of scale. Furthermore, the nature of the industry makes
consumers and institutions less inclined to trust counterparties, vendors
and advisors without an extensive track record. However, as boomers
begin to draw down retirement accounts and transfer assets to millennial
offspring, we may begin to see a rush of assets being transferred to
more millennial-centric platforms. Traditional asset managers will have
to acquire more fintech tools in order to bolster their offerings.

As venture capitalists have poured funds into upstart asset management

platforms, institutions have also seen success rolling out their own
offerings. Vanguard and Schwab were late to the robo-advice game,
yet their offerings each boast greater AUM than all upstart robo-
advisors combined. Much of this growth comes from shifting client
assets from their existing offerings. At least $10 billion of Vanguard
Personal’s $50 billion+ in AUM came via transfers out of its Vanguard
Asset Management advisory. Furthermore, there is room for growth as
Vanguard has a much higher account minimum ($50,000) compared to
other platforms. Existing platforms can use the clout that comes with
a long track record and financial resources to outcompete upstarts on Traditional asset managers will find many

fees and, in some cases, UX. They may also be able to leverage existing accretive opportunities in acquiring
fintech startups.
institutional relationships to offer access to other asset classes such
as private markets. Ownership of proprietary ETFs also increases the
percentage of fees that go to the legacy asset manager compared
to startups without the same clout. Since ETF fees make up a sizable
percentage of overall revenue from passive management, being able to
double dip enables these firms to gain the scale necessary to become
profitable since the requisite AUM to break even currently stands in the
billions of dollars for many low-cost platforms.

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As investors look out for the future of their portfolio companies in the
space, we expect M&A to make up a disproportionate exit route for VC
investors. There are several key synergies between a variety of legacy
business models in the asset management space and upstart platforms
with both consumer and enterprise SaaS offerings. The lean nature of
Revenue from asset management tools
online platforms would allow acquirers to implement these systems
is highly recurring and can thus be
and cut costs. On the revenue side, these innovative products and
modeled out well into the future.
software tools will bring in sticky, younger and/or more tech savvy users
who represent a recurring source of revenue. Many of these platforms
simply lack the scale to reach their full potential, as AUM growth and
global expansion comes with headwinds—the greatest being trust and
regulatory issues related to jurisdiction. Today we see strategic acquirers
pay a premium in order to drive inorganic growth. We see legacy asset
managers being able to pay a higher multiple to drive recurring revenue
on their massive AUM and further increase their customer retention.
Since startups in the asset management space will be relatively more
attractive to strategic investors when it comes time to exit, all else
being equal, funds that invest in these companies will be positioned
to outperform their peers given the higher multiples that we believe
strategic investors will be willing to pay.

We hope this report serves as a valuable resource as you continue to

explore this nuanced sector. As the industry continues to mature, we’ll
keep a close eye on it and provide updates as developments unfold.
As always, feel free to reach out with any comments or questions at
reports@pitchbook.com.

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Select company profiles

Robo-advisors
Location: Redwood City, CA | Year Founded: 2007 |
Capital Raised to Date: $129.9M |
First Funding Date: Feb 2007 | First Funding Amount: $150k |
Latest Funding Date: October 2014 | Latest Funding Amount: $64.17M |
Latest Funding Post- Valuation: $700M |

Description: Founded in 2007, Wealthfront became the first robo-

advisor to reach $1B in AUM in 2014. The company offers automated
tax-loss harvesting that mimics index funds by buying and selling the
individual securities in order to maximize the tax write-off for taxable
accounts over $100,000. This can also be done at the asset class level
for smaller accounts, as individual ETFs are bought and sold to maximize
tax write-offs while maintaining exposures. The company targets
millennial investors with a $500 minimum and no fees under $10,000;
assets over $10,000 cost 0.25% annually.

Location: New York, NY | Year Founded: 2007 |

Capital Raised to Date: $205M
First Funding Date: November 2010 | First Funding Amount: $3.0M
Latest Funding Date: March 2016 | Latest Funding Amount: $100.0M |
Latest Funding Post- Valuation: $700M |

Description: Betterment offers an online investment platform based on

behavioral finance techniques around goal setting and risk tolerance.
The company also offers tax-loss harvesting and automated rebalancing.
Fees stand at 0.35%, 0.25% and 0.15% with account sizes of less than
$10,000, greater than $10,000 and greater than $100,000 respectively.

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 Location: San Carlos, CA | Year Founded: 2009|
Capital Raised to Date: $185.53M |
First Funding Date: July 2009 | First Funding Amount: $2M |
Latest Funding Date: December 2016 | Latest Funding Amount: $75M |
Latest Funding Post- Valuation: $500M |

Description: Personal Capital aims to provide a combination of the

smart tools and automated strategies of robo-advisors, with dedicated
financial advisors. The personal touch comes with slightly higher account
minimums at $25,000 and annual fees of 0.89% for accounts less than
$1 million, decreasing on a sliding scale to 0.49% for accounts over $10
million.

