DeGiro searching for HiQ’s millions
DeGiro needs cash. The discount broker is investing heavily in marketing. Advertising on TV and internet is expensive, and their balance sheet is apparently running empty. I got the hand on a confidential prospectus on a certain DeGiro offering. Showing more colour on the broker.
DeGiro figures
The broker has 100.000 clients. They have spent €7.5 million on advertising to convince people to thrust their money with DeGiro. That’s a price of €75 per customer. On average the money earned after regular costs is €150 per customer per year. On a daily basis DeGiro earns €60.000. That’s €15 million a year.
Balance sheet runs empty
Do the math. Spending 75 to earn 150 yearly is a done deal. But apparently, the balance sheet couldn’t afford more expensive advertising. Selling a stake in the firm didn’t work out. Several private capital firms turned them down (“unprofessional, no figures prepared”).
More debt may not be allowed by the regulator. Selling a stake didn’t work out. Where to look next?
HiQ closes the doors
DeGiro happens to know people with a few million to spare. Investors in HiQ have been losing money for years. Give them a small guaranteed carrot to recoup some losses, and they’ll be eager to switch.
Getting most investors out isn’t the same as closing the fund. HiQ will continue as a tiny fund. Closed to outsiders, it will probably function as a private holding for people behind DeGiro. After all, on a smaller scale it’s a piece of cake to make a profit trading against the DeGiro retail flow. Running the fund is cheap, all infrastructure costs can be covered by DeGiro.
The proposition
The HiQ investors can switch to “acquisition financing participations”. The money will be invested in advertisements for DeGiro. That’s correct. Investors’ money will be spend on TV commercials. They keep track on the new DeGiro customers. The profit these customers make for DeGiro will be passed on to the investors.
The natural inflow of customers is set at 3000 per month. Say 4000 new customers join, all earnings on a thousand of them will flow to investors. Creative. In reality it’s only a small teaser. It’s a kind of subordinated debt instrument with a maturity of 5 years and a guaranteed profit of 180% and capped at 225%.
Like most financial firms, there are no assets to secure the debt. The profit sounds cool these days. The Rabobank certificates have a current yield of 6%. At least the shareholder in DeGiro promise not to withdraw any dividends as long as this debt hasn’t been paid off including the guaranteed profits. When the LPE (DeGiro, HiQ, Fundshare) group folds, investor lose their money.
NoT ALL PROFITS TO PARTICIPANTS
Not everything DeGiro earns on new clients is passed on to the participants. The money earned with internalizing retail flow is kept within DeGiro. Also the margin on automated currency hedge (“AutoFX”) is kept. Another odd thing is the deal is within the personal holdings of the founders.
According to spokesman Niels Klok, this is because of the capital requirements for DeGiro. Personal holdings don’t have this regulation. What happens when the marketing efforts are a failure is difficult to say. Paying back the money can be postponed forever, but no dividends for shareholders sounds like a fair guarantee.
An alternative could be to cut back in advertising, introduce two-factor authentication, stop juggling with fees and get a serious app.
- Source – prospectus (Dutch only).
“An alternative could be to cut back in advertising, introduce two-factor authentication, stop juggling with fees and get a serious app.”
And an API for Automated Trading
+1
Though wouldnt thrust DeGiro with very big positions and / or algo’s.
ANONYMOUS
MAY 27, 2016 AT 8:32 AM
“Though wouldn’t thrust DeGiro with very big positions and / or algo’s.”
I Agree 😉 But if they want to really be a future player, they need a serious API. I wouldn’t use it for the next couple of years. First see where DeGrio is heading to
The countdown has begun. On a scale of 1 to 10 of being desperate, I would rate this as 11.
Also, when they say they earn 15 million a year or 150 euros per client what they really mean is GROSS REVENUE, before DeGiro pays the exchange fees, a rather substantial amount of money. The net revenue per client (after exchange fees) in the year 2014 was EUR 82,86 according to their interview with the FD newspaper on 16th October 2015. It’s hard to believe the revenue per client has gone up substantially since then, given that future clients are likely among the less active traders than the first ones to make the switch and thus, less profitable.
Out of the EUR 82.86, DeGiro has to pay their staff (salary expenses of 3 million euros divided by 100.000 clients), housing, infrastructure, their auditors etc. And, of course, also their marketing. In other words, DeGiro is not spending 75 euros in marketing to earn 150, they are spending 75 to earn 83 BEFORE taking into account their normal costs of doing business.
Thanks, but no thanks.
Another inconsistency is that, according to the above mentioned 2015 interview, DeGiro spends all of its profits on marketing, hence DeGiro didn’t post any profits in previous years. For the first quarter of 2016, DeGiro reported a profit of a little over 1 million euros.
This means that in Q1 2016, DeGiro abandoned their policy of spending all of their profits on marketing. So instead of investing their own money on marketing, they would rather spend the money of HiQ investors on future marketing efforts. What does that tell you?
And when they say they have around 100.000 customers, that means they are hardly growing anymore. They said they had 95.000 accounts at the end of 2015. Setting the autonomous rate of growth at 3.000 new customers per month seems optimistic and advantageous to the shareholders of LPE. After all, the higher the assumed autonomous rate of growth, the lower the number of “new customers” to pay money to the Participation Investors.
Jack, do I understand correctly that the original investment will never be paid back? I cannot find any information in this regard in the prospectus (when/how this money would be paid back). This would mean that instead of receiving (maybe) 180% return, really you are making only 80% return (if everything goes according to plan).
Where did you read that Participation Investors will make at least 180%? The way I read it, so long as they haven’t been paid 180% of their investment, they may demand continuation of their revenue share until that target is met. Of course that is no guarantee that you will ever be paid 180% (or even a single cent).
None of the five companies that you would get a claim against, