Buy-side view: playing the pre-IPO market

Investment banks are creating new teams to trade the shares of pre-IPO giants including SpaceX, Robinhood and Airbnb. Specialist boutique HPC Investment Partners has been offering access to these underlyings via structured products for some time, in response to institutional demand.

SRP spoke HPC Investment Partners directors, Mehdi Rayane and Ilya Zuckerman, about their experience structuring this kind of trade, the company’s focus in the current demand and how the firm’s clients are navigating the marketplace.

At HPC IP, as with many other active providers of structured products, the current uncertainty is seen as an opportunity for structured products as they offer many options and serve different risk profiles and market environments.

“Our DNA is structuring bespoke solutions” – Mehdi Rayane

Is there demand for pre-IPO exposure from institutional investors?

Rayane: There is an increasing demand for private market opportunities among wealth and asset management investors. Some independent structuring houses and investment banks are currently entering the pre-IPO market of giants including SpaceX, Robinhood and Airbnb by connecting sellers and buyers in this booming market. Trading private tech companies’ shares that are not yet listed is now possible. The pre-IPO business is providing qualified investors accessibility to this market.

How are structured products being used to provide access to illiquid companies?

Zuckerman: We started to enter this market in 2017 as part of our diversification plan. As a structuring house, HPC Investment Partners’ DNA is to create bespoke structured products, but we always knew that diversification was key for the future of HPC IP and its clients. The pre-IPO market was already huge in the US but not very mature in Europe. Two years after us, banks understood the huge potential of this market and started to seriously invest in it. It started with BNP Paribas and now J.P. Morgan just announced a new team dedicated to this business. We not only offer shares to our clients, but also complete our offer by securitising their investment stake. Investing in this sector is quite complex as it relies on a US fund structure. We managed to adapt it to our European clients’ needs with a simple securitisation process: we are now able to offer a term-sheet with an ISIN code linked to these investments stake similarly to structured products. This new product could then be easily added to any multi-asset portfolio, helping our clients increase their private market participations in a more consolidated way.
Moreover, we offer our clients the ability to launch their own fund through an AMC so they can invest in a basket of private companies to target diversification. The less liquid the market, the more the diversification is important.

Is this an area where broker-dealers can differentiate their offering?

Rayane: Our DNA is structuring bespoke solutions, so structured products remain a strong part of our revenues but strategically, we are compelled to innovate. The structured products business is more competitive as we see new players entering the market every week with more capabilities and aggressivity. The pre-IPO is an innovative way to offer portfolio managers and family offices access to something previously out of their reach due to the lack of reporting and follow-up. Being the forerunner in Europe is a privilege and we are proud to say that we can democratise the access to this market thanks to our securitisation scheme (term sheet, ISIN code, data provider publications, etc).

How have your clients reacted to the recent market events and uncertain outlook?

Zuckerman: We have not seen an increased activity during the Covid-19 crisis – clients adopted a wait-and-see approach for the first months of lockdown. Since September, demand picked up to the point that we have more flow year-to-date than the previous year. It has been years since the volatility has been so high several months in a row. Indeed, we have recently seen volatility spikes during the Brexit votes for example, but these spikes lasted a couple of days at most. Covid-19 has been the only strong event impacting literally everyone since the subprime crisis. We can identify two types of clients today. On the one hand, those thinking that the second wave will be lethal for the economy depicting it as the start of a long recession. On the other hand, those thinking that we will return to a normal life once the vaccine is released and largely adopted by the population.

Technology has played a pivotal role in keeping the market moving. At what stage of development is HPC IP’s Skyline platform?

Rayane: Technology remains a strong component of our offer. We are currently adding new tools and features to our Skyline platform to keep an innovative mindset and continuously fine tune. We were one of the first independent structuring houses launching a complete lifecycle management platform. We see that our competitors are following the trend. The market is going towards a more automated set up and if one wants to stay within the trend, they must continuously invest and improve their offer.
The needs of asset managers and advisors are also evolving, and current structured products players have to be able to always offer new features. Adaptation is a key asset in developing a business. You cannot develop a platform with the same strategy for all your clients. Flow clients – ie those who trade structured products everyday – need specific analytical tools with sophisticated data around pricing parameters and even pricing discovery among many issuers. Clients that are not trading these everyday would rather have a focus on lifecycle management and trade ideas: they want to see how their portfolio reacts to corporate actions, market moves, increased volatility, rolling proposals etc. The current environment is making these tools even more relevant.

Do you have any concerns as of the direction of the market over the next few months?

Zuckerman: Volatility should remain quite high over the next months. Markets reached new all-time highs during the crisis despite all the uncertainties that remain (Covid, US election, Brexit). It is no secret today that the market and the economy are not necessarily correlated, due to all the cash that was injected by central banks after the financial crisis and the tax cuts offered by the Trump administration to big companies that led to massive buybacks from these companies (Apple being by far one of the best examples). Hence, despite all the uncertainties that remain for the next months, markets might not drop as much one may think. As Keynes once said: ‘the markets can remain irrational longer than you can remain solvent’.

16 Oct 2020 by Pablo Conde

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