Blythe Masters - Fintech Innovation at Motive Partners (EP.376)

26:11Professional shareholder representation, online M &A payments, digital stockholder solicitation, SRS Aquium pioneered each and continues to set the bar for game-changing innovation. So leave the days of disjointed deal management behind and define your future with SRS Aquium, the smartest way to run a deal. Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. So after what anyone would consider an entire lifetime at J.P. Morgan, you did leave. I did leave, yes. I want to hear a little bit about your journey that then led to Motu. So if you think about what I did at J.P.

27:00Morgan over the years, I didn't stay in any one spot for that long. Maybe three years was probably the longest. And kudos to the firm that they took young executives and deliberately tried to stretch them with new assignments and opening horizons. And so I did a lot of different things at J.P. Morgan that involved building new capabilities. So when it came time to leave J.P. Morgan, which I did because we sold the physical commodities business that I was then running, I didn't wish to travel with the business. And I could have stayed with the firm, but I realized if I did, I was going to be a lifer.

27:30And I had an itch entrepreneurially that I wanted to scratch. I also had a suspicion that even though I thought of myself as an innovator within the fabric of JP Morgan, innovating with such an enormous safety blanket around you and a whole legion of people who are there to make sure you don't screw it up, doesn't necessarily count as being really entrepreneurial. So that's what led me to open my mind to doing something different at that time. And also, I had developed a point of view that was the bank and every bank necessarily had been very inwardly focused in the period from 2008, 2009 onwards.

28:05And it had to do with regulatory reform and the many scandals and big settlements that had to be worked through. And it was really a period of existential crisis for banking. And meanwhile, the same year that began, this little thing called the smartphone came to the world and that spawned an unbelievable explosion of innovation that was largely ignored by the banking sector for a few years. got to the point where, okay, maybe there were mobile banking apps being deployed. I wasn't really on the ball. So what was going on was the development of new technologies fueled a new category of people that were chipping away at the competitiveness of the banking sector with non-bank charters, in many cases, completely unregulated, all leveraging technology to do it.

28:48And so this was the thing that is fintech. And I developed a point of view that this was somewhere on the spectrum between scary and very exciting depending on where you sat and that it was underappreciated by my industry. And that and the urge to do something more entrepreneurial is what led me to move. That led to Digital Asset, which was a very early mover in the enterprise blockchain space before that became a thing. And I had watched with interest and some skepticism, I might add, the cryptocurrency movement, if you want to call it that, but was very interested in the technology behind behind Bitcoin and its potential for revolutionizing the way that banking and other businesses involving multi-party processing could get conducted.

29:31And that I did for four years from ground zero, no revenue, no pitch book, no clients, no capital through several rounds of funding and our first customers contracted. And then the job became an enterprise software delivery job, which I wasn't best suited to really do. I have no particular skills in that area. And I then took a year off having spent a lot of time traveling the world, did a lot of business in Australia, Hong Kong, Western Europe, whilst being based in New York. So I was tired. I wanted a break. And I took a year off and met Rob Havert, who's the managing partner and founder of Motiv Partners.

30:04And he chased me around the world for about a year and persuaded me to join Motiv in December of 2019. And the reason I joined Motiv were as follows. First of all, the firm is focused exclusively on financial technology. So space that I'm passionate about, really interested in, and it doesn't do anything else. And I think the sheer size of this space merits specialization. Secondly, Rob's vision, and it was more at that stage, a vision, and it's now a reality to give him credit. What's been built at Motive has actually delivered on this, but was to bring a new operating model to the way of doing private investing.

30:41And that was what we've come to now term, the IOI model, which is shorthand for investor, operator, innovator. And in essence, that's what we do at Motive. We pursue thematically driven investments in our space, and we create value in those investments by deploying investment skills, of course, because those are table stakes, added to that deep and deeper than customary in-house operating experience and very extensive in-house technology and innovation capabilities. So we have many people who have been, like myself, decades of operations in the financial service or fintech space. Jeff Yabuki, our chairman, who was the chairman and chief executive of FISA for 15 years.

