E256: What Fintech Will Look Like in 5 Years - Steve McLaughlin (FT Partners)

0:00Welcome back to the podcast. Great to be back, David. Good to see you down in Miami recently as well. So for those that don't know, tell me about the FT Partners origin story. I was at Goldman Sachs for a bunch of years. I was in their fig group from 95 to 02. That was sort of the whole dot-com run up, run down. In 02, I had moved out to San Francisco with Goldman, was doing very well there. And I was spending 100 % of my time on fintech. But fintech was dead. The world was dead. The world was melting down from the dot-com, 9-11, the war. you know so it was uh you know it's not a great time to be at a place like home sex they weren't paying very well and they don't you know to you know do so in the markets now which they which they shouldn't so i left started ft partners and uh the theory was that a bunch of my clients would follow me to ft partners and turns out they didn't uh you know i had to sort of start from scratch um you know because you know when you're working out of your apartment with no money no brand and no employees, it's not easy.

0:56But the origin story, that's part of the origin story. It's like I had to kind of build it up from scratch and hire people from day one of my own money, didn't have any partners, didn't have any capital coming in, no debt, nothing. So I really just bootstrapped it from day one and literally worked out of my apartment in San Francisco for a year before we got our first couple deals. I was 32 when I incorporated the business. I actually incorporated it on companycorporation.com for$99, bought a used laptop, and got$10 business cards at Kinko's back in the day. So it was a pretty humble beginning.

1:27And what scale are you guys at today? We are coming up on probably 250 people. We're San Francisco, New York, London. I happen to be sitting in Miami. But the firm's really global at the moment. We've got clients on pretty much every major continent. We just did a deal in Japan not long ago, did a deal in Australia. We got a lot of big deals going on last time and just flying all over the world constantly. least. I'm preparing for my interview with Bill Ackman, and I've been studying his investment in Valiant and how it basically torpedoed him. And I just keep on seeing this over and over. These great business leaders go through these difficult times.

2:02I'm starting to wonder, is that actually the source of their power? Look, I started it during the dot-com bust. So I know what it's like to be in a bad economy. And we did really well at that time. We actually did really well during the global financial crisis as well. So we're seeing Bear Stearns blow up over here, Merrill Lynch blew up over there and Lehman get destroyed over there. And we're just like working 100 hours a week on 20 deals. You know, FinTech was, was, wasn't booming, but we were, we were small and super busy. We all, the whole industry had a pretty big bull run from call it 2012 to 2021, early 22.

2:37And then, you know, the market really took a turn, particularly in FinTech. I think FinTech was probably the hardest hit sector. There was a lot of negativity around fintech, people had overpaid for a lot of assets. And I think people thought, well, because everything had been invented, it could have been invented. And, you know, it is what it is. And there was the hype kind of went away a little bit and shifted over to, you know, AI and crypto. And crypto really is fintech. I think I said to my team 20 different times during the last three years prior to things bouncing back really hard in 25, what we do as a firm, fintech, investment banking, high-end, elite, deep client service, you know, that's never, ever, ever going out of style.

3:15So even during those three years, we made money, you know, kept the team together. And, you know, I think we're seeing today, like there was massive layoffs across the street in 22, 23, 24 and losses, all the big boutiques were losing money. And, you know, we kept all our people, our key people and the big banks are now super strapped for resources. One of my clients has a motto, never die. And it's not really my motto, but, but I like the idea of just, you know, just be there, be consistent, you know, whether it's, you know, playing basketball or, you know, a sport or any other sport or banking.

3:45You just got to show up to work every day and keep doing grinding and have good things happen. You mentioned one of your rules, don't die. In venture, oftentimes it's only three to six months every decade where investors make the crazy returns. And there's really only two models there. One is you could pick those correctly, which is incredibly difficult, if not impossible. Two is you could be there for a decade. That's the hard part, being there for a decade, being there for 20 years and continuing to be consistent so that you get that asymmetry in the market when things get better. Yeah, this business is not meant to be like smooth, right?

