The film production company Barry Films and the Swiss securitization specialist Gentwo are jointly structuring an actively managed certificate that is intended to provide financing for productions, for streaming services such as Netflix, Amazon or HBO. Such issues are Gentwo’s daily business. The company has specialized in making non-bankable assets such as reforestation projects in Indonesia or a large dairy farm accessible to investors.
This helps investors out of a dilemma. After all, the common asset classes hardly seem attractive any more: shares are volatile and highly valued, bonds carry the risk of rising interest rates, money depreciation, and offer hardly any earnings opportunities in a low-interest-rate environment.
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The risk is widely spread
The Swiss start-up promises to remedy this situation. The fintech company specializes in the securitization of assets for institutional clients such as asset managers, family offices, brokers and small banks. “We have democratized the issuing process by setting up an issuing platform for each financial intermediary,” explained founder and Chairman of the Board Patrick Loepfe. Gentwo creates an off-balance sheet vehicle for each client. Because an independent company is established that is not consolidated in the balance sheet, security is increased in the event of bankruptcy.
Securitization solutions have been around for a long time. However, Gentwo not only designs a product, but also builds an issuing platform for it. This distinguishes the company from its competitors. Large issuers aggregate many funds and issues, but also the issuer risk, which becomes the focus of attention again, especially in turbulent times. In this environment, investors want to minimize risks – including default risks.
The advantage of Gentwo, according to Philippe A. Naegeli, founder and CEO, is that the risk is segregated with the many separate platforms. The company has many venture capital and private equity firms as clients, as Gentwo’s solution makes it easier to present portfolios than through funds.
No liability for performance
“Gentwo offers a disruptive business model that attacks that of traditional issuers,” said Loepfe. The structures are so streamlined that they barely meet the requirements of the financial intermediaries that Gentwo is addressing. For the traditional issuing business, the main cost drivers, apart from regulation, are the prospectus, the stock exchange listing, market-making and distribution costs. Gentwo charges a fee of 20 basis points and charges a minimum of $20,500 (CHF 20,000) per year per issuing platform.
The asset manager gives Gentwo the mandate to structure a vehicle. However, the client manages the vehicle himself in accordance with the mandate agreement. As in any mandate relationship, there is no liability for performance. One of the cornerstones of the business model is that the assets that are created are always value rights, i.e. dematerialized property rights. These exist only as book-entry securities with an international securities identification number. It is only possible to invest in these assets through a bank, which has the advantage of a simple and secure investment process. The Gentwo founders are convinced that transparency is worth more than regulation for the investor.
The mediator is not regulated
The company is primarily aiming for actively managed certificates (AMC). The free choice of a custodian, the modular structure, the absence of issuer risk, and the favorable cost structure of AMC make the offer flexible. However, this area of business currently accounts for just under a quarter of the business. So-called “non-bankable assets”, such as peer-to-peer financing, private debt, private equity, vehicle financing, real estate projects, etc. account for the lion’s share. Digital assets account for just over 10% of the volume.
Gentwo itself is not regulated. The trustee in Gurnesey, who is responsible for the management of the vehicle, is. And also the securities dealer, who acts as a paying agent and has to meet the requirements of the Anti-Money Laundering Act and customer identification.
Assistance for crypto investments
“We are often mentioned in connection with tokenization and portrayed as a company of ‘Crypto Valley’ because it’s simply exciting and hip,” said Naegeli. But while the possibilities of tokenization are being discussed and work is being done on how this could one day work, Gentwo is already offering a standardized solution. In contrast to crypto-assets, Gentwo’s assets operate within a legal framework and a securities system that have been in place and functioning for decades.
However, the company also offers crypto-assets. “The customer must bring the appropriate token, and we proceed with the securitization in the same way as we do with other assets,” said Naegeli.
In terms of booking – and in the case of financial institutions, in terms of required equity capital – everything that is still open in the crypto area is thus clear to an institutional investor. Seba Bank, for example, one of the first crypto-banks in Switzerland, has brought Gentwo on board to implement the first investment solutions.
Counter-draft to the fragile financial system
The founders of Gentwo come from the banking business. Patrick Loepfe worked in investment banking for 15 years. Among other things, he was the driving force behind Vontobel’s Deritrade platform. Philippe A. Naegeli also has many years of experience in investment banking as well as in the consulting and start-up business. During their banking career, they had seen how fragile the financial system was.
The financial crisis had led to the too-big-to-fail situation of even larger banks, as even more leverage was needed to compensate for the high governance costs. This has led the founders to question whether it could not be more efficient, more transparent, more flexible and even cheaper. “Gentwo has not invented anything new, but has simplified and merged the existing,” said Loepfe.
Gentwo is currently in a financing round for $10.3 million (CHF 10 million)
The project paused during the Corona crisis, but has now been resumed. Raising funds has never been a problem as the company has been cash flow positive since its start in 2018. In its first year, Gentwo “built” 28 issuers, last year there were 70. The company stated that 3% of Swiss equity capital brokers are already clients.
In the current year, the fintech company will manage $1.02 billion (CHF 1 billion) in its structures. “We need the funds from the capital increase to strengthen our business in Switzerland, but also to offer better structures to our foreign clients, who account for about 15% of our business.” Gentwo is negotiating with foreign partners to scale the business internationally.
Comparable securitization projects have so far only existed abroad – in Germany, Ireland and Malta. However, Bank Vontobel is also working on similar projects, according to Loepfe. They could well imagine that these companies would later become partners or shareholders.
The effects of the Corona crisis
In the first weeks of the Corona crisis, existing customers massively reduced their activity. Recently, however, according to Gentwo, they seem to be trying to compensate for the inactive periods: “We are virtually flooded with inquiries about new products. Numerous potential new customers have approached the company during the lock-down. Gentwo notes that old fears from the past financial crisis are rising again. The securitization of genuine alternative assets enables customers to effectively diversify their portfolios.
The founders have not lost sight of reality: “What we do is honestly second or third choice,” said Loepfe, citing the example of the dairy farm. The first choice is for the interested party to buy a farm himself, the second is to contact the farmer directly and acquire a stake. Gentwo, on the other hand, offers a standardized solution and thus offers customers a “big bouquet” of new investment opportunities. Banks had told Gentwo that thanks to its solution they had investments in their portfolio for customers who would otherwise have migrated.
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First published in NZZ.ch, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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