31:22Steve Daffron, who ran Interactive Data Corp and then Dun & Bradstreet and now Betanext. Richard Lum, who was the head of financial services for Accenture for many years. Bridget von Kralingen, who was the number two at IBM. I could go on, but you get the picture of people with real operating chops who aren't just called in every now and again to ask for their opinion on such and such an investment. They're actually part of the origination process, part of the investment process, part of the portfolio management process, and in many cases go into the portfolio companies to act as executives. So Jeff is now the CEO of InvestCloud.

31:57Steve Daffron is running Beta Next, having previously run Dun & Bradstreet for us, and so on. And what we find is that combined with extensive in-house technology capabilities, where we have about 170-ish full-time motive people that are technologists that are deeply knowledgeable in everything from cloud deployment, microservices, APIs, go-to-market strategy, blockchain and cryptocurrencies and digital assets, ultra-personalization of services and AI, which is probably the biggest one. This extraordinary resource that not only do we use for underwriting and doing due diligence when we make an initial investment, but then actually ideating and executing, in some cases, value creation plans that are all technology driven.

32:41This adds tremendous edge. It actually means that both investing at early stage, because we're stage agnostic, we do everything from incubation, venture, growth, and buy-up, all the way from the very beginning to the grown-up phase of a company's life. having your finger on the pulse of technology innovation to a level that you're able to actually do it or prescribe doing it or help with doing it is incredibly powerful for the entrepreneur that you're interacting with. And for us, it creates our edge. It means that fixer-uppers are less scary. Tech debt is less scary if you actually know what it takes to fix it.

33:14It means that you have confidence in employing new technologies defensively or offensively. And that edge that comes from that is what's unique in the motive space. And for me, I thought that was genuinely properly differentiated from anything I'd ever heard from the private equity industry that I knew well because of years dealing with them at JP Morgan, unbelievably incredible creators of value. But the playbook that was developed in private equity originally used to be buy cheap, deploy the maximum amount of leverage that you conceivably can tolerate at apparently almost no cost until recently, cut a lot of costs out of a poorly managed company to cut it to the bone and then flip it into the wide open public equity markets that will embrace this with a couple of turns of multiple expansion.

34:00And you're done. That is a playbook, which I think I listed four items. I would say debatably, all four of those things are not so true today. The buying cheap thing, yes, maybe. Some great companies are much cheaper than they were two years ago, but others are cheap for a reason. And there's a lot of dry powder chasing the good companies. So they're often not that cheap. Cutting costs for a living. Most people have figured that out. And in a world where there's this much innovation going on, you're not going to cut costs to greatness any longer. That's not the reality. Cheap and free money. Not true anymore.

34:30And then wide open public equity markets embracing youthful or improved companies. Not so much. Yes, there are green shoots and a few IPOs are happening now, but that has not been the case. So in that context, you have to have a differentiated playbook. And thus, the case for specialization is greater, and the case for having operational chops and technology chops and having the ability to create value the hard way, which is by actually creating value is what's needed. So that's what we try to do. I'd love to break down the I, O, and I. Maybe we'll start with the innovation and tech piece. When you have that many people and you're deploying across many different stages, how do you differentiate the technical expertise your team has from supporting a company that needs to live on the right?

35:15Yeah. Good question. The answer is it's obviously not a one size fits all. And we do have a playbook that is outlined for companies of different stages, but we don't stick entirely narrowly to those playbooks. Quite heavily depends on the nature of the company that you've bought. A microscopic startup very often doesn't have the resources to be paying third parties to do anything for it. There we tend to provide much more input around fundraising, go to market, customer acquisition strategic partnerships with other bigger companies and enterprise customers many of whom are already in our network or our portfolios then if you buy something at the much more evolved end of the spectrum that is say an unloved older non-core non-strategic asset that we carve out from a bigger company that has potentially a significant body of tech debt there the company will typically have its in-house technology capability you need to be able to evaluate the talent there from the top on down.

36:12So we help people source great resources. We supplement that with our own where desired and appropriate. So people actually pay motive to execute for them. And the difference between paying motive to do that versus another consultant or integrator is two things. One is we charge modestly because we love our portfolio companies. More importantly, we have skin in the game. And so that's very appealing to many CEOs. And then And there are companies that are in the advanced stages of growth that are wildly successful, going like rocket ships. Their rule of 70 companies, the sum of their growth and EBITDA margins are 70 % and they don't necessarily need any help at all from a technology point of view.

36:53Then along will come something like generative AI. When something like that comes along, we assess the risks and opportunities for every one of our portfolio companies. And then once that assessment is done, and it usually throws up revenue generating opportunity as well as cost avoidance. Then we, in many cases, help execute that or help the company build the muscle memory so that they have the capability on a continuing basis to do that. So we second people and bring them back. We help them hire or we just work on a project basis. When you look at the operations, the OPs and the operating partners you have, what is it about financial services that feels a little bit different from an operating partner in another private equity fund?

37:32I think it's how we use those skills. My perception, never having been an operating partner elsewhere, is that operating partners tend to be somewhat passive until a specific opportunity comes up. And then they're brought in with that in mind. Our industry partners are responsible for driving industry and sector thesis work. So developing our views on what's going on in asset wealth management, banking payments and so on. They are responsible for originating transactions. through their networks, all the way from venture to later stage opportunities. They're involved in working directly with the investment team and Motive Create on the due diligence and transaction evaluation process.

38:19And then they're part of the team that manages the portfolio company. And in some cases, that extends to being placed as a senior executive to run that company or be part of the C-suite somehow. Other cases, they're board members and operating from the outside in. But in all cases, they're very much a part of the company and they're part of the way that we produce our product. Of course, our product being returns for investors. So I would say that we use them much more extensively and intensively than would be customary. And then if we turn to the investment side, I'd love to maybe talk through a theme and then how that plays through to different stages of investments.

38:59We operate in four verticals and then loosely horizontal. So the verticals are insurance technology, banking and payments, capital markets, and wealth management. And then the horizontal that cuts across some or all of those often is data and analytics, including obviously AI. To answer your question, the asset management and wealth technology space, which is an area where we have a very concretely defined and strong view, there are some mega trends afoot in that space that are being driven by demographics and technology and opening of architecture and all sorts of interesting things. So that has led us to be particularly active in recent years.

39:41Across all stages, we have, I think, 19 or 20 maybe now investments in businesses that are in the asset and wealth management technology space. Some of them are babies that you won't have heard of. Some of them are very prominent, indeed, even household names. So for example, we own Wilshire. We own Case, who operate a marketplace and technology platform for alternative investments. We own InvestCloud, which is a fully integrated end-to-end technology platform for wealth that handles everything from advisor to customer interaction all the way through to post-trade processing and SMAs and UMAs.

40:22We own Betanext. It's not a household name, but you would notice if it broke. It provides the technology that runs self-clearing software for a very large part of the industry. Our thesis around wealth is the analogy to it is what happens in the world of advertising and search with the advent of Google and what happened in the world of e-commerce and then cloud computing with the advent of Amazon. These are massive platforms that enable other people to conduct their business using those platforms. They generate enormous amounts of data as an exhaust, which has value in its own right. And they've revolutionized everything from supply chain to last mile delivery to advertising the way you position businesses.

41:04It's extraordinary that hasn't happened to the same degree in the asset and wealth management space. It's extraordinary that we're being driven around today in autonomous vehicles on the streets. And yet we still haven't cracked T plus less than two settlements. Our view is that there's an absolutely extraordinary opportunity that is being fueled by this confluence of different technologies that are coming of age now simultaneously. But cloud computing was radically reducing the cost of data storage and compute, how APIs and microservices, smart contracts that auto-execute, the development of platform businesses that are foundational for third-party business, obviously big data, AI, generative AI, blockchain and its uses.

