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P.E. powerhouses struggle with cash flow – Industry roundup: 21 September

Private equity powerhouses struggle with cash flow

Major private equity firms are facing intense scrutiny from investors for how they manage their own cash flows. Companies such as SoftBank Group Corp., a tech unicorn investor, abruptly sold some of its most notable assets. When the shares were about 70% below peak, the company reported they had sold US $22 billion worth of Alibaba Group Holding Ltd. Shares, reducing exposure by nearly half.

Reports indicate that the premature sale may be attributed to SoftBank potentially violating a covenant with its lenders that requires it not to report financial losses for two years in a row. In its fiscal year that ended in March of 2022, SoftBank reportedly lost $15.5 billion, incurring a $23 billion loss the next quarter. As a result, the $22 billion share sale, which is said to be recorded as investment gains, can counterbalance significant losses from the two Vision Funds currently managed by the company, according to reports. Additionally, the price of its $450 million bond that was due on 29 January plummeted to as low as 80 cents on the dollar, exacerbated by a ratings downgrade by Moody’s Investors Service, which cited refinancing risks.

Similarly, the recent decision by Fosun, a China-based multinational company, to reduce holdings in its core pharmaceutical unit, which accounts for 18% of its $37 billion gross asset value, was equally significant, surprising investors.

Reports are suggesting that neither private equity behemoth can generate enough cash to pay its monthly interest payments at a minimum while also paying operating expenses like employee compensation.

Outside investors typically use the loan-to-value ratio as the primary indicator of the liquidity of a private equity firm. SoftBank and Fosun, according to reports, appear unconcerned with only 14.8% and 41.5%, respectively. However, reports explained that selling invaluable assets prior to a recession may indicate inadequate liquidity management procedures currently in place.

Goldman Sachs enters Europe’s competitive corporate cash management landscape

Goldman Sachs plans to expand its cash management service for businesses into the European Union as it seeks more stable revenue streams outside of its highly unstable investment banking and trading businesses.

Recognized for providing complex products and advising companies on large transactions, Goldman began offering company deposits and payments in the US in 2020 and the UK in 2021. The EU service will reportedly be based in Frankfurt, with intentions of spreading into Amsterdam. According to David Solomon, CEO, Goldman, the new initiative will diversify into lines of business that provide consistent revenue streams (such as Marcus, a consumer arm that accepts deposits), as opposed to investment banking, which is highly profitable but subject to abrupt fluctuations depending on the state of the economy.

According to Goldman, its new operations have drawn over 400 clients, with more than US $65 billion in deposits and trillions of dollars processed.

India's all-inclusive payment ecosystem gains global attention

According to Finance Minister Nirmala Sitharaman, other nations are currently interested in India’s locally developed payment stack system, which resulted from promoting digital payments through the Unified Payments Interface (UPI) and RuPay cards.

UPI has reportedly become a vital component of the country's digital payments in the last two years, largely driven by the pandemic, and was valued at US $940 billion in 2021 (30% of India’s gross domestic product). Reports indicate that UPI's compounded annual growth rate (CAGR) in value has been 160% in the five years since its launch in 2016. There were 338 banks on the UPI platform as of July 2022, with 6.57 billion transactions totalling Rs 10.72 trillion, a volume and value record, in August 2022. Sitharaman commented that many unbanked citizens of India have now become part of the financial system as a result of the digitalisation of financial services and increased use of UPI in India.

The National Payments Corporation (NPCI) of India is expanding UPI's reach by assisting other countries in developing their own payment systems. It is also facilitating cross-border payments through the acceptance of UPI or RuPay cards for remittances, according to Sitharaman.

Additionally, the account aggregator (AA) network, which launched in September 2021, is expected to transform credit flow for medium and small businesses, currently serving all major private and public sector banks. The AA network is said to include fifty-two regulated entities by the Reserve Bank of India, including banks and nonbanking financial companies (NBFCs), as of September 2022. Other participants also plan to join the platform in addition to the banking, insurance, and pension sectors. Sitharaman stated that the number of accounts enabled on the AA network is currently at 1.1 billion.

