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Tuesday 09 April 2019
BUSINESS DAY
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NATIONAL NEWS
Fintech start-up Branch raises funding for EM lending push New alliance with Visa helps loan provider pursue new markets TIM BRADSHAW
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ranch International, a Silicon Valley-based start-up that offers loans to first-time borrowers and customers without bank accounts in Africa, India and Mexico, has raised $170m in new financing. The deal, which is made up of a combination of equity and debt, forms part of a new alliance with payments group Visa. “It’s tough to convince VCs in Silicon Valley to invest in something for Africa, and it’s tough to get lenders to lend due to the risk,” said Matthew Flannery, Branch founder. Branch is vying with its California-based rival Tala to become the first provider of financial services to the emerging middle class in developing markets, who are underserved by traditional banks. This latest round brings Branch’s total financing to $260m, comprised of $100m in equity and $160m in debt. The company started operating in Kenya in 2015, led by Mr Flannery, who had previously co-founded Kiva, the microfinance non-profit platform. Branch collects data from potential borrowers’ Android smartphones, including the contents of their text messages, address books and other apps they have installed, to assess their likely creditworthiness. Interest rates can range between annual rates of 12-180 per cent, with rates highest for first-time borrowers then falling as customers repay more loans. “To use a few buzzwords, we literally are using deep learning to do the underwriting,” Mr Flannery
said, referring to one form of artificial intelligence that also analyses how borrowers use the Branch app and contact networks. “If people are careful using the app, if they look at the financial screens, the repayment plans, the terms and conditions, then they almost never default.” Branch expects to lend about $350m this year, usually in small loans of $20-$40, which are primarily financed by its own borrowings. The new venture round, which was led by Foundation Capital and Visa with participation from existing investors such as Andreessen Horowitz and Formation 8, will be used to develop new markets after recently expanding from Africa into India and Mexico. “We want to set an example that this is a good market,” said Mr Flannery. “You can invest in low-income people in India.” Branch is expanding in the wake of infrastructure such as smartphone penetration, low-cost mobile payments systems like M-pesa, and government biometric databases. Its new partnership with Visa will offer “virtual” prepaid debit cards to 2m people that allow Branch customers to withdraw their loans using a cash machine, even if they do not have a bank account. “By focusing on digitising payments, we aim to build a more digitally inclusive ecosystem,” said Otto Williams, Visa’s vice-president of strategic partnerships, fintech and ventures. Charles Moldow, a general partner at Foundation Capital who is joining Branch’s board, said the company was “poised to become the cross-border financial super-app”.
China sounds alarm over bad-loan surge at small banks Fresh questions over bailouts and failures as bad-debt rate tops 40% at some lenders banks,” said Richard Xu, a China DON WEINLAND AND financial sector analyst at Morgan SHERRY FEI JU Stanley. “We’ve been highlighting hina’s central auditing author- this as something policymakers ity has sounded the alarm on should be watching.” Financial authorities have dea surge of bad debt at small banks around the country, raising vised a number of methods for paring the question of whether Beijing will bad debt levels. Last year the volume continue to bail out struggling lend- of bad loans reaching the market for ers or eventually allow some to go distressed debt hit a two-decade high of Rmb1.75tn ($258bn) as regulators bankrupt. The National Audit Office said promote the transfer of NPLs from that some banks in Henan province banks to private investors. Ultra-high rates of bad debt above in central China had recorded 40 per cent of their loan books as bad debt 40 per cent have prompted questions by the end of 2018, the first official over whether some banks could be disclosure in decades of such high allowed to fail. In recent years, banks in dire straits have been consolidated rates of toxic assets. The province was home to 42 with others and recapitalised but banks with non-performing loan none has been allowed to go under rates that had “crossed the warning since the collapse of Hainan Develline” of 5 per cent, 12 banks with rates opment Bank in 1998. In response to the central audiabove 20 per cent, and “a few” with NPLs exceeding 40 per cent, accord- tor’s report, an op-ed on Saturday in the influential Chinese newspaing to the audit authority’s report. Solving China’s bad debt problem per The Economic Observer called is a top priority for Beijing, which for permitting small banks to exit views it as a core component to main- the market if warranted by market taining financial and social stability principles. The government’s tolerance for in the country. Many large banks have brought allowing state-owned companies to NPLs under control, but city com- default on bonds has increased over mercial banks and rural financial the past year, as shown by a number institutions, which make up more of missed payments. One such comthan 26 per cent of China’s total pany failed to repay a US dollar bond banking assets, have continued to in Hong Kong in February, the first record higher rates of soured loans offshore default in 20 years and a sign that the government was not rushing as economic growth cools. “The key risk right now is regional to rescue state groups.