Location: San Francisco, CA | Year Founded: 2010 |

Capital Raised to Date: $21.68M
First Funding Date: August 2010 | First Funding Amount: N/A |
Latest Funding Date: September 2015 | Latest Funding Amount: $152M |
Latest Funding Post- Valuation: $152M |

Description: The company offers an online dashboard analyzing

investments holistically across multiple accounts, as well as a premium
service that directly manages funds for 0.5% annually. The fee does not
include trading commissions and fund expense ratios. The company
offers tax-loss harvesting for accounts as small as $20,000. Asset
management and ETF provider BlackRock acquired the company in
September 2015.

S TA S H I N V E S T
Location: New York, NY | Year Founded: 2015 |
Capital Raised to Date: $37.25M
First Funding Date: February 2016 | First Funding Amount: $3M
Latest Funding Date: September 2015 | Latest Funding Amount: $25M |
Latest Funding Post- Valuation: $99.28M |

Description: Developers of an automated investment app for

smartphones where users can choose from a pre-selected list of 30
ETFs. Individuals can open an account with a deposit as small as $5, and
receive automated allocation and investment advice for $1 per month for
balances less than $5000 and 0.25% per year for larger accounts.

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 Location: New York, NY | Year Founded: 2009 |
Capital Raised to Date: $1.85M |
First Funding Date: October 2013 | First Funding Amount: $100K |
Latest Funding Date: May 2014 | Latest Funding Amount: $1.75M |

Description: Operators of an online automated investment platform

with no account minimums targeted toward millennials. The company
also touts more advanced hedging tools than competitors in order to
dampen volatility, including the ability include uncorrelated assets like
Bitcoin in client portfolios..

M1 FINANCE
Location: Chicago, IL | Year Founded: 2015 |
Capital Raised to Date: $9M |
First Funding Date: September 2016 |
First Funding Amount: $9M |

Description: The Chicago-based two year old company offers an

intriguing improvement on both traditional brokers and the large
robo-advisors. Investors build accounts around pie chart percentage
allocations to specific securities, ETFs or premade baskets. The platform
is optimized to act as an automated savings account where additions
and withdrawals are automatically rebalanced to the target allocation.
Small account sizes are and withdrawals are facilitated by fractional
shares, some of which the company holds on its own balance sheet.

Location: London, UK | Year Founded: 2011 |

Capital Raised to Date: £68.28M
First Funding Date: May 2011 | First Funding Amount: £700k
Latest Funding Date: November 2016 | Latest Funding Amount: £30.0M

Description: The London-based company offers retail-focused

automated investment management solutions. The platform bases
portfolio allocations on investor risk-tolerance and preferences with
automatic diversification and rebalancing.

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Social Networks
OPENFOLIO
Location: New York, NY | Year Founded: 2013 |
Capital Raised to Date: $1.85M |
First Funding Date: November 2013 | First Funding Amount: $1.1M
Latest Funding Date: December 2015 | Latest Funding Amount: N/A |

Description: The company offers a platform aimed to bring the open

culture of Wall Street trading floors to active individual investors
by offering social benchmarks. The company leverages data from
connected accounts to provide insights and analytics of investment
performance stacking retail traders against their peers.

Location: New York, NY | Year Founded: 2011 |

Capital Raised to Date: $8.53M
First Funding Date: September 2012 | First Funding Amount: $1.36M|
Latest Funding Date: July 2015 | Latest Funding Amount: $6M |
Latest Funding Post- Valuation: $36M

Description: The company aims to leverage the wisdom of the crowds

by aggregating individual investors’ estimates on over 2,000 stocks.
The platform markets itself on data showing it’s user base’s earnings
estimates to be more accurate than Wall Street analysts given the larger
sample size and freedom from conflict of interest.

Location: New York, NY | Year Founded: 2008 |

Capital Raised to Date: N/A |

Description: Alexey Loganchuk founded Upgrade Capital after realizing

that students had few opportunities to showcase their achievements
in finance with employers. The firm offers a platform for students to
share their investing skills and ideas with financial firms regardless of
university, GPA or resume. The company has 23 corporate partners
including prominent investment banks, hedge funds and fintech startups
who use the platform to identify and recruit talent, while students can
find mentoring and potential employment opportunities.

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 H A R V E S T E XC H A N G E
Location: Houston, TX | Year Founded: 2012 |
Capital Raised to Date: $9.26M |
First Funding Date: January 2013 |
First Funding Amount: $1.96M | Latest Funding Date: June 2015 |
Latest Funding Amount: $5.07M | Latest Funding Post- Valuation: $20.07M

Description: The company, founded in 2012, offers an online platform

and social network for investment firms and individuals to share and
access ideas, creating opportunities to target clients and build private
communities of investors.

Location: New York, NY | Year Founded: 2008 |

Capital Raised to Date: $1.41M | First Funding Amount: $275k |
Latest Funding Date: June 2012 | Latest Funding Amount: $1.0M |

Description: A global community for professional buy-side investors

founded by Divya Narendra, also the founder of ConnectU, an early
social network. The platform allows buy-side employees to post and
share ideas, leading to collaboration, professional development and
career opportunities.