US Federal Reserve debuts the FedPayments Insights Service for ACH tracking efficiencies

The Federal Reserve has launched a new service named FedPayments Insights, a business and analytics tool, to assist financial institutions in tracking trends for FedACH payments as well as information on pertinent operational, strategic or risk management decisions. Additionally, the FedPayments Insights Service will generate reports on payments settled through FedACH.

The Fed plans for the service to provide a comprehensive and easily accessible view of an institution's daily and historical FedACH activity, including government and commercial transactions, for greater transparency and approval. FedPayments Insights, which is available through FedLine Web and FedLine Advantage Solutions, will reportedly track all FedACH transactions for individual originators and any single routing transit number (RTN) or family of RTNs. Furthermore, the service is said to provide visual reports and data on payment trends and activity as well as volumes and return rates. Detailed historical data will be available for access for two years prior, with summarised data for six years prior.

Eight-month US tech IPO slump is the longest during the 21st century

The stock market declines in the United States this year have reportedly driven investors away from technology start-ups, resulting in the longest period without a tech initial public offering (IPO) since the start of the century. According to Morgan Stanley researchers, 21 September will be the 238th day without a tech IPO of more than US $50 million, marking a period longer than those after the economic collapse in 2008 and the early 2000s dot.com crash.

Reports indicate that inflationary pressures have prompted the Federal Reserve to increase interest rates, lowering investor optimism for growth stocks, which performed exceptionally well during last year's explosive growth. According to the Financial Times, the tech-heavy Nasdaq has fallen 28% this year, compared to the S&P 500's 19% decline.

Start-ups in the technology sector have been severely impacted, as shown by total US IPO volumes decreasing 94% year over year, as well as raising only $7 billion as opposed to $110 billion, according to reports. “There is a tremendous amount of market uncertainty right now, and uncertainty is the enemy of the IPO market,” stated Matt Walsh, Head of Tech Equity Capital Markets, SVB Securities. Walsh commented that he anticipated that at least a small group of businesses would attempt an IPO this year, but the majority have already postponed their planned stock listings until 2023.

Mastercard strengthens fintech NORD.Investments with open banking payments solution

A Mastercard company, Aiia, and NORD.Investments, a Denmark-based digital investment firm, have partnered to provide open banking payments for Denmark's digital investment advisor platform. NORD.Investments customers have reportedly had difficulties adding funds to the investment platform, requiring them to manually transfer funds from their online bank.

NORD.Investments, using Mastercard's open banking network, plans to enable customers to make account-to-account payments with more convenience. This collaboration is expected to accelerate and simplify the process while also reducing human manual entry errors. NORD.Investments reportedly manages more than 2 billion DKK with the new payment solution and expects to significantly improve the user experience for more than 7,000 users.

The Danish Financial Supervisory Authorities recently granted NORD.Investments an Investment Firm license, allowing them to expand the platform into new European markets. With Mastercard as its new open banking partner, the company plans to scale top-up payment solutions throughout Europe. NORD.Investments is reportedly investigating how it can use open banking data to create intuitive user experiences directly in the app in the future.

Sardine secures US $51.5 million in funding for its fintech fraud platform

Sardine, a behaviour-based fraud and compliance platform for fintechs (developed by Coinbase, Revolut and PayPal), has reportedly raised US $51.5 million in a Series B round led by Andreessen Horowitz's growth fund.

Sardine's main technology employs artificial intelligence (AI) to generate a real-time fraud score based on the user's identity, device and behaviour patterns at the time of account creation and funding. Additionally, it monitors potential fraud during account login, deposits and withdrawals on an ongoing basis.

By providing an instantaneous ACH and card on-ramp to cryptocurrency, the firm plans to enable its fintech and cryptocurrency clients the option to buy over thirty different crypto assets or NFTs immediately. A direct fiat-to-NFT checkout product was recently introduced by Sardine.

"Faster payments mean faster fraud," says Soups Ranjan, CEO, Sardine. According to reports, Zelle, RTP and FedNow are becoming more prominent, making customers more susceptible to social attacks and threats in which they are persuaded to purchase or invest in products that are not valid. Financial institutions typically only have knowledge of their customers' purchases of ETH or USDC and are unaware of their subsequent actions. Ranjan further commented that it is necessary to adopt a new perspective on fraud prevention that closely examines user behaviour at the point of sale and integrates that with the progression of the funds afterwards.

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