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Larry Fink says China wants greater participation of global companies in its domestic asset management market
Larry Fink says BlackRock aims to control a Chinese asset manager
World’s largest investment group ‘very engaged’ with local regulators PETER SMITH
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arry Fink says BlackRock is “very engaged” with Chinese regulators as the world’s largest asset manager attempts to take control of a local investment group. The BlackRock chief executive said in his annual letter to shareholders that his ambitions in China — forecast to be the world’s second largest investment market behind the US in less than two years — had not been dented by the US-China trade war. “If anything the Chinese are looking for greater participation of global firms in their asset management space because they also have a growing retirement crisis,” he said. “We hope to have a majority-controlled asset management [business] in China and we are very engaged with the Chinese regulators.” In the annual letter, published on Monday, Mr Fink said BlackRock aimed to be one of China’s top asset managers as the Asia region, driven by China, comes to account for an ever growing share of global assets. Beijing said in late 2017 that international asset managers would soon be able to own up to 51 per cent
of a domestic fund management company, and 100 per cent in three years. However. none of the large foreign asset managers operating in the country, including JPMorgan Asset Management which has a stake in China International Fund Management, have applied to the China Securities Regulatory Commission for permission to move to 51 per cent. BlackRock has held talks with CICC Fund Management, a wholly owned subsidiary of state-backed investment bank China International Capital Corps, about buying a majority stake in the investment unit, according to people close to the situation. The CICC unit is the first mutual fund management company established by a single shareholder under China Securities Regulatory Commission rules. BlackRock has also held talks with a handful of other Chinese groups, according to a person close to the New York-listed group, which declined to comment on its interest in CICC Fund Management. BlackRock already owns 16.5 per cent of Bank of China Investment Management, part of Bank of China. However, it is regarded as a legacy holding after being inherited when
it bought Merrill Lynch Investment Managers in 2006. Lifting its holding to 51 per cent is seen as unlikely. Peter Alexander, managing director of Z-Ben, a consultancy that advises foreign asset managers in China, said the CICC unit was unusual in China as most local fund management companies had four or five shareholders. “Global asset managers should be planning for a scenario whereby 100 per cent retail mutual fund licences in China are granted more quickly than currently expected,” Mr Alexander said. BlackRock’s Chinese expansion is led by Geraldine Buckingham, the former global head of corporate strategy who recently took over from Ryan Stork as Hong Kong-based head of Asia-Pacific. It already has a large team in China with about 40 staff. BlackRock has a “private fund management” registration that allows it to make and distribute investment products to qualified Chinese investors, and last year launched a quantitative fund investing in Chinese equities. The Asia-Pacific region accounted for $430bn of BlackRock’s $6tn of assets under management at the end of 2018 and $678m of its $14.2bn of 2018 revenues.
Hedge fund Renaissance pulls back on hunt for market trends Once highly successful strategy of latching on to patterns in futures has faltered LAURENCE FLETCHER
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enaissance Technologies, one of the world’s most influential and secretive hedge fund firms, has sharply cut back its use of strategies that bet on patterns in futures markets, a big sign of such strategies’ waning popularity. US-based Renaissance, founded by former cold war codebreaker Jim Simons and with about $60bn in assets, reduced its use of such strategies in its Renaissance Institutional Diversified Alpha (RIDA) fund by two-thirds near the end of last year, say people familiar with the matter. The news has not previously been reported. The move comes after a long period in which hedge funds’ timehonoured strategy of following market trends has struggled to replicate past returns in markets dominated by central bank stimulus. Such funds, pioneered by the
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likes of billionaire John Henry and the founders of Man Group’s AHL fund — David Harding, Martin Lueck and Michael Adam — use complex computer models built by teams of PhD scientists to try to latch on to trends and other patterns in futures markets. Such funds made double-digit gains in the market meltdown of 2008, profiting from falling equity and oil prices, while most other investors suffered large losses. Those gains helped engender a belief that trend followers could help protect investors during periods of market turbulence, helping such funds attract tens of billions of assets in the wake of the credit crisis. But despite strong returns in 2014, many have otherwise delivered largely lacklustre returns, sparking concerns over overcrowding in the sector. The drab performance has prompted some managers, notably London-based Winton Capital, to @Businessdayng
cut back or alter their use of trendfollowing models. Renaissance’s RIDA fund trades stocks around the world, balancing out bets on rising and falling prices, and also seeks to capitalise on trends and other patterns in futures markets, which provide the means to lock in financial-market prices for future dates. As a result of Renaissance’s decision, only a very small portion of RIDA’s assets are now invested in such futures strategies. Instead, Renaissance will trade more in Japanese and Hong Kong stocks. Renaissance’s decision is based on the performance of the futures strategy, two of the people familiar with the matter said. RIDA gained 3.23 per cent in returns last year, a bright performance compared with an average 4.75 per cent loss among hedge funds overall, according to data group HFR, and amid falling stock markets. This year the fund is up 1.35 per cent.