In the latest in our webinar series on the digitalization of investment banking, Leon Saunders Calvert spoke with Raja Palaniappan, CEO and co-founder of Origin Markets, about the opportunities for a digital transformation in capital raising.
- Capital markets are at the kind of inflection point witnessed once in a generation. Rather than overnight disruption, however, the change may be more gradual.
- As you might expect, the conversation began with talk of efficiencies, but this is just the beginning. Raja Palaniappan, CEO and Co-founder of Origin Markets, already sees cutting-edge technologies (such as their origination platform which connects frequent international debt borrowers with investment banks) opening up new capital raising business opportunities.
- We concluded the conversation with a debate about the future of blockchain, before finally discussing the endurance of investment banks as the expert intermediaries.
In contrast to the rapid digitalization of personal banking — the ability to purchase your coffee with your smartphone or make payments via an app — the basic functions in capital markets remain highly manual.
Take for instance, the interaction between the dealer, and the issuer’s paying agent, which often require a fax and wet ink signature before payment is authorized.
Raja sees such basic workflow inefficiencies as ‘low hanging fruit’ and it is such quick wins where he expects most near-term efficiencies to happen. In other words, don’t expect a major market restructuring from some disruptive technology any time soon.
However, there is a lot of such low-hanging fruit, and, in aggregate, people probably underestimate the impact it will have.
In the context of Origin Markets’ platform for facilitating bilateral debt trades, the key is information centralization. When it comes to origination, the information gap is around who is out there, who needs to raise and where are they based, and where in the world is there an interested investor base for that product?
Today, that knowledge is splintered across countless proprietary databases of potential issuers.
Origin’s pre-trade origination platform is a centralized place where dealers can view profiles of frequent borrowers and their respective funding requirements.
This is a well-trodden path — from telephones and emails to communicating over a platform. There are no losers from this simple step, and it enables issuers to broaden out their investor base.
Once a transaction is agreed, Origin offers a level of standardization within the documentation, so users are only a few clicks away from a term sheet. All this doesn’t change the nature of the contract, or how an investor interacts with that security or clearing system, but the basic steps are simplified.
Benefits of innovation
The potential benefits of such innovation include, of course, efficiency and its accompanying cost reductions, but also reduced risk, since each requirement for manual intervention raises the risk of error.
More inspiring is how platforms such as Origin, which set about making things efficient, end up increasing the pie. Raja is already seeing transactions between borrowers and dealers who have never dealt together before, all because that information friction has been eliminated.
Unusually for a technologist, Raja (who is also a former investment banker) believes the most interesting change in DCM for a decade or more will be analog/real-world: namely, the rise of Asia and the maturing of the Chinese cross-border fixed income market.
The full potential of this could not possibly be grasped using 20th-century processes, particularly since China itself is advanced in the adoption of digital platforms compared with the West, where practices have evolved organically over decades.
Solving the expertise gap
When it comes to the impact of tech on capital markets employees, Raja takes the long view.
The capital markets undergo radical reorganization every other decade, and most ‘big industry names’ were operating at such an inflection point. The nature of such jobs will change every few years, so it makes sense to be in the driving seat.
Investment banks themselves will, in Raja’s view, always be in the middle of the capital markets transactions. There are some fundamental reasons for this (balance sheet underwriting, KYC functions) but arguably even more enduring is expertise, per se.
Even the most frequent issuers typically have a day job — managing the treasury function of a corporation. Solving the information gap therefore doesn’t solve the expertise gap.
Treasurers will still find value in relying on an expert; it’s just that the expert will spend less time on a traditional desktop product with advent of technology. (This isn’t just wishful thinking, Raja has half-a-dozen examples of where expertise has remained when technology has otherwise thoroughly disrupted).
Gradual disruption of capital markets
For me, the indispensability of expertise is obvious in processes such as IPOs and other big deals with long life cycles and enormous scope for added value. But what about transactions with a short lifecycle that are typically high churn and more ‘vanilla’ in nature?
Raja (who started life as a corporate bond trader) gives a great argument for why he thinks expertise will still prevail in such circumstances, which can be distilled down to this: only people can bring people together.
We didn’t agree on everything. Where I am bullish on the potential for technology to help capital markets support underserved areas such as SME financing, Raja sees intractable issues of scalability.
Where I am bullish on the adoption of blockchain for capital markets processes within the next decade, Raja sees the co-ordination required for such adoption problematic, preferring simpler solutions such as smaller scale automation, to achieve similar goals.
But we both see capital markets at the kind of inflection point only witnessed once in a generation. Rather than overnight disruption of capital markets, the change may be more gradual, but no less pervasive.
To coin a phrase, through the ‘aggregation of marginal gains’, investment bankers may quickly find themselves in a brave new world of business opportunity and job satisfaction.