FinLab — A German fintech incubator

Established in 2014, FinLab is primarily focused on investing in and incubating early stage fintech companies in Germany. It currently has five fintech investments and intends to increase this to seven to 10 over the next two years. The company also holds two asset management businesses, Heliad Equity Partners and Patriarch. These are relatively mature and cash-generative businesses that provide FinLab with financial resources to pursue fintech opportunities. The company is based in Frankfurt and employs 15 people at the holding level and over 50 people through its subsidiaries.

The company was created from the restructuring of listed asset management company Altira Aktiengesellschaft and renamed FinLab in December 2014. Heliad Equity Partners and Patriarch were both previously part of Altira’s portfolio.

Strategy

The FinLab portfolio consists of two components: more mature, cash cow investments in asset management companies that it inherited from Altira; and more recent stakes in German fintech businesses in incubation phase. Its business model is to leverage off the asset management businesses, which provide balance sheet strength and cash flow, allowing it to focus on building its fintech investment portfolio.

The asset management companies Heliad Equity Partners, Heliad Management and Patriarch contributed €4.9m to FinLab’s income in 2016, more than sufficient to cover FinLab’s €2.6m operating costs.

FinLab looks for innovative and disruptive fintech companies in which to take a significant stake of at least 20%. This allows it to have influence in the company and also to have representation on the supervisory board. Unlike venture capital companies that typically take small, passive positions in a large number of holdings, FinLab’s goal is to build a portfolio of between seven to 10 investments and add value to its companies in the following ways:

Asset management companies

Heliad Equity Partners and Heliad Management

Heliad Equity Partners is a listed private equity investment company focused on German special situation investments, both listed and unlisted. It has three focus sectors: internet and technology; lifestyle (entertainment); and e-commerce. The largest holding is listed company Fintech Group AG, which accounts for more than 50% of Heliad’s NAV. For more information, see Edison’s QuickView note on Heliad Equity Partners,1 published 16 November 2016.

FinLab has been a shareholder of Heliad Equity Partners since its inception in 2000. Its 47% stake is currently worth around €24m and it receives dividends and distributions from the company. The recently announced 2016 dividend of €0.15 per share represents around €670,000 for FinLab in 2017.

Heliad Management performs the investment management function for Heliad Equity Partners for a fixed fee of 2.5% of reported shareholders’ equity, which generates annual income of around €1.5m for FinLab. It also receives a 20% performance fee of the company’s realised profits, which, by nature, is more volatile. In 2016, performance fees were approximately €200,000, down from around €2.2m in 2015.

Patriarch Multi-Manager

Patriarch Multi-Manager develops fund-of-fund solutions and asset management strategies for independent financial advisors, selecting managers for each mandate. In so doing, Patriarch provides investors with access to expertise that is normally only available to wealthier families and institutions. It also creates products for larger partners to rebrand. In February this year, Patriarch launched an online robo-advisor product, truevest, which it hopes will extend its retail investor reach. Assets under management are currently around €245m. FinLab has indicated it expects to receive annual dividends of around €250,000-300,000 from Patriarch.

Fintech investments

nextmarkets

nextmarkets was FinLab’s first investment in February 2015. Founded in April 2014 by the entrepreneurs behind social trading platform ayondo, nextmarkets is an e-learning platform for private investors active in traded markets. Experienced professional traders serve as coaches to provide a real time narrative on their investment ideas and decisions, which it describes as “curated investing”. The service was formally launched in December 2015, and in July 2016 nextmarkets successfully completed a seven-figure funding round in which Peter Thiel, among, others participated. FinLab estimates the value of the company at around €15m.

Peter Thiel’s participation in the follow-on funding round of nextmarkets (and also Deposit Solutions) is significant because of his profile and track record. As the co-founder of PayPal and the first external investor in Facebook, his participation in an investment may be seen by some as an endorsement of a start-up’s potential. He potentially lends credibility to FinLab among the start-ups community and could bring access to a significantly broader and higher-calibre network.

Deposit Solutions

Founded in 2011, Deposit Solutions developed a platform (COMONEA) to allow banks to gain access to savers across borders in Europe without the cost of operating local infrastructure. With its proprietary technology, Deposit Solutions allows banks seeking deposits to list their savings offers on an open architecture platform and be available to customers of all participating banks. Thus any customer can access products of all participating banks through their existing account without the need to open multiple bank accounts. This allows retail banks to offer the best available rates without losing their customers. Meanwhile banks get low-cost access to a much larger pool of depositors.

COMONEA’s model creates efficiencies and opportunities for retail banking while benefitting customers. With a deposit market size of approximately €9tn in Europe, the model is highly scalable. Meanwhile, Deposit Solutions has the benefit of early mover advantage and proprietary technology. To date, Deposit Solutions has mediated deposits of over €1.5bn and has attracted blue-chip names onto its platform, including Deutsche Bank and FFB, the German subsidiary of Fidelity.

FinLab invested €3m for a 12.9% stake in the company in 2015 alongside one of its major shareholders Apeiron Investments (7.5%), thus combined they own 20.4%. Peter Thiel became an investor in Deposit Solutions in January 2016 and a further funding round successfully raised €15m in July, valuing the company at over €100m (over four times FinLab’s entry valuation).

Kapilendo

Kapilendo was formed from a merger in April 2016 of FinLab’s existing crowd-funding company Venturate and crowd-lender Kapilendo. In its current form, it is a platform to provide both traditional loans to small and medium-sized enterprises, as well as investments in start-ups and companies looking for growth capital. It had high-profile success last year when it raised €1m for Berlin football club Hertha BSC in a matter of minutes. More recently, Kapilendo announced a joint venture with Engel & Volckers Capital to launch a crowd-funding platform for real estate. The last financing round, completed in January 2017 valued Kapilendo at around €22m.

AUTHADA

Founded in 2015, AUTHADA provides real-time mobile authentication of a customer’s identity via a smartphone’s NFC interface. The applications are broad across all aspects of digital life including e-commerce, mobile banking and services. The technology is patented and its procedure already meets legal and regulatory requirements of the second European Payment Services Directive (PSD2). FinLab’s 20% stake was acquired in April 2016.

FinLab recently announced strong 2016 results with net income more than doubling to €14m (€6.5m in 2015). This was largely due to significant write-ups of Deposit Solutions and nextmarkets. Post year end, FinLab concluded a capital increase of Kapilendo, which also resulted in a valuation increase.

Starting this year, the company will publish its NAV quarterly to improve transparency. The first-quarter NAV, due to be published shortly, will capture the write-up of Kapilendo.

Management indicated the company has identified potential new investments, which may serve to highlight the opportunities available to the company and help grow its NAV.

On 2 May, FinLab announced it will make an investment in FastBill alongside venture capital company coparion GmbH. FastBill is an online financial management tool for small businesses and the self-employed. It is a ‘software as a service’ (SaaS) solution that allows small businesses and the self-employed to access professional business software that can relieve the users of time-consuming, clerical work and help eliminate accounting errors. FastBill has over 40,000 users. It was founded in 2011 and employs 22 staff.

Presently, the company does not expect any of its companies to be ready for exit for another one to two years. However, successful follow-on funding rounds and participations from respected investors could serve to highlight value creation within its portfolio.

The financial services sector is one of the largest in the world, accounting for around 8% of global GDP or around €4.5tn. Digitalisation is proving a hugely disruptive force to incumbent service providers and, at the same time, providing enormous opportunities for newcomers and innovation. Traditionally, customers faced high costs, high dependency upon their bank, limited choices and little transparency. Customers are now less loyal and increasingly demanding of more choice, convenience and transparency at lower cost.

The investment potential for the fintech sector is therefore, in FinLab’s view, very attractive. There are around 60m online bank accounts in Germany and nearly half the population use online banking. In 2015, capital invested in the German fintech sector amounted to around US$770m, a growth of 840% over the previous year. FinLab believes it is well placed to capitalise on these trends given its financial strength, network and reputation.

Supervisory board and management board

German corporate law requires public companies to have two boards: a management board and a supervisory board. The board of management is executive and responsible for the management of the company. The supervisory board is made of non-executives whose role is to oversee the board of management and appoint its members.

The management board consists of three members:

Axel Benkner has been chairman of the supervisory board since 2011. He was global head of retail and head of DeAM Europe at Deutsche Asset Management and a member of the Management Committee Germany at Deutsche Bank.

Shareholders and free float

FinLab has two major shareholders, BF Holding GmbH with 49% and Apeiron Investment Group with 31%, leaving a free float of 20% (Exhibit 3). Both were pre-existing Altira shareholders when it restructured to become FinLab and are regarded by management as constructive, long-term shareholders. Apeiron Investment is the partner investor with FinLab in Deposit Solutions and introduced Peter Thiel, who subsequently participated in two FinLab investments: Deposit Solutions and nextmarkets.

FinLab was created out of the restructuring of Altira, a listed company that held a number of investments in asset management companies. The company refocused its business model to one investing in and incubating early stage fintech companies in Germany and, as part of that restructuring, sold its previous investments with the exceptions of Heliad Equity Partners and Patriarch. The company was renamed FinLab in December 2014. As a result, the historical financials of the company do not reflect the current business model.

Income statement

FinLab recently reported 2016 IFRS earnings of €14m, more than double that of 2015 (€6.5m). This was mainly attributable to an €11.8m increase in financial income due to write-ups of two of its fintech companies, Deposit Solutions and nextmarkets, following successful capital increases in July 2016.

FinLab also receives income in the form of management fees, dividends and distributions from Heliad Equity Partners, Heliad Management and Patriarch. These are reflected in total income (see Exhibit 4), which fell to €4.9m in 2016, from €6.5m in 2015. Management fees (2.5% of assets under management at Heliad Equity Partners) and dividends are relatively stable at around €2-3m per annum. The company also receives performance fees from both Heliad Management and Patriarch, which are more variable. These fell by around €2m in 2016 and account for lower total income.

Balance sheet and cash flow

FinLab’s balance sheet expanded to €71.4m (€57.3m in 2015), largely due to a €9.8m increase in retained earnings. The company had net cash of €970,000 at the end of the year, which management believes is sufficient for its investment needs this year when combined with cash held in its subsidiaries (undisclosed). With a strong pipeline of potential investments being presented, it would consider raising capital in the future. At the present 10% share price discount to NAV, this would be dilutive for existing shareholders. FinLab also has the flexibility to reduce its 47% stake in Heliad Equity Partners, however, at its current 30% discount to NAV FinLab does not view this as an attractive level to sell shares.

FinLab’s growth is driven by its fintech activities and shareholder value should be driven by its ability to grow the NAV over time. Earnings in any given year can be less informative as the timing of revaluations and exits, which are reflected in the income statement upon recognition, can be volatile.

2016 NAV increased by 21% to €67.1m and FinLab trades at a 10% discount this NAV. This does not capture an increase in valuation of Kapilendo from €10m to €22m following a capital raising in January 2017. Furthermore, 40% of FinLab’s NAV is its holding in Heliad, which is valued at a 30% discount to its own NAV. While it is normal for investment companies to trade at a discount, it could be useful to consider the impact on FinLab’s NAV if Heliad’s assets are reflected at fair value (NAV). If the discount is removed, FinLab’s NAV would rise to over €80m, suggesting a discount to NAV of c 25%.

FinLab’s NAV has grown rapidly since its inception at the end of 2014 to the end of 2016 (see Exhibits 5 and 6) and the discount to NAV has narrowed sharply from 54% at end 2013 to 10%, suggesting change in strategic direction upon the creation of FinLab has been well received by investors.

NAV growth since the end of 2014 has been driven by the increase in value of its fintech investments as the value of the asset management businesses is relatively unchanged. As a result, Heliad’s share of FinLab’s NAV has fallen from 48% to just under 40%. Given the current fintech investments are still in early stages and FinLab’s intention to increase its investments from four to seven to 10 companies over the next two years, there is still significant potential for the NAV to grow.

From this year, FinLab will publish its NAV on a quarterly basis to improve transparency. The first-quarter NAV, due to be published shortly, should show growth all other things being equal as it will reflect the Kapilendo revaluation discussed above.