Retail Portfolio Management

Location: San Francisco, CA | Year Founded: 2007 |

Capital Raised to Date: $67.05M |
First Funding Date: October 2007 |
First Funding Amount: $2.5M | Latest Funding Date: May 2016 |
Latest Funding Amount: $33.0M | Latest Funding Post- Valuation: $171.78M

Description: The company, founded in 2007, offers managed accounts

to investors with a $2,000 investment minimum and a 0.25% annual
fee. The platform also syncs with more than 80 brokerages to track your
401(k), IRA and brokerage accounts in one place and provide insights on
overexposure, risk and performance.

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 Location: Rancho Cordova, CA | Year Founded: 2010 |
Capital Raised to Date: $126M |
First Funding Date: June 2010 |
First Funding Amount: $6.0M | Latest Funding Date: January 2015 |
Latest Funding Amount: $40M| Latest Funding Post- Valuation: $463.43M

Description: An online investment platform offering thematic baskets

of up to 30 securities called “Motifs” as well as individual stocks, ETFs
and access to J.P. Morgan-led IPOs. The company also offers automated
investing tools via its Motif BLUE platform for a $4.95 monthly fee and
no commissions.

ROBINHOOD
Location: Palo Alto, CA | Year Founded: 2012 |
Capital Raised to Date: $66M |
First Funding Date: December 2013 |
First Funding Amount: $3.0M | Latest Funding Date: May 2015 |
Latest Funding Amount: $50M| Latest Funding Post- Valuation: $250M

Description: The company offers zero-commission brokerage accounts

for retail investors. Robinhood makes money by collecting the interest
on uninvested cash balances and interest from margin accounts.

Alternative Investments
Location: New York, NY | Year Founded: 2014 |
Capital Raised to Date: $68.4M |
First Funding Date: March 2015 |First Funding Amount: $18.4M |
Latest Funding Date: January 2016 | Latest Funding Amount: $50M |

Description: The company offers an online platform providing a

transparent and secure way for institutional investors to review and
invest in real estate transactions. Cadre serves as an intermediary
between investors and developers seeking capital. The platform
automates a range of services for investors and asset managers desiring
exposure to real estate.

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 Location: Tygervalley, South Africa | Year Founded: 2010 |
Capital Raised to Date: $29.79M |
First Funding Date: April 2015 |
First Funding Amount: $12.7M |
Latest Funding Date: February 2016 | Latest Funding Amount: $13.1M |

Description: Wealth Migrate facilitates cross-border real estate

transactions for investors well below the threshold of traditional private
real estate investors.

Location: Seattle, WA | Year Founded: 2010 |

AUM to Date: $20M |

Description: The company aims to recreate the fundamental of private

equity’s early success of using leverage to buy cheap undervalued
companies. The emerging manager invests in small-cap companies it
identifies as attractive based upon criteria based upon the founders
experience at Bain Capital and refined in a thesis at Stanford’s Graduate
School of Business.

Capital Markets & Risk

management
Location: New York, NY | Year Founded: 2014 |
Capital Raised to Date: $44.25M |
First Funding Date: March 2015 |
First Funding Amount: $8.25M | Latest Funding Date: June 2016 |
Latest Funding Amount: $36M| Latest Funding Post- Valuation: $116M

Description: The company backed by Peter Thiel and George Soros

provides a marketplace for corporate fixed income securities. The
platform provides a unique solution offering trading in bursts during
short time windows improving liquidity and price transparency.

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 Location: San Francisco, CA | Year Founded: 2016 |
Capital Raised to Date: $2.2M* |
First Funding Date: November 2014 |
*includes funding raised by Sliced Investing and LoGe Solutions, which came together
to form STRATiFi in a merger-of-equals in 2016.

Description: utilizing machine learning technology, the company offers

analytics and portfolio management tools for investment advisors to
utilize options overlays in order to hedge against volatility in client
portfolios

Location: Boston, MA | Year Founded: 2011 |

Capital Raised to Date: $49.48M |
First Funding Date: January 2013 |
First Funding Amount: $2.15M | Latest Funding Date: November 2016 |
Latest Funding Amount: $25.63M |

Description: The company provides a platform for users to create, test

and generate profits from trading algorithms. Through an agreement
with backer Point72 Ventures, the family office of Steven A. Cohen will
allocate $250 million to invest in user-created algorithms chosen by the
company.

Location: Kildare, Ireland | Year Founded: 2012 |

Capital Raised to Date: $3.25M |
First Funding Date: January 2013 |
First Funding Amount: N/A | Latest Funding Date: February 2016 |
Latest Funding Amount: $3.25M |

Description: The company offers an automated risk and compliance

platform for Hedge Funds, Asset Managers and other financial
institutions. Features include intelligent data management, security, and
advanced analytics.

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