Firstwire Reinvents Private Placement Funding. What Is Their Aim In Digitizing That Business?
# innovation: disruption of banks' information pool about private placement data
# business model: platform, lender and investor directly negotiate the contract
# number of borrowers not known, focus Firstwire: corporates and municipalities
# > 10 investors. focus Firstwire: banks, assurances and other institutional investors
# established 2014
# 15 employees
# two rounds of seed funding, private investors
# online since October 2016
Grade of innovation
# pro: simplicity of the product, quality of the management team
# challenge: proven advantage for the client and handling of individualized corporate funding mix
# risk: cybercrime
Private Placement in Europe
# market sentiment: Borrowers such as corporates and investors see alternative finance as an important part of corporates' funding mix besides bank lending and capital markets.
# market potential: Issuance of private funding for companies in Europe, including private placements via I.O.U. and the pan-European PP market, grew 78% to 32.8 bn euro in 2015 from 18.4 bn euro in 2014 (S&P, April 2016). Market participants expect private placement funding to grow further.
# actors: Incumbent banks play a central role as matchmaker between borrowers and investors.
# regulation: Private Placement markets are promoted by the European Capital Market Union.
Firstwire: A funding network for institutional clients.
Firstwire is on the go to reinvent the private placement funding. Up to now, incumbent banks maintain a well established network of investors such as other banks, assurances or other institutional investors to fund corporate or municipality credits. Michael Dreiner (CEO) and Johannes Haidl (CFO) are building Firstwire on the alchemy of digitalization. Firstwire brings creditors and investors together and assures clearly designed negotiation rules. No further party is involved. Creditor and investor directly negotiate the terms and conditions of the funding.
Future potential of private funding and placement in Europe.
The European market for private funding and placement is growing. In April 2016, S&P indicated that issuance of private funding for companies in Europe, including private placements via I.O.U. and the pan-European PP market, grew 78% to 32.8 bn euro in 2015 from 18.4 bn euro in 2014. Nearly 50% of borrowers and investors expect to increase their use/ provision of alternative finance over the next five years, according to Allen Overy (2015). Regulation favors that development in two ways. First, capital regulation is one way for banks to adjust their business model from lending towards more fee income generation. Second, private placements are promoted by European Commission president Jean-Claude Juncker’s Capital Markets Union initiative. Seeing those developments, we expect cross border private placements to become more important also.
The bet on digitizing private placements: Firstwire's strategic rational.
Firstwire's innovative element is to disrupt the information pool of banks on private placements. Borrowers and investors shall be enabled to negotiate on their own. As a result, they save commission fees usually charged by incumbent matchmakers for their private placement services. Firstwire itself is also financed by fees, which shall remain on a competitive level.
Firstwire starts with a focus on the growing funding market of German Schuldschein (IOU). We expect that regulators attentively observe the development of digital market places. As a result of this, there is a risk of future regulation, which we expect to be manageable. Supervisory concerns on Leveraged Finance might either support private market platforms, if regulators focus on incumbent banks, or also impact platforms such as Firstwire.
Overall, competition will increase, as the European private placement market has growth potential with new investors entering the market, such as specialist credit managers or even SME-focused online invoice trading platforms. With regard to the matchmaker between borrowers and lenders, technological advances will impact both, incumbent banks and new competitors. Banks will certainly remain a central provider of services, offering security, distribution networks and a specialized market and funding mix know-how. New actors profit from technological leadership. Banks that boost their market power with technology will drive the transformation of private placement markets.