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Understand needs of customers: GIC

The sovereign wealth fund advises companies to start with understanding what customers are looking for when evaluating fintech.

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"We believe companies that grow too aggressively without having proper systems in place will eventually face challenges. With the pervasiveness and concentration of power, making responsible choices along the way is key to long-term success." - Lim Chow Kiat, GIC CEO.

GIC is no stranger to investing in technology. The sovereign wealth fund was an early supporter of the venture asset class, opening its office in San Francisco, home to Silicon Valley, more than 30 years ago.

Today, its Technology Investment Group has built up a solid global network and is partner to leading tech investors and companies.

GIC is also no newbie in financial services either. The group has been investing in financial services since it was established in 1981, and continues to remain active in the space.

So perhaps it was no surprise that at the confluence of technology and financial services, GIC was well-positioned to capture the opportunities that arose.

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"Our long history of investing in both financial services and tech businesses globally gives us a unique perspective to fintech," chief executive Lim Chow Kiat told The Business Times.

GIC has been tracking the development of fintech for the past decade. In June, it was a part of a group of investors that pumped in about US$14 billion of Series C funding in Alibaba affiliate Ant Financial.

Last year, it led a US$200 million Series E financing round for Affirm, a digital lending startup founded by serial entrepreneur and PayPal co-founder Max Levchin.

Mr Lim said a good starting point in evaluating fintech is to get a good understanding of what customers are looking for. "In our view, safety, convenience and good economics are essential qualities for success. They form a good set of screening criteria."

For instance, Affirm's mission is to provide quick and transparent financing to consumers. GIC also invested in European fintech company Klarna in 2014, which has become a leading bank in Europe, providing simple and convenient payment solutions.

Mr Lim added that investors need to have a view on the value chain of financial services so that they understand where pain points and fat margins lie - this helps to further narrow the opportunity set.

He highlighted the trend of large tech companies creating financial businesses by leveraging their extensive customer network and data, as opposed to traditional financial firms that rely on their domain expertise and existing presence.

"These tech companies may be the competition, and for investors, they can well be better vehicles for fintech exposures. It differs from case to case, but this is a dimension we certainly cannot ignore these days," said Mr Lim.

While the West has produced thriving fintech, in GIC's view, it is Asia and South-east Asia that are goldmines for opportunities. This is because the region has exhibited "very promising economic growth", which drives demand for financial services.

Financial services in Asia, ranging from basic consumer credit to cashless payment methods, have not had the opportunity to reach the same maturity in the US and Europe, so there are fewer incumbent solutions to displace, and ample scope for new players to innovate.

"Emerging markets have become major hubs for innovation and technology adoption. This is due to their greater openness to experiment, less mature industries and fewer legacy arrangements," said Mr Lim.

"Technological disruption can be even more powerful in these economies as they have more unmet and undiscovered needs, hence more opportunities to leapfrog."

A mobile-first strategy has also proven to be rewarding for fintech as smartphones become more affordable to a large share of the population in Asia.

And there is still room for smartphone usage to grow, according to the Pew Research Center. The number of adults who owned a smartphone in 2017 stood at less than 30 per cent in India and Indonesia.

"Not only are the current penetration rates of smartphones still low, tech advancement will add more features to allow more services," said Mr Lim.

As a long-term investor, GIC supports companies through their startup to growth to maturity stages, no matter which industry they belong to.

There is, however, one aspect where fintech businesses differ from others: They operate mostly in highly-regulated environment. This is why moving fast and breaking things might not necessarily be the best approach.

"We believe companies that grow too aggressively without having proper systems in place will eventually face challenges. With the pervasiveness and concentration of power, making responsible choices along the way is key to long-term success," said Mr Lim.

The group's fundamental focus is on owning assets with good long-term earning potential, at reasonable prices. Over the years, tech valuations have soared as the space continues to be hotly contested by investors of all sorts, from other sovereign wealth funds to venture capital to hedge funds and pension funds.

Mr Lim had said at a Bloomberg event in September that as companies become more tech-driven, it is essential to look beyond traditional classifications and deeper into the actual technological capabilities.

"First-principle perspective is needed, including examining the fundamentals of business enterprises such as prospects of cash flows, balance sheet strength and competitive position," he said.

"We have found traditional companies with substantial technology capabilities trading at 'old economy' valuations. They are good investments and we keep looking for more of them."

But investments are not without risk, especially for young tech companies. GIC manages these risks by diversifying across sectors and life cycles, ensuring that they abide by a robust investment process and that they understand the risk-reward calculus and position sizing.

As the group ventures into new investments, a key part of their overall framework is to ensure that its existing investments are protected as they face disruption. Given its diversified portfolio that holds many established companies, this defensive stance is as important as offence, if not more so, said GIC in its FY2017 annual report.

"A huge benefit from our invesment in technology is a better appreciation of the threats and opportunities faced by companies in our portfolio," said GIC. "In some cases, we have worked with existing investees to adjust to the new reality. This helps us to protect our portfolio value."