41:47And I shouldn't leave out quads and computing. So All of these technologies together are going to drive the enablement of enormous platform businesses that create significant value by eliminating inefficiencies, by developing the capability to deliver ultra-personalized service all the way to the level of the end investor at much lower cost than is possible today with much lighter touch. so that as new asset classes evolve and become opened up, such as the alternative space, it will take the process and the pain out of opening up access to these instruments, which have traditionally been the private domain of institutional investors and ultra, ultra, high net worth investors, retail, and just merely high net worth as a segment, very under allocated to alternatives.

42:36A typical allocation will be in the very low single digits, less than 3%. Institutional allocations are 20 to 30%. That's going to shift. But the cost of delivering that, executing that, it's not viable with the way that this business is done today. So the use of digital distribution channels, which will also become digital asset origination channels. So think you sell a fund through a digital platform to someone, a wealth group, and they want leverage against that fund position, which you can now provide. And now that's a source of private credit origination from the same platform. The ability to use AI to personalize and to help with education, which is a big issue for alternatives.

43:07And new products will evolve as well, too, that offer different liquidity profiles. Retail needs better liquidity than a seven-year private equity fund. So all of this is all being technology-enabled. And what most of the ecosystem of investments in that space is building is an end-to-end capability where we can drive ultra-personalization. We can drive lower cost of execution. We can provide end-to-end straight-through processing. It doesn't mean we're going to merge every single one of our companies together, but It'll mean we'll help them integrate and provide services to each other. And the youngest companies who are doing things at the cutting edge are keeping the older companies informed and sometimes being tucked into those older companies to help renovate and drive forward an innovation agenda.

43:49What's really interesting, Rob Hayward, our managing partner, likes to call this ecosystem economics. And that's exactly what it is. It's that this cross-sell opportunity, the synergies that we're able to deliver, once you have a really well-thought-out thesis, It causes you to buy things that rhyme with each other and that have real opportunity to be better together. When you walk across those different examples of portfolio companies in this space, it's reasonable to think of how technology is going to apply as you're in the earlier stages. And then you mentioned something like Wilshire. And whether it's that particular company or you think of investment consulting, it's not synonymous with technology forward business.

44:28So I'm curious, just in an example like that, how do you apply that lens to a people-based, more staid business? the people part of that business is super important but supplementing it with the ability to perform sophisticated analytics to use data to inform investment strategy to create interfaces that allow for straight through processing and communication and that enable the institutional client to spend less time on the operations and more on the content of the substance these are things that technology can help with, even in a human capital intensive business, the ability to connect new product into that ecosystem as the sort of traditional portfolio allocation model is being ripped up and thought about the 60-40 thing isn't going to fly any longer.

45:19What is it going to look like? We're not totally sure yet, but it's certainly not going to be as simple as 60-40, but to have ways to deliver alternative investments and information about alternative investments through a Wilshire to their customer base, very important. A good example is another of our portfolio companies, Forge Global, who operates a market infrastructure for secondary private equity securities. It's developed an index product. Wilshire is eponymous with index products. It's an investable index product related to private equity securities that can now be allocated as part of a target portfolio allocation by an outsourced CIO.

45:53So as you start connecting the dots across your four verticals, across the themes in this one ecosystem, as you look out over three, five years, what do you see happening with the investments you're making and the natural technology industry? The world is just going to look very different in as little as five years' time. You're going to see advisor desktop space, which today is multiple different screens, the ops process and the email and this for public equities and that for fixed income and goodness knows what for the smorgasbord that is alternatives. That's all going to get integrated. The holy grail here is to get vastly greater productivity.

46:34If your objective is to deliver investment opportunity to more of the masses, you've got to find a way to do that at lower cost. So having technology capabilities that allow someone to invest$10 or$100 or$1 ,000 or even$100 ,000 in an instrument that typically has had a$500 ,000 minimum or$250 ,000 minimum is a significant development, but it can't be done the current way. has to be done with automated education and resource support. So I think that in wealth, you're going to see that for sure. Almost all of the major wealth networks and even the smaller RIA type platforms and their aggregators suffer with fragmented technology estates and in many cases, aging technology estates and clunky integrations or no integrations.

47:20And they're still dealing with faxes and emails and crazy things that they should not have to be dealing with, that will radically change the economics of their doing business. That's happening as we speak. One area I'm very interested in that's a risk to this vision, the cyber risk associated with an increasingly digitized world is obviously enormous. So these risks are significant. And in a world where we're more digitally interconnected, obviously the risk goes up and the risk to violation of privacy and intrusion at an individual level, but institutional and systemic risk also goes up. Now imagine a world where bad guys, individual criminals, nation states, whatever, are armed with quantum computing and AI.

48:00The juxtaposition of these two is super powerful. The ability to ultra-personalize phishing attacks, just as you might ultra-personalize exquisite customer service, is just as possible to do bad things whether it is with good. With quantum computing, the particular risk is the ability of quantum computers to defeat the algorithms we use to encrypt data. And the world has only just been gone to really grown up about properly encrypting data. We're encrypting data using linear algorithms that are trivially defeatable with commercially viable quantum computers. That should scare you because if we're not prepared for that adequately, the implications could be truly pretty diabolical.

48:40Now, the good news is that although quantum computers debatably do not yet exist at a commercially viable form. The math exists to encrypt data to a degree that non-linear encryption algorithms that would be impervious to attack by quantum computing. The scale of the transformation and the data exercise needed to convert data to being encrypted in a quantum resilient cryptographic way is very important and I think increasingly pressing area. I like thinking about where are the sort of black swans that could come out of the woodwork and surprise us. And this is definitely one of them. Among your other theses outside of wealth management, what are you most excited about?

49:24Capital markets is an arena where the trading and execution end of the capital market space has been radically transformed over the past years. But what's interesting in capital markets is the post-trade is still a mess. And also that just like I described in the asset and wealth space, there aren't that many real platform businesses that are ubiquitous and that are excellent and that are cloud native and that are efficient and that are modular and that can be evolved to fit the needs of diverse and disparate customers. Instead, you find in capital markets, many businesses that are burdened with legacy technology, often written in languages like COBOL that they don't even teach in schools any longer, millions of lines of code that are expensive to address.

50:05And a lot of these providers are very entrenched. Their clients are very costly to move off these capabilities. But the case for doing that is increasing and increasing because the cost of operating in capital markets, especially in light of a world where capital requirements are going up. And so the imperative of operating efficiently in order to generate an appropriate return on capital deployed is increasing. In a world where money was priced at zero, zero or negative interest rates, it didn't really matter that stuff was slow. It really matters that stuff is slow when there's a time value associated with money.

50:37So lots of opportunity there to really build new and interesting capabilities in and around the capital market space. Backing payments, the consumer payments business domestically in most of the developed world is ultra competitive, but all sorts of opportunities, especially in cross-border payments and remittances, which are still astonishingly inefficient and fragmented. Significant opportunities to improve digital identity, which has implications for KYC, AML at the individual level, but also digital identity for entities and institutions. lots of opportunity there. But I want to get a chance to ask you a couple of closing questions.

51:13What is your favorite hobby or activity outside of work and family? I'm a horse person. I've been an avid pony girl since I was growing up in the pony club in England and took a few years off. But I started again after I had my daughter in my 20s and I've been riding ever since. I still compete to this day. I don't practice enough. Riding in a 1 ,500 pound animal over four foot expenses is not particularly advisable at the best of times, but without practice is definitely not a good idea. But it's a hobby that I'm passionate about. I love my horses. And I live here in Florida and I have a farm in Wellington where I actually have the privilege of living on my own farm with my own horses.

