Market feasiblity approach adjacent market final
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Transcript of Market feasiblity approach adjacent market final
Work Examples – Market Feasibility 1
FrontLine Partners Viewpoint Series Market Feasibility Approach Adjacent Markets
Examples of Work Conducted in the Trading Platform Market Structured Finance Market Extension: Approach to Build / Launch / Execute
www.frontlinepartners.net
Work Examples – Market Feasibility 2
Define the Market and Its Size Defining trading markets requires an understanding of the market and its products
CAPITAL UNDER MANAGEMENT
CAPITAL COMMITMENTS TO US VENTURE FUNDS
$BN
1.0 2.3
8.0
14.0
20.0
26.3 24.9
32.3
45.6
26.2
0
10
20
30
40
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
RETURN ON EQUITY(1)(%)
INVESTMENT BY INDUSTRY SECTOR
$BN
0.6 1.0 0.33.3 3.8 5.2
1.2
6.310.4
18.7
35.1
4.0
0
10
20
30
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1998 1999E
21.4%
16.7%16.1%
0%
5%
10%
15%
20%
25%
Expansion andMezzanine Fund
Seed and Early StageFund
Balanced Diversif iedFunds
RO
E (%
)
Computer Software
Communication
Consumer Related
Medical and Health
Other
Internet Specific
15%
5%
5%
6% 20%
39%
Average Return (17.4%)
EXAMPLE MARKET SIZING
Work Examples – Market Feasibility 3
Define the Market and Its Products Defining trading markets requires an understanding of the market and its products (cont.)
EXAMPLE PRODUCT DEFINITION
MARKET SIZE, GROWTH, MIX
PRODUCT DEFINITION
• Venture capital investing has grown from a small investment pool in the 1960s and early 1970s to a mainstream asset class that is a viable and significant part of the institutional and corporate investment portfolio
» Venture capitalists invested over $13 billion in about 2500 companies in the United States alone (approx. $5.4M per company)
» Capital under management in the U.S. is around $45.6B by more than 3,000 professional venture capital providers
» New funds raised by venture capitalist rose sharply from $3.1BN (1992) to $18.7BN (1998)
• Venture capital volume is concentrated in the U.S. market with Europe and Asia growing quickly
» High appetite for risk and an entrepreneurial culture results in a strong need for start up capital in the US
» The European and Asian markets are less developed than the U.S., although growing rapidly
• The main drivers of growth comes from Internet start-ups and technology companies that have sprung up to take advantage of the paradigm shift in retail and corporate commerce
» Internet specific investment accounted for 39% of new capital raised in 3Q 1999
» Computer software related investments accounted for 15% of capital raised in 3Q 1999
• Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant businesses. Venture capital is an important source of equity for start-up companies
• Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves
• Venture capitalists generally:
» Finance new and rapidly growing companies
» Purchase equity securities
» Participate in Management and Leveraged Buyouts (LBO & MBO)
» Assist in the development of new products or services
» Add value to the company through active participation
» Take higher risks with the expectation of higher rewards
REVENUE POOL / MARGINS
MAJOR PLAYERS
• The venture capital market is similar to a mutual fund industry in terms of revenues:
» Main revenue is the potential increase in the value of the firm resulting in a return on the equity invested. This is normally realised through exit of the venture investment by means of a merger, acquisition or an initial public offering (IPO)/private placement
» In addition, as an investment manager, the general partner will typically charge a management fee to cover the costs of managing the committed capital, usually 2-3% per annum of the capital raised
• The 10 year average return on equity for venture capital investments are around 17.4%
» The seed and early stage funds return 21.4%
» Expansion and Mezzanine funds showed a return of 16.1%
• The European average return is 11.6%
