GenTwo launches special purpose vehicle (SPV) structuring solution for second generation structured products
Following the launch in May of the first financial service for individual securitization of all kinds of assets by Zurich based FinTech startup GenTwo, SRP spoke to the firm's founders and managing partners, Patrick Loepfe and Philippe A. Naegeli, about the goals of the new service which is based on segregating risks into smaller issues and how this could help establish a more sustainable structured products market and a more stable financial system.
GenTwo is an off-balance-sheet unregulated solution that enables intermediaries to consolidate their issuance needs via their own issuance special purpose vehicle (SPV), according to Loepfe.
"GenTwo solves long-term structural problems such as issuer risk, non-transparency and high production costs with its off-balance-sheet issuance vehicles," said Loepfe, adding that products issued via the platform will have a Swiss Isin code and can be distributed to professional investors on a private placement basis.
Loepfe who was a driving force behind the development and construction of the Vontobel Deritrade multi-issuer-platform, also noted that GenTwo wants to bring some clarity to the market and challenge the perception that structured products are complex and not transparent.
"By looking at the whole value chain we thought we could improve the perception and bring efficiency to processes inside out," said Loepfe. "One of the things we noticed was that structured products manufacturers have very big balance sheets which they leverage to issue products and support their issuance programmes but they have huge costs relating to risk control, auditing, reporting, etc."
Regulation has exacerbated the need for investment banks to increase their balance sheets even more and therefore added to the costs and workload, said Lopefe, pointing that by looking at the whole value chain they were able to identify areas where the workload and costs for the intermediary market (financial advisers, private banks, family offices...) could be reduced.
"We did compare all the offerings and components of the value chain, and we identified the biggest cost drivers which are prospectus, regulation, balance sheet costs, and market making, and our platform has cropped out those elements that make transacting structured products a burden for intermediaries," said Lopefe. "They don't need a structured products retail offering, they don't need intraday secondary market, and they don't need a prospectus. We offer asset managers the opportunity to create and manage segregated, flexible, transparent and secure structured products or bankable and non-bankable assets at unprecedented low cost of 20bps p.a."
GenTwo is also seeking to address "the problem of conventional structured products, where banking institutions act as issuers and charge high fees in order to meet the regulatory requirements for their risk aggregation", according to Naegeli (right).
"The GenTwo platform has been developed to carry bankable assets including all kinds of structured products such as tracker certificates, and actively managed certificates (AMCs), and also enables a straightforward securitization of nonbankable assets such as wine, art and cryptocurrencies or -coins, which up to today was very expensive and dependent on high volumes," Naegeli said.
"The ethos and philosophy behind GenTwo is to put the relationship manager in charge to respond to what the end investor needs. By doing that we loosen up the whole regulation and cost side of things while increasing security and safety because whatever you put into that basket is in that basket and nothing else, so intermediaries can address issues around third-party risk, and any other mix-in-the-bag issues."
The current focus of the platform is on structured products with simple payoffs for complex underlyings but the goal is to cover and accommodate complex structures, according to Naegeli. "The platform can also be used for clean financing, loan securitisation, even crypto assets and ICOs," he said. "For instance if a firm wants to buy a new machine we now can enable investors to invest directly into that with a physical collateral as easy as buying a normal note with a Swiss ISIN."
The Swiss market has seen increasing traction around actively managed certificates (AMCs), and the platform provides an open framework for managers to choose their custodians so that asset managers can do AMCs without the banking issuer risk, according to Naegeli.
"We think we are well positioned to act as a valuable outsourcing partner for banks in that area so that managers can have their AMCs portfolios off-balance-sheet and at a cheaper cost," said Naegeli. "We're not trying to disrupt the market but to bring efficiency to the market as an addition to the existing set up."
The main objective behind GenTwo is to democratize financial products issuance as well as challenge the existing cost structure and eliminated risk premiums, administration fees, and compliance costs. GenTwo however is not an issuance platform but a service provider for asset managers which covers all operational aspects in relation to the issuance of structured products, according to Loepfe.
"The platform is not fully automated yet and we're working on a semi-manual basis in order to optimise some of the processes," Lopfe said. "However, we plan to fully automate the platform as we grow it."
The initial geographical focus will be Switzerland but the firm is already working to launch in other markets as its approach is based on a purposed aligned model aimed at partnerships, according to Lopefe.
"Our goal is to give the structured products market a push on the basis that it is necessary to provide new simple flexible structures," said Naegeli. "Our solution helps the financial intermediary to create new business opportunities and to use network effects among his clients. With that he can give his clients new financing solutions and investment opportunities."
GenTwo also offers a white-labelling service which will enable the platform to deploy its tools in different ways, according to Naegeli. "We want to change the market and we think this kind of platform can also help educate the market and add transparency as the end investors will be able to see the risks embedded in a given portfolio in real time," said Naegeli. "This is replicating a managed account for certificates. We hope this will also add transparency to how managers work and increase the trust of the end investor."
The platform is adding "great flexibility" and clients will be able to use all kinds of custodians, crypto or traditional custodians, depending on their needs, according to Naegeli. "We think the platform will also open up new opportunities around the different processes related to the issuing and transacting structured products," he said.
Related stories:
Vontobel launches multi-issuer platform in Austria with two issuers
Front office revenue minus cost is no longer viable to run a structured products business, Anchura
Blockchain starts delivering value to structured products investors