51:52So I can get off a zoo and get on a horse and not even have to leave the property. It's great. What's one fact that most people don't know about you? Maybe it's a story about my dad. My dad, who's passed away many years ago now, joined the Royal Air Force in Britain before the Second World War and involved an instructor of fighter pilots and trained countless young pilots who fought in the air war against Germany and others. He was frustrated by the fact that as an instructor, he was prevented from participating in combat throughout the whole Second World War. He also had become aware of the Holocaust and became a very vocal opponent of the British government's foreign policy towards Palestine.

52:35And his view was that particularly in light of what had happened in the Holocaust, this was an unforgivable act by Britain. And so he volunteered as an unpaid, non-Jewish Gentile who showed up, approached the Israeli government, who were convinced immediately that he was a spy for the British government, which he wasn't. They took him anyway, and he became part of the orchestration of a plan that helped Israel with its first air force defense capabilities, which was created by flying by hook or by crook illegally under the cover of darkness, behind the mountain, under the radar, to behind the Iron Curtain, the new emerging Iron Curtain in Europe, to places like Czechoslovakia, where they bought, stole, varted, goodness knows what, pieces of surplus equipment aircraft that had been abandoned by the Nazis and the Russians, took those pieces of aircraft, flew them back, a great danger to themselves, back and forth for many months, and accumulated enough stuff to be able to build a homemade air force.

53:35And so that became Israeli 101 Squadron, which my dad then fought in as a fighter pilot. He was a squadron leader. He flew with Aza Weitzman, who was the head of 101 Squadron, who subsequently became the president of Israel. And dad was a bit of a hero in the creation of what is now the Israeli state. It's not really about me. It's about my dad, but I think it's interesting. What's your biggest pet peeve? Probably the most annoyed I get on a regular basis is the inability quickly to get the news in an unbiased fashion. And this is true all over the world, but it used to be you would turn on one news source and you were reasonably confident that you could get your news.

54:09But you have to really work to get unbiased news today. It drives me nuts. Which two people have had the biggest impact on your professional life? So Phil Demchak has to be one of them. He is presently the CEO, what not surprisingly is one of the most successful banks in the United States, PNC. Brilliant man. I worked for him for many years at JP Morgan, and he was responsible in many ways for pressing me to do new and different things. And he constantly challenged me. He was a critical boss, but he was irritatingly usually right. He was an exceptional leader and he gathered a group of extraordinary people around him and that drove a lot of innovation.

54:45So he was one. I would say watching Jamie at work has obviously been an interesting lesson. I want to say three because I just feel I ought to, but I would say Rob Havert, albeit that his influence has only been felt in the last five years of my career. I've found a home at Motiv that I really love. I'm getting to do really interesting things and do stuff again in a really different way. And Rob's vision created that. What's the best advice you've ever received? It probably was when I was younger, much younger, I was still a kid, I would act in school productions. I suffered the worst, terrible stage fright.

55:23And the advice I got, which had to do with managing nerves and managing fear, there's a book about it actually, it's called How to Feel the Fear and Do It Anyway. And you'd be amazed, even though that original advice was about how to manage stage fright, you'd be amazed the number of situations where it's good advice in personal life and in professional life, it's helped me do things that are hard. It's scary because when you get asked to do something you don't know how to do, or you haven't done before, and you have to let go of something that you really know and love and is getting easy, it's hard to do that.

55:53But that sort of notion, get over it and turn the fear into motivation has been actually, I think, very helpful. I think also acknowledging that fear exists, which most of the time is completely unacceptable on Wall Street, has been helpful to me because it does exist. And anyone that tells you it doesn't is either a sociopath or is lying. All right, Blay, last one. What life lesson have you learned that you wish you knew a lot earlier in life? It's got something to do with the fact that most of the things that really annoy you about other people, professionally or personally, say a lot more about you than they do about them.

56:29And it takes a while to learn that. And when you do, life changes. Blay, thanks so much for taking the time. Real pleasure. Thank you for having me. Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.