• The four major types of players in this market are:
» Government Departments: usually in the form of loan guarantee schemes (e.g. SBIC program in the US) and tax incentives (e.g. Venture Capital Trust in the UK)
» Venture Capital professionals: Also called ‘fund managers’ or ‘general partners’. Usually manage investment schemes; typically raise “closed end” investment funds from institutional investors such as private and public pension funds, endowments, corporations, high net worth individuals, and wealthy families. Some venture capital professionals manage ‘open-end’ funds that increase in size as they invest in companies
» Incubators: provide services aimed to help companies in their professional image projection and provide orchestrated access to critical business support
» Investors: Also called ‘limited partners’; provide capital; typically private sector venture capitalists, private investors, pension funds, insurance companies and banks
» Venture Capital Associations: Help fund start-ups and encourage venture investment (e.g. British Venture Capital Association
Work Examples – Market Feasibility 4
Example Trading Activity Chain Once the market is sized, FrontLine Partners works to understand the trading environment and analyze how things work in the industry/market
Greatest source of value, cost
Least source(s) of value, cost
Areas under change due to market trends Industry utility 0 4
• Confirmation • Transaction
settlement • Fees processing • Feed to books,
records and G/L • Reconciliation • Custody • Information
management
• Exposure limit setting/ monitoring
• Credit risk limit management and monitoring
• Regulatory reporting
• Trader position monitoring
• Hedging • Proprietary
trading
• Principal trade (risk taking) or agency trade (executed on exchange or OTC)
• Data collection and analysis
• Packaging • Delivery
• Price quotation • Order
management • Advice to clients
on current trends
• Account planning
• Periodic discussions of needs
• Introduction of research analysts and product specialists as needed
Key Processes
Value Chain RISK MANAGEMENT
TRADING/ POSITION
MANAGEMENT
ORDER EXECUTION RESEARCH SALES RELATIONSHIP
MANAGEMENT OPERATIONS
Sources of Value to
Customer Sources of Cost
to Supplier
Risk Management solution providers: Reuters, BARRA,
SunGard
Sell Side: GS, ML, JP, MS, SSB
1 0 0
3 2 1 1
4 1 1 3 2 3 1
Custodian: State Street, Bankers
Trust, Chase Manhattan
Pure market maker:
Knight/Trimark
Pure agency broker: ECNs
Specialist research
companies: Princeton
Economics
Work Examples – Market Feasibility 5
Fund Admin Custody Execution Portfolio
Management Distribution
$34.0 $6.0 $8.5 $41.0 $2.4 $91.9
37% 7% 9% 44% 3% 100%
Total Value Captured (2)
As % of total
29 bp
• Fund administrators
• Custodians • Broker/dealers • Fund managers • Pension Consultants
• Fund managers (i.e., direct sales)
Key Intermediaries
Value Capture Mechanism
Growth Rates
Trends
• Fees paid by plan sponsors on services performed (e.g., customized report generation) -- bundled together with management fees
• Securities borrowing / lending fees (off P/L) earned by custodians
• Fees on AUM paid by fund managers (off P/L), incurred directly by plan sponsors
• Commissions and spread paid by fund managers (off P/L), incurred directly by plan sponsors as lower AUM
• Management fees paid by plan sponsors
• Fees paid by plan sponsors based on amount invested
• Increased value attributed to fund administration services by end customers
• Proliferation of services required (e.g., account aggregation)
• Commoditization of services leading to margin compression
• Increasingly used as a loss leader for fund administration services
• Increasing competition for buy side wallet leading to pressure on spreads and commissions
• Disintermediation of broker/dealers’ electronic dealing platforms & crossing networks
• Greater performance accountability, enhanced premium placed on good performance
• Globalization
• Proliferation of fund types
• Increased demand for personalization
• Growing power of pension consulting services
5 bp 7 bp 35 bp 2 bp 78 bp
EXAMPLE OF ANALYSIS ON PRIMARY POOLS OF VALUE
Fastest growing
Slowest growing
Market Overview Framework for Valuing Markets Next we translate the activity chain into pools of value and analyze each one for total market and percentage of value in the process
Work Examples – Market Feasibility 6
Fund Admin Custody Transaction
Processing Execution Risk Portfolio Management Research Sales &
Marketing
55%
0.4 bp
0.6 4%
0.5 bp
2.0 19%
1.7 bp
0.8 19%
0.7 bp
1.1 12%
0.9 bp
5.2 9%
4.4 bp
1.7 13%
1.4 bp
4.3 50%
3.6 bp
14.0 36%
13.7 bp
0.3 7%
0.3 bp
5.2 39%
5.1 bp
1.1 29%
1.1 bp
3.4 7%
3.4 bp
8.4 23%
8.2 bp
2.3 37%
2.2 bp
20.9 19%
20.5 bp
2.0 2.0 2.0 1.0 3.5 5.0 1.0
4.3 0.5 2.0 0.8
2.3 14.0 5.2 1.1 8.4
Institutional Fund Mgr Costs (2)
17.9 50%
15.2 bp
59.7 50%
58.5 bp
16.5
Retail Fund Mgr Costs
Available to Service
Providers
Key Trends / Drivers
SECONDARY POOLS OF VALUE
Pressure points: Activity Growth > Average Growth CAGR (Yr 1-Yr 3)
Total cost in $bn
Costs per AUM
$ bn %
bp
• STP - need for bundled back office solutions
• Shift from batch processing to real-time messaging
• Need for customer data aggregation
• STP
• T + 1
• Globalization and deregulation
• Diffusion of market liquidity
• Regulatory shift towards more disclosure and new reporting requirements
• Increasing sophistica-tion of portfolio analytics
• Increasing complexity of manufact-uring
• Information overload
• Pressure on soft dollar arrangement
• Consolidation of wealth mgmt tools
• More demand for personali-zation
• Greater performance accountability
Growth Rates
Fastest growing Slowest growing
Finding the Underlying Value Points Then we go one step future and figure out where the underlying value is in the market place
Work Examples – Market Feasibility 7
Figuring Out How the Industry Works Knowing the key value points of an industry is only useful once it is applied to the primary market interactions – this is where value is determined for a trading system
LEGEND
Role
Type of Interaction
Number of players in role
Frequency of Interaction
Flow of information
Nature of interaction
1-2 3-10 >1000
Transactional Informational
Administrative
Description on facing page
Monthly or less Weekly Daily Hourly
One way
Two way
One-to-one One-to-many Many-to-many
11-100 101-1000
Investors
Hedge fund
Info. prov.
Acct. Admin
Prime broker
OTC
Research
Mkt.
Ex. broker
Stock loan
Repo ECN
EXAMPLE TRADING MARKET INTERACTION ANALYSIS
Work Examples – Market Feasibility 8
Understand the Key Market Players We believe the best way to source deal flow is through other internal trading and execution platforms that is why we spend the time to get to know the market players
SERVICE PROVIDERS BY TYPE
Note: Full service provider solutions and internally-developed solutions can range across the entire activity chain
Execution Fund Administration
Research, Content & Analytics
Transaction Processing Custody Sales &
Marketing Portfolio
Management
Prime Brokers
Custodians / Fund Administration
Risk Management
ECNs / Trading Communities
Order Mgmt
Account Aggregators
Portfolio Mgmt, Analytics & Decision Support
eCRM
End-customer empowering
direct marketers
Market Data & News Vendors
Artificial Intelligence Systems
STP Enabler
Back Office Systems
Infomediaries/ Communities
Ratings Groups
Middleware / Messaging / Data Distribution
Portfolio Accounting
Transaction Cost Analysis
Knowledge Aggregator
Functionality can overlap e.g., modeling capabilities Closely related, enable straight through processing in back office functions
VALU
E C
HAI
N
ACTI
VITI
ES
PRO
VID
ERS
Work Examples – Market Feasibility 9
Know the Trader/Customer FrontLine Partners knows that traders are creatures of habit and like proven methods, we go beyond the market and get in the heads of the user
Valuating market information (e.g., price,
supply/demand) 27%
Trader Productivity
Set trading strategy 21%
Execute deal 10%
System Performance
17%
Create reports (e.g., P&L, VAR, Curves)
13%
Deal workflow management (e.g.
logistics, modification)
12%
Drivers of Trader Productivity
• User-friendly, intelligent deal entry interfaces
» Contracts with up to 50 fields routinely captured in 30-60 seconds; most trades entered within 10-15 minutes
» Automatic data entry for logistics details
• Single data entry and integrated front and middle office systems to reduce manual reconciliation
• Credible system-generated reports on as-needed basis
• Web exchanges to reduce broker chit-chat and facilitate digital data flow
Inefficient Trader Time
Work Examples – Market Feasibility 10
Value the Important Functions Electronic trading platforms need to address the critical market components to enable liquidity
SAMPLE TRADING PLATFORM HEATMAP
Processing Impact Minimum Maximum
Credit Assessment
Information Provision Pricing Logistics Trading Valuation Middle
Office Risk
Management
Forwards
Financial
Options
Com- modity
Non- Com-modity
Futures OTC
Short Term
Long Term
Swaps
Exchange
Straddle
Spread
Asian
Put/Call
Metals
Coal
Oil/Gas
Weather/ Temperature
Products Instrument
Pre-Trade Work Flow Post-Trade Work Flow
Work Examples – Market Feasibility 11
Build the Business Case Finally, FrontLine Partners takes the industry and trader specific knowledge and builds a business case to provide our clients with recommendations and direction
SUMMARY BUSINESS ASSESSMENT
Community value score
3 A
3 B
3 C
4 D
4 E
3 F
Community
Score along value creation dimensions
Financial value
3
Feasibility, immediacy
4
Sustain- ability
2
Member-ship
3
1 4 4 3
4 4 2 2
4 4 4 3
4 4 4 3
1 4 4 3
Estimate of financial value creation
Source of value Value attribution methodology
Potential value ($m)
Block trade facilitator
Lower transaction costs; lower search costs
Potential savings to institutional investors in market impact(2) 650
Research quality aggregator
Higher confidence Maximum earnings associated with research ratings business of Institutional Investor Magazine(3)
<40
Institutional sales communities
Better information; personal relationship
Commission part of sell-side revenues associated with trades executed for institutional investors(4)
15,000
Middle office / back office
Lower transaction costs
Total sell-side clearance expenditures(5) 1,200
Execution communities
Lower transaction and search costs
Total revenues of ECNs, exchanges, and IDBs(6) 4,200
Sector trading information
Better information; new trade ideas
Total industry revenues in sector trading information(7) <100
Work Examples – Market Feasibility 12
Build the Business Case Finally, FrontLine Partners takes the industry and trader specific knowledge and builds a business case to provide our clients with recommendations and direction
SCORE
VALUE CATEGORY
Financial value creation
Value creation score
DESCRIPTION
The total potential annual revenue associated with the activity underlying the community
POOR (1)
< $100 million
FAIR (2)
$100m-$500m
GOOD (3)
$500m - $1 billion
EXCELLENT (4)
> $1 billion
Total of the above scores, expressed on a scale of 1-4
<8 8-11 12-14 15-16
Feasibility & Immediacy
How feasible is the community in the near term (e.g. due to regulation, technology, market dynamics
Serious obstacles mean currently unfeasible
Obstacles can be overcome
No current obstacles
Demonstrable need
Sustainability The number of years the community is likely to retain the majority of its value potential (including momentum)
Trends already undermining value within 1 year
Value likely to sustain for 2-3 years
Supported by current trends: 3-5 years
Aligned with long term industry trends: > 5 years
Membership Number of member organisations - a broad membership increases exposure
Small: < 50 Medium: 50-1,000 Large: > 1,000 N/a
Work Examples – Market Feasibility 13
FrontLine Partners Overview
FrontLine Partners (www.frontlinepartners.net) is a management consulting firm that works with banks, institutional investors, lenders, owners, intermediaries, and service providers in the commercial real estate and financial services industry to help them accelerate growth of their business or repositioning of their business model and assets.
FrontLine Partners offers a number of services ranging from strategy formation, corporate and business development, mergers and acquisitions, capital sourcing, loan work-outs and corporate restructuring. Refer to our website at www.frontlinepartners.net for additional information.
For further information on your unique needs, please contact our Managing Partner - Jim Vincent at 214.369.2085 – for a free initial consultation.