Israel boasts a thriving fintech ecosystem, and we have witnessed the emergence of several promising companies mushrooming in the space. While recent years have seen limited notable activity, with most fintech solutions falling into one of two categories: insurtech or payment solutions, there is ample room for creative innovation.
The world of finance is still plagued by legacy systems, many of which were developed in the ’70s, ’80s, and ’90s. It is within these untapped sub-sectors that we at Key1 believe the fintech resurgence will arise.
With asset managers needing to maintain a competitive edge and overcome the restrictions of legacy infrastructure that have characterized their industry, next-gen investment management software represents a growing opportunity for innovators in Israel. Just last month we led FundGuard’s $100 million Series C, marking one of the largest growth rounds for Israeli startups this year.
FundGuard, an accounting and investment software for asset managers led by co-founders Lior Yogev , Yaniv Zecharya and Uri Katz, is a prime example of companies tackling the space.
Asset managers are all the firms that invest in and manage financial assets, including traditional asset managers (the likes of Fidelity and Vanguard), custodians, hedge funds, pension funds, insurers, private equity funds, sovereign wealth funds, private banks, custodian banks, and so on. This is a large market with total assets under management (AUM) of more than $100tn and a compound annual growth rate (CAGR) of 7% over the last 10 years globally. Today, the largest asset manager globally manages $10tn in AUM while 10 years ago, the largest asset manager globally managed only $4.3tn in AUM
It is estimated that current software spend among asset managers is annual spend is many $10 billions a year, but as the number of assets under management, and their level of complexity (currencies, multi-jurisdictions, etc. ) increase, it naturally follows that the need for innovative software to manage these growing assets effectively increase alongside.
There are a few key reasons why asset managers increasingly require more sophisticated technology:
The level of accounting complexity has swelled exponentially as asset managers now manage a growing amount of capital across an ever-increasing number of asset classes, financial instruments, currencies, and jurisdictions. Added to the increased complexity of closing the books, regulatory pressure for timely and accurate reporting is intensifying, often resulting in fines and other burdens used to ensure compliance.
On top of increased complexity and regulations, average management fees for traditional asset managers are falling by approximately 2% per annum. With this ever-compressing profitability, the need to find efficiencies is no longer a nice-to-have, but a must-have.
Above these sector-specific challenges, there is the overarching need felt by all businesses to increasingly focus on core competencies. Investing in the best software solutions available in the market allows asset managers to eliminate unnecessary time spent on administrative and back-office activities, empowering them to focus on their core: generating returns for their clients.
Despite the pressing need, and the significant ‘prize’, building next-generation technology in this space is proving anything but easy.
Innovation in this sector faces significant barriers that must be addressed for viable solutions to emerge. The first major obstacle is the reliance on outdated legacy systems, originally programmed in the 70s and 80s (!) that demand innovation be initiated 'de novo', essentially from scratch.
Furthermore, there is no room to build partial solutions as there is no way to just close a ‘part of the book’. Whoever tackles the space must present a complete solution from the outset, and refine from there.
The complexity of the technology stack adds another layer of difficulty. Given the vast number of variables (currencies, interest rates, tax regimes, etc) and inputs (number of assets in a fund, daily movements in values, buying and selling activities, etc) building the stack requires a large, highly skilled team with ample time and resources.
Challenges extend from the team to the customers, who are often found in large, layered organizations. This makes initial engagement difficult as it requires interacting with high-level decision-makers to ensure meaningful engagement.
Finally, sales and adoption cycles within this sector are slow and complex, largely due to the type of customers and what is at stake for them ( just think about the catastrophic consequences of not being able to close your books…). This emphasizes the need for diligence throughout the sales and adoption process.
For those few who are capable of navigating these obstacles, this sector presents a huge business opportunity. This is underscored by the size of the industry, the desperate need for innovation, and the long list of sizeable buyers who compete, and pay up for the best technology assets available in the market.
While FundGuard is one of the relatively few examples of next-gen investment management software in Israel, and the only AI-driven, cloud-native solution in its sector globally, we have seen several instances of successful exits in this sector over the last five years such as State Street’s acquisition of Charles River for $2.6bn in 2018 and the acquisition of eFront by BlackRock for $1.3bn in 2019, just to name a few. In the public markets, CLEARWATER TECHNOLOGIES LTD. serves as a good example, currently trading at over 11x 1yr forward revenues, giving it a market cap of nearly $5bn at the time of writing this piece.
The software management sector is ripe for innovation, and we expect to see more Israeli companies in this fintech sub-sector on the horizon. In a time where good news and resilience are more vital than ever, a round like FundGuard that brings an emerging sector to the frontlines is highly welcome.