A decade after launching, oneZero secured new outside investment this week. Galen Stops takes a look at the logic behind this deal for all the parties involved.
Earlier this week, Lovell Minnick Partners (LMP), a private equity firm focused on investments in the global financial services industry, completed a minority investment in oneZero Financial Systems. LMP was joined in the investment by Phil Weisberg, the former CEO of FXall and the founder of Matzliach Capital, who has also served as senior advisor to oneZero since June 2018.
So, specifically what value do these investors see in oneZero?
Reflecting on his experience in the FX industry, Weisberg says that many of the fees being charged to firms in this market were set on rate cards that were developed 20 years ago, despite the fact that the profitability of these firms has declined significantly during this period. As such, he claims that this is creating cost pressures that can benefit a firm such as oneZero.
“I think that in the past couple of years, the focus on compliance and regulation has been a key driver of the industry, but now that a lot of those regulatory changes have happened, people are looking for one of two things. Either they’re looking for new products and services to provide their customers in order to grow their revenue, or they’re taking a hard look at their stack of expenses and looking to rationalise it in order to reduce their costs. I think that oneZero is uniquely positioned to benefit from this change because they’re building off a great technology stack and are therefore very efficient, while also able to keep innovating,” says Weisberg.
He also points out that oneZero serves a network of over 200 global retail and institutional broker-dealers, which conduct over $100 billion in average daily trading volume on over 6 million executed transactions per day. While he also highlights the breadth of this network, the key figure here for Weisberg is this last number, which he claims represents an order of magnitude larger than the number of transactions being processed by some of the larger institutional platforms in the FX market.
“They have built an ultra-high performance, highly reliable stack which already has all of these end points, and there’s a lot of things you can do with this,” says Weisberg. “I think that’s what this transaction unlocks, the ability for the oneZero team to either deepen their relationships with their existing clients and do more for them, or bring the benefits of this stack that they’ve been honing for 10-plus years to other parts of the foreign exchange market.”
FX an attractive asset class
On this last point he notes that securing investment from a well-established private equity firm like LMP, which focuses specifically on financial services, adds business credibility to oneZero’s existing technology credibility and will help the firm get through due diligence and vendor assessment processes at larger financial institutions.
Steve Pierson, managing partner at LMP, certainly agrees with this assessment, stating: “We have a very big network, which includes institutional firms that need to upgrade their FX technology. So it’s really easy for us to make a phone call to any major institution and at least open the door for oneZero to go in and start a dialogue. This is where I think we can help, because oneZero primarily sells into smaller and mid-size banks and brokers today.”
Explaining why the oneZero investment was attractive from LMP’s perspective, Pierson highlights a number of factors. He says that it is thematically consistent with the company’s experience in the financial services sector, given that it represents a pure middleware/software play around risk, accounting and regulatory reporting and is a B2B operation with financial institutions as its clients. In addition, Pierson notes that the core team of oneZero has been together for some time, it passed LMP’s extensive technology due diligence with rave reviews, and – crucially – has been growing at a rapid pace organically.
On top of this, he argues that FX is an attractive asset class to invest in because of both its size and the scope for growth in this market right now.
“FX is the largest asset class in the world and it’s a global market, which we like. Also, as an asset class it does much better when you have disparate rates, so when you have high rates in one country and low rates in another, and when there is greater volatility. Right now, we continue to be in a low rates environment while volatility also remains, relatively speaking, low. So while we’re not trying to time this to the market and we haven’t modelled any growth of FX trading volumes into our investment, we do think that it’s a good time to be investing in this space because the market is unlikely to move materially lower,” says Pierson.
Weisberg echoes this view, stating that it’s during periods of historic low volatility when it’s possible to separate out the firms that have a scale efficient operation from those that don’t.
“I always find that the right time to invest is when everyone thinks the FX market is slow,” he says. “At that point in the investment cycle, you can see very clearly the differences between the companies that can operate and be profitable in most conditions because they’re efficient and those that can only operate profitably when volatility is high.” he says.
Maintaining the course
So now that oneZero has secured this investment, what does the firm plan to do with the additional funds? Well, according to its CEO, Andrew Ralich, no significant changes are planned in the near future as a result.
“We’re continuing our approach to scaling the business. The company has organic growth in our DNA. Securing this investment allows us to approach future opportunities with the confidence and validation that comes from having an experienced, top tier PE firm and additional expertise. We plan to use this foundation to accelerate our current wholesale market initiatives to extend data and multi-asset trading.” he says.
Expanding on this, Ralich says that oneZero has been cash flow positive since its inception. As a “bootstrapped business” for the past decade, Ralich argues that a tremendous amount of equity value has been created in the company from its approach to investing in people and technology.
“We felt the best way to leverage this value was to use our strong equity position and growth trajectory to attract new partners, who have access to resources that can help drive our next decade of growth. We specifically looked for investors experienced in working with companies growing at the rate and size of oneZero, familiar with the institutional fintech space, and comfort allowing us to maintain control of the day-to-day business.” he comments.
While Ralich says that LMP and Weisberg will be included in driving high level strategy and any major decisions regarding onZero, he stresses that the firm’s existing management will remain behind the wheel.
He continues: “We value the experience of our new investors, which is why we chose them. We worked closely with LMP and Phil in structuring this investment, by identifying opportunities to apply oneZero’s powerful technology stack in applications that are complimentary to our existing aggregation and risk management platform solutions.”
Ralich adds that the company will continue to build upon its existing model, whilst also seeking to benefit from the input that its new partners can provide as it seeks to expand into different areas of the market.
On the other side of the equation, Pierson insists that LMP’s involvement does not change, regardless of whether it is buying a controlling or minority stake in a firm.
“If you look at our portfolio, historically anywhere from 10-40% of any given fund is going to be minority growth versus control. But we don’t treat these investments any differently than control deals in terms of our involvement and ability to assist,” he says.
Talking about LMP’s investment approach more generally, Pierson claims that his firms always backs good management teams and therefore never looks to replace them, but will sometimes try to augment them by providing additional skill sets from within its network. For example, he says that some firms they invest in don’t have CFOs or someone that has the specific skill set needed to optimise their financials and this is an area where LMP can help.
Pierson also says that LMP will regularly look for bolt-on M&A opportunities following an investment but that, specifically in the case of oneZero, this is not central to LMP’s investment strategy.
“I would say that this business is growing so rapidly, organically, that while we may look at a few bolt-on M&A situations, it’s not a core part of what we’re attempting to do here,” he comments.
Occurring on oneZero’s 10th anniversary, this investment clearly represents an important milestone for the firm. Asked about what the next 10 years hold for the company and Ralich expresses optimism that it is well-placed to take advantage of broader shifts occurring the in FX market.
“We are seeing a convergence happening between the world from which we’ve originally come, the retail space, and the traditional wholesale,
institutional FX market. The entire industry is getting faster, and dealing with more transactional load every day. We have a massively powerful
platform that handles millions of tickets and over a hundred yards of volume daily, with plenty of room to scale. So from what we’ve looked at
and what we’ve shared with the investors, we are confident that our platform is very well positioned to address the future challenges coming into the institutional space,” he says.