4:20You're building up your deal flow, you're building up your backlog, your pipeline, your credibility, your friends, you know, your employee base. And then when the good things happen, the tidal wave of business, the tidal wave of profits comes. That's what we're seeing. That's what others, I think, are hopefully seeing. But that's the kind of way it's been for us. I mean, there's been sort of slower periods and busier periods, but you've kind of been around long enough. You know that the big, big wins are going to come. And so that's what's happening now. And I see that over the next year. I think our backlog has something we publicize.

4:51It's at least$2,$3 billion of revenue, like signed clients that if they did their deal tomorrow, it'd be billions of dollars of revenue. So we've never had that in the history of the firm. So, you know, it's a good time to be in FinTech. How would you differentiate your talent strategy versus the Morgan Stanley's at Goldman Sachs? Our world is more the people that don't want to work at the big banks, right? It's sort of like, how do you differentiate Sequoia employees from, you know, Goldman Sachs? If you are really good at what you do and you're the absolutely best, you want to go off and do it on a smaller platform and, you know, prove to yourself, prove to the world that you can do things better than the big platform.

5:27So, you know, how does a 200 person, 250 person firm beat Goldman Sachs morning state that she'd been working in all the time? It's a teamwork and the elite team that we have and the results, it's all, it's all in the results driven, you know, we're, we're very results driven place. And, you know, we kind of figured, you know, whatever the big banks are doing, we need to do something differently. Right. So that's the whole reason I left Goldman Sachs, you know, was I just didn't see the kind of work getting done that I would do for myself if I was a client. Right. So, you know, we started doing things very differently from day one and we've doubled down on that.

6:02And our team needs to kind of understand that. A lot of times we've hired people from big banks and McKinsey. Why are you guys doing 500 page decks or 500 page decks for a company? And why are the models so deep and so detailed and so long dated? And why are you guys paying McKinsey a million dollars out of your own pocket? Why did you develop a data science team? Why do you have sort of a mini McKinsey inside the firm? And why, you know, why, why, why are you doing all this extra stuff? All you have to do is throw, you know, a 40 page deck together and start working. And I'm like, that's just not the right way to do it.

6:34You know, so we're, you know, we're throwing a lot of money at the team, a lot of money at innovating things in this space. So we've always been an innovator in the way we do things. But all this isn't public yet, although it might be about the time this podcast goes out, but we just invested$25 million in a company that's basically the leader in AI for financial services and investment banking. So a company called Model ML. So we were the lead investor in a$75 million round that many of the Silicon Valley elite were trying to lead. So we broke in and took that lead role there. And so we're going to be AI all over the firm, whether that's looking for buyers, looking for investors, talking to investors, doing analytics, doing deeper data science work, using and applying AI to every single thing that we do as an investment bank, and then giving that AI to our clients.

7:19So, for example, right now, it hasn't happened yet, but these AI tools can today and they will certainly tomorrow be ripping through thousands of documents and data rooms and financial spreadsheets and audits and historical legal documents and being able to basically tear all that down in a matter of minutes and create multi-hundred page reports. So, you know, we're going to be arming our clients on the sales side with that kind of, you know, deal of diligence and defensibility. So if someone's going to come and look at your data room with 1500, you know, AI agents, you know, you better be prepared on your side to make sure you've done that work ahead of time.

7:58So, so yeah,$25 million back into the business, actually into Model ML for the support of our clients. And so, so we're just constantly adding many, many, many elements. As a matter of fact, we were in Vegas at Money 2020, had an amazing time there. And we decided they were off-site a couple of days before Money 2020. The theme was F1 racing. So it was kind of like, you know, we want to be like the fastest F1 team in the world. And it's actually the driver or the brand of the car, but it's all the people around the car, all the people around the brand, all the people around. If you're going to be better than everyone else in the world and getting better every single year, you need that elite team.

8:34And you've got to glorify and thank and love every single person on that team. at F1. Yeah, sure. Max Verstappen's a guy in the car and he's great, but without the car, without the brand, without the team, he's sitting in a go-kart, you know, on a little track somewhere. So I feel like we've got, you know, a great team, a great, you know, amount of innovation and everyone works together, kind of like a proverbial F1 team. And, and it would look when you're in a big firm, you know, um, it just doesn't work that way. You don't have all those tools. If Goldman Sachs, if somebody at Goldman Sachs said, or Morgan Stanley, JP Morgan, BAML, whatever said, hey, you know, FT's got that great data science team and they're like taking all the data cubes and running, you know, two days worth of analysis overnight to run their models and to prove out their clients' data.

9:15You know, we should do that across all of our groups. They'd have to add a billion dollars of cost, you know, or something like that to get all these people on board, but then it's not going to do that. You know, if someone said, let's go hire a mini, let's go build a mini consulting group for every single niche within Goldman Sachs to provide that extra layer of service, that would, they'd just never do that, right? I remember when I was at Goldman Sachs, I even pitched my boss, Peter Kraus, that we should go buy McKinsey. That didn't go over too well, but it would have been a great idea to some extent.

9:41So yeah, that's always been in my mindset, either from a young age, to provide the best of the best service. And I guess there's two ways to look at traditional bolt bracket banks. One is that all the people are short-term focused, focused on the deal over promising, under delivering. But then there's also a second aspect of that, which is the firms have no loyalty either. They'll pay you based on not on past performance, but future performance, all these things that large banks have. Large banks are then incentivized quarter to quarter versus in the long term. So I'm still trying to wrap my hands around about how you create a different system, because these are the default operating principles in banking.

10:21Why is FD Partners different? What upstream decision did you make to make a difference? There's a few things I talk about, which you have to new employees and new team members. and I think about every day, it's like we chose to be in a high growth sector with companies that are largely not public, right? I mean, there's a number of public companies, obviously, but most of the market cap is in the private world. And these companies are generally high growing. They're usually not at their full EBITDA margins. They're usually losing money or breaking even. They're changing their business, changing the business models for a couple of years.

10:56They're, you know, altering the landscape of financial services and they're hard to value. So what I figured out was that the skill set of being able to value properly and actually attain proper value for highly opaque assets is the best job in all of investment banking. Right. If you're at Goldman Sachs and I say Goldman Sachs, I work there and I have respect for Goldman Sachs. But at the end of the day, if you're one of these big banks, you know, and you're working on, let's say, an IPO, first of all, you're one of five or six or seven or eight firms working on the IPO. And second of all, you're one of any 50 people on the meat grinding process on the IPO just at one firm, right?

11:36You got the bankers, ECM, you've got, you know, equity sales, equity research, you got back office, you've got, you know, stabilization people. and it's this whole entire process. And it's very hard as an individual banker or as anyone on the team or even any one of the banks to sort of claim credit for, oh, I was the one or our team was the one that added all the value, you know, to this particular deal. As a matter of fact, you take a debt deal, it's like, is it really adding that much value to wire someone out$500 million to do a bunch of credit work and hope to get it back? Sure, that's value-add, but it's like you're giving someone$500 million and charge you in the library.

12:12It's commoditized. It's somewhat commoditized, right? And then if you're working on very large M &A, it's generally seen as these companies typically trade at 25%, 30 % premium to market. That's the average over many, many, many deals. So you go in there, there's already 10, 20 analysts covering the stock. So there's no mystery there. They've been public for how many years, how many quarters. Everyone knows that market premium is 25 % or 35%. So if you get 25 % or 35%, you're basically doing an average shot, right? There's no glory in it. You didn't add that much value. you've got to be administering and processing the deal.

12:44If on the buy side, you're not really creating a lot of value. You may be trying to compress value and maybe getting a deal of a hunk. But most of the time, bankers are paid very little for the buy side because they're not really doing a lot of work. They don't really get in the weeds and understand the fundamentals of the company and decide is this going to be worth buying or not. They're doing more or less back of the envelope work to figure out whether the company might be worth X or Y and the accretion might be worth A or B and might be A or B. But it turns out all those things are like administrative roles, right?

13:13And you deserve to be paid administrative fees for administrative roles. And like, there's nothing wrong with that. Goldman Sachs, an amazing place. They had a huge market share. And same with Morgan Stanley Merlin, nothing wrong with their model for the kind of deals that they do. But if you're a smaller elite firm and you can pick one or two things on earth to do, those would be capital raising and sell-side M &A in the private markets where value rises are highly opaque. The clients don't really know the buyers that well. They don't know the investors that well. And we can kind of be a network between the buyers and investors and the companies and help get things done in a high-class way.

13:51Like I said before, in other, maybe your podcast, it's always about maximizing the value. It's finding the right fit. None of my clients wants to maximize, maximize value. They'd rather find a good partner and a quick deal that made sense for all sides. So that's actually even harder to do. It's actually fairly easy if you want to just maximize value. This one function, maximize value. You don't care who the buyer is. You don't care what the timing is. You don't care about anything. But we're trying to think about, you know, speed and certainty and quality of partnering with the employees. And, you know, you want the buyer to be happy with the transaction as well.

14:21So, you know, there's, or the investor for that matter. So it's that matchmaking game is you can add an enormous amount of value in that equation. And, you know, you can get paid for that, right? You know, we have a deal right now. We have a lot of our deals that are, you know, we get, you know, X percent up to, say, 500 million and Y percent above that and Z percent above that. And, you know, we just got a, this is not public. I'll make it public here for you, but we just got$167 million fee on one transaction, which is the largest fee in the entire year. There's been two articles in the Wall Street Journal that Goldman Sachs got$110 million fee on this deal, the largest deal in the firm's history.

14:55And Merrill has got a$137 million deal. And those were on like$40,$50 billion deals, right? You know, or even bigger, quite frankly. I think the BAML was even a bigger fee and a small fee that was on a much, much larger deal. But we came in and we actually added billions of dollars of value to, you know, to a company. And so, you know, we got paid, you know, a good fee for that. So, you know, we kind of figured out how to turn, you know, basically, you know, get paid on a value added model as opposed to administrative model. And that's really what we do. So it's a, you know, how do you get paid for adding value versus being an administrator of a transaction?

15:34And it's very similar to, you know, if you're managing treasuries, you're not going to make as much money as Sequoia makes adding value to its portfolio companies and its investors all piece money. They're making 35 % of everything over X par, right? Because they're adding value to that X, right? They're quite dribbling that X. They should get 30, 35 % of it. And I always say, why don't bankers get 10, 20, 30 % of everything they get that they help achieve over a certain benchmark? And the reason is that bankers don't have any track record of doing so. In PEBC, there's a perfect track record of who added value and who didn't, right?

16:13You know exactly what your money, money returns. You know exactly what your ROI is. You know exactly what your IRR is, I should say. And everyone knows it. It's completely 100 % roofable. There's not a banker on the planet that has anything like a track record of adding actual economic value. And we do, right? Because that's the only thing that we're known for outside of fintech and selling companies is that everyone sort of says, you guys have really served your clients well and your loyalty serves the clients and you've actually gotten them great outcomes over the course of time. And it's been really consistent over 20 something years, right?

16:49It's not just, oh, there was this one deal that was a high valuation that, you know, maybe you got lucky on that deal. Tell me about the best practices when it comes to structuring these kind of deals. What are some things to do? what are some things to avoid? The thing about the business is we are very flexible in terms of what the client wants. So we're happy and interested in working on really early stage companies. And we're really excited about working on much larger companies too. So we have clients that are$500 billion in market value, half a trillion. And we have clients that have no revenue, right?

17:21So we'll be advising, for example, Model ML, which is in the sort of lower end of the revenue spectrum and one of the probably hopefully fastest growing AI companies out there, but that's a plan of ours. And we've got clients that are 40 billion, 50 billion, et cetera, many hundreds of billions as well. So we're really able to be very wide on that spectrum. And a lot of times, if the company's super early, we're sort of well-known for sometimes going in and saying, look, if you want us to be your banker between now and when you ultimately exit, we can do that, right? If you want to do buy the drink and it's$6 million capital raise, that's just not something we can do bandwidth-wise, right?

