Monday, 7 July 2014

Disruptive . . . another lunch at BBY . . . bienvenue le Tour de France

Australian investment is an equity culture, sometimes I wonder if there is such a thing as a local corporate bond market. Yes Australia has hybrids, but even these are little understood by many in the investment community, as for the more exotic structures often seen on offering letters in Europe and Asia these are basically relegated to a too hard basket. I think it has a lot to do with the highly concentrated banking industry and the affinity that we have as a commodities nation with the discovery of bright shinny things buried in the ground. It's no wonder then that when presented with the potential gold mine that is intellectual property that most run a mile and would prefer to trip over an iron ore deposit than deal with understanding some of the new business models that I've been lucky enough to see again last week.

More gold was left lying around level 17 of 60 Margaret St, Sydney Thursday in the main meeting room of local investment house BBY. As I said in the last blog another four companies were presenting their "disruptive" businesses for those lucky enough to get an invite:
  • GoFar - automotive and insurance sector
  • Open Learning - education sector (relevant to the announced 3P IPO)
  • SocietyOne - banks and financials
  • Zed Technologies - healthcare sector
Of these four I found Society One the easiest to understand. It helped that Matt Symons the CEO is an ex-Accenture partner via the acquisition of a company he helped found while living in the USA and was a polished and importantly focused speaker. Society One is a Peer to Peer lender, so in an international sense this isn't ground breaking, but for Australia it offers some real disruptive qualities in a personal loan market that is sorely in need of a good shake up. Readers of this blog know that the big 4 banks (CBA, WBC, NAB & ANZ) dominate the market for virtually all financial products in Australia. Competition where it exists is usually confined to first mortgages and little else.

There's a reason that the BIS recently ranked the Australian banks as the most profitable in the world with class leading net interest margins as a result of the super-charged profits they garner from personal loans and credit cards. Mr. Symons quickly summarised the situation when he put up a couple of simple slides showing the way how both credit card rates and personal loan rates had hardly moved in the face of rate cuts by the RBA and that's because there is no competition. If credit cards are charging around 18% and personal loans are around 14% versus a 2.75% official funds rate then you can see why the whole sector is crying out for someone to bypass these regular channels.

Peer to peer lending is nothing new, but it is in Australia. The main sticking points in Australia is probably just educating people in the use of a non-bank intermediaries. Society one is offering the conventional model of matching lenders to borrowers by offering them the ability to build a diverse portfolio of loans in definable categories. The system works on an auction type basis where borrowers offer business and lenders bid via rate and size. Society One acts to amalgamate the bids. I was bit slow in getting my hand up to ask some questions about the securitisation process which I think is the key to the business both in terms of loan administration and regulation. They use there own proprietary software "ClearMatch™" which they say offers:
  • Customer Service Tools 
  • Credit Decisioning and Score carding 
  • Debt Management Tools 
  • Bank Account, Control Account and Suspense Account Management
Having viewed this I'd still like to hear from the company themselves answers to the following questions:
  1. What is the entity for the administration of the loan?
  2. What is the procedure for actioning repayment for loans in arrears?
  3. Will their be any independent auditing in respect of statistics available to lenders?
There was a question asked about the regulatory framework under which Society One operates and while I felt assured by Mr Symon's answer that they had jumped through the various "hoops" I'd still like a one on one with him and a flow diagram given the forthcoming Murray Report on the Australian Financial sector. I've seen a lot of "blow-ups" over the years due to government regulation (anyone remember offshore online betting in the US?) and remain always aware of Warren Buffett's rule to avoid or limit investment in businesses that are easily "outlawed" by government regulation. I actually think that we're more likely to see an expansion in this sector rather than a crackdown, but remain vigilant that the first time a business like this "forecloses" on the proverbial widow with eight children that the press will plaster them on the front page of every news source in the country.

In summary Society One has credible management, an understandable and operating business plan, a confirmed niche offering acceptable returns and a regulatory environment on balance that is likely to favour rather more competitive force. Against this I don't see any barriers to entry, especially from the current group of mortgage brokers who already have brand awareness on there side. I think a successful peer to peer could easily be snapped up by said brokers and fit smoothly within their businesses as an alternative to them setting up their own versions. Society One remains one to watch.

An altogether different proposition was GoFar. Danny Adams and the team have a strong engineering background that should give comfort to investors. I think too often these small tech based start-ups lack a depth in this area and leave themselves somewhat vulnerable to the usual teething problems that business suffer in their roll-out.

GoFar is a device that you plug directly into your vehicle's engine diagnostics port. It then sends data via smartphone to the cloud from which it is analysed enabling the driver or importantly a fleet manager to adopt best practices in respect of energy management and data for insurance companies. There are a number of international companies already in the sector, especially in the UK and US where insurance has been the focus. GoFar owns a number of patents on the technology that is contained in the modules and I assume this is once again another system where the real value may end up being the accumulation of  data. They say they've already seen demand from fleet owners and if I was GoFar I'd concentrate on this area rather than in the broader retail sector as it's more likely that savings and therefore the value of the system will be recognisable and actionable in a business environment.

Danny and the team are spicing things up with some "gamification" of the results. You'll get a section of an app that will tell you how you rate versus other drivers in a kind of Strava-esque way. They'll also be a dashboard mounted device that glows green when you're being a efficient and red when you're not. I don't believe the average commuter will care about this, but I'm prepared to be proven wrong in knowledge that I'm not exactly the most "hip" driver on the road so as an investor I'd say to Danny "thats nice, but lets talk about the real guts of things". And that takes me to insurance.

As the proud owner of a vehicle tracking device as far back as 15 years ago the development in the user pays insurance system has always seemed logical to me. I think the first anti theft trackers I had were about a GBP1000, but when fitted to your wannabe master of the universe sports car of choice it brought down my insurance premiums by enough to make the trackers pay for themselves within 2 years. Of course now with GoFar adding driving style and in version one operating hours you can see the benefits for the actuarial classes. They're not doing GPS in 1.0, but I asked Danny about this and it looked very doable for 2.0 and thats where I think (excuse the pun) the rubber will hit the road. You see if I know as an insurer that a vehicle spends all it's time in a low theft area being driven at low correlated times for accidents (i.e. outside of rush hours) then I'm likely to cut a deal with the owner. On top of that you'll have proper data on what people do as opposed to what they say they do. If the only times they drive are between 9pm and 4am I'm wondering if the driver is worth having as a customer . . . but thats just me.

As an investor I need to know a little more about the nature of the patents in question and I reckon that they should try and get some insurance companies on board (if they haven't already) in  their next round of capital raising. Gamification alone probably doesn't do it for the average family unless they get a little prompting from their insurance company. Other than that I'd also need to do a bit more research on the competition.

Of the other two companies I thought Zed Technologies was the more easily understood as Open Learning looked to me a bit too easily replicated by the already established players in web based learning. I just have to believe that the big US players could make the jump very quickly to limit Open Learning whereas Zed might just be simple and nimble enough to gain a foothold before their competition wakes up to what is going on.

As is my usual practice I arrived early at BBY and was lucky enough to grab a couple of minutes with Co-Founder Ross Wright and one of the more senior BBY bankers. Ross is an ex-radiologist and works from the basis of empowering the patient. Essentially Zed offers portability of radiological film by the patient. Essentially you get your X-ray or similar digital scan and it's uploaded to the cloud and you get access through an account and I gather eventually even an app. Instead of carting analogue film from doctor to specialist etc. you simply generate a passcode for the medical practitioner in question and allow them for a given time to access your digital films. The benefits for radiologists and for that matter governments, patients and medical insurers is that you're not spending money generating film that if you're anything like my family gets damaged or lost pretty quickly. For patients it means you can get a second opinion quickly. At this stage the patient owns the data, but I see where Zed can leverage this in future, though I appreciate that at this stage lots of people are not too keen to let even anonymous versions of their films be on-sold. Keeping it nice and clean until people get used to the security of the system works best to me in version 1.0, but consider in the long run just the benefits of a vast database of these type of things for researchers I can see the potential.

Having been a long time citizen of the world I know the problems of transferring medical data between countries and doctors, so I'm an easy sell. I wonder what the more single jurisdiction citizens might think about the system? My guess is that if the price was low enough the under 35's would jump all over this. At this stage it's a film/scan-centric service and they already have a system operating in Australia for practitioners. The possibilities are good and I can imagine other biological information could easily be uploaded. I fear of course that the main pushback might come from the medical community who always surprise me with their desire to control the patient "experience". Doctors are a conservative lot given the technology they work with. I just wonder what might happen to Zed if (say) GE offered a similar system to hospitals or insurance companies. As I said Zed will have to rely on flexibility and first mover advantage to get a strong enough foothold. I'm a big fan of of the anything health related and therefore at the very least would recommend investors watch out for Ross and his partner when the time comes for a capital raising.

I wasn't always interested in health and those readers who know me probably can testify to my love of fine food and wine. That changed for me in Singapore in 2006 when I had a health scare and ever since I've been extremely aware of how you can let things go. Garmin has been the main beneficiary of my conversion to an exercise regime and the world's wine traders the biggest losers. I'm a concrete believer in measurable data in health matters. Luckily given my focus on cycling since 2011 this has become ever easier. The combination of various monitors, be they heart rate straps, cadence counters, wireless body mass scales or home blood pressure monitors are fast being condensed to fewer and smaller units. The ageing baby boomer generation and the spiralling cost of insurance makes the wholesale adoption of personal health monitoring a no-brainer. In fact I think much like the space race gave us a vast array of devices and materials so too has the world of high-end athletics. Take for example the trends in cycling towards monitoring personal power output. Watching Chris Froome and team Sky competing under the direction of a strongly analytical staff can be both fascinating and soul destroying. I know personally I hate to think that the team rides knowing a given rider can sit on 400w for 62.5 minutes and then he's burnt and you need to have the next guy in the procession step up.

I appreciate Sky, but prefer Contador because he rides more with guile and cunning and puts pressure on other teams to react because of his explosive power on the climbs. You need a team with a lot of depth to combat a Contador, because you've got to be patient and hope he burns himself out. If that doesn't happen you're going to be down 2 or 3 minutes on a an alpine clime and even if you're a phenomenal time trailer that might not be enough.

On Stage 2 of the tour yesterday there was another wildcard at play in the form of Vincenzo Nibali.

The course was setup like a slightly shorter version of Liege-Bastogne-Liege, meaning lots of short sharp climbs with chances for riders with real endurance to get away.

Readers will know I like they way Nibali won the 2013 Giro and have been somewhat disappointed with his form since. He took the Italian Road Championship recently and although I agree with a number of the more fashion conscious commentators that the Astana kit he's been weaing since is pretty poor there's no denying that it's given him a boost as evidenced by the way he point at the flag while winning this stage. I also like the new shark themed bike that Specialized have provided him with for the TdF.

I liked the old Tarmac SL4 "Shark Of Messina" frame with the blue highlights on the forks and stylised sharks on the top tube so much I tried to buy one.

The new Tarmac SL (they dropped the model number) is in my mind strangely cartoonish and perhaps less classy? As an investor with a few years under my belt I'm still more a buyer of the older graphics, but can appreciate the more menacing newer version. Whatever your preference watch out for Nibali.


1 comment:

  1. Good call on Nibali re the TdF