18:02So we have to work on fairly high ROI things, but the ROI can be stretched out over 15 years, or it could be, you know, 15 weeks. You know, we're very flexible. So a lot of times we'll let the client sort of set the terms. So we've got clients where, you know, for example, amazing story, right? We got hired in 2009 by a great little company at the time called Avid Exchange. It was worth$20 million, if their metrics weigh, but they were raising money for$20 million. And they wanted us to come in and help them raise, say,$6 or$7 million because they were buying a company for$3 million. Sort of famously said, Mike, this is too small.

18:36We can't really do it. And after many, many, many conversations, we agreed that we would basically be their banker for the long term and they could fire us wherever they want, but they'd have to pay us for 49 years post firing, which basically means that you're not going to fire us. So we now work with them from 2009 to 2000. And 25. So we just sold them this year for$2.3 billion to TPG and Corp. So it was a private equity strategy that teamed up by the company for 100x what it was when we found them. And of course, along the way, we raised a billion dollars for them. We helped them do eight acquisitions, never charging for any acquisitions, helped them go public and helped them on the sale.

19:18And I believe it would have worked for them even if we didn't have the long term engagement letter. but you know that certainly helped and and you know we're like your best friends this day support for today's episode comes from square the all-in-one way for business owners to take payments book appointments manage staff and keep everything running in one place whether you're selling lattes cutting hair running a boutique or managing a service business square helps you run your business without running yourself into the ground it's actually thinking about this the other day when I stopped by a local cafe here.

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21:03So, and then, you know, we'll work on stuff like raise the billion dollars for Revolut and they base, you know, X percent. And it's a one-time deal. And, you know, we don't have a lifetime deal on that one. So, but a lot of things we'll let the client set the term. So, you know, it's a daily thing for me to say to the clients, you know, we love big incentives, but, you know, you tell us how you like to incentivize this. You probably know your fair market value. You know that X is a single, then there's the double, triple home run, grand slam, bottom of the ninth, lights out, grand slam, whatever, you know, and whatever you feel comfortable with, you know, paying us, you know, we'll consider that and we may want to tweak it or sometimes they set it, you know, in a way that doesn't make sense and we'll have to change it.

21:42But in general, we're trying to let clients pick the fees. And so that way they're just going to be happy with them. I have to say, I was a little skeptical of this model. And then you invited me to breakfast in Miami and we were sitting down and you started talking to me about what structure you should put on your own home with the agent. That's right. And right there, I knew you were a true believer. I mean, I believe in it and the clients believe in it, too. The clients that have paid us the most money, we have multiple, multi-hundred million dollar fees. I must have gotten four referrals in the last two weeks from one of our clients who paid us a multi-hundred million dollar fee.

22:17And, you know, for and the guys that just paid us a multi-hundred million dollar fee, like there are best clients, right? They're the ones that so it's always the clients that are a little thrifty that are that are kind of missing the ball and saying I'm self-fulfilling. Yeah, I mean, yes and no. I mean, yeah, hopefully not. But but, you know, if someone says and show me incentive, I'll show you the activity. Right. So or something like that. So I think, you know, would you would you pay a private equity manager, you know, one and four, right? I give you one percent, you know, to just manage my money and then I'll be a four percent of everything over a dollar.

22:52You would never hire that person because like they must not be qualified. They must not have confidence themselves. They must not have the motivation. So I think that, you know, actually giving investment bankers similar types of upside as other financial professionals and other industries like private equity, venture capital, et cetera, you know, makes a lot of sense. Does it have to be two and 20? No, it doesn't have to be that at all. It could be more, it could be less, whatever. So I just think that that's something that will change over the course of time. And a lot of bankers are trying to emulate what we're doing.

23:25but the truth is you need to build a track record first. So if you're working on a big buy site on Monday, a merger of two companies at no premium on a Tuesday, a big bankruptcy recovery for FTX on a Wednesday, you have a debt deal on a Thursday, IPO on a Friday, a secondary next week, and then, oh, you just got to sell a private company, but that's like one of 15 things that you do. You're not going to really build a track record, right? So you really got to do the same thing in the same space. the same people for a long, long, long period of time in order to have the credibility, you know, to, or the audacity, you know, to charge, you know, greater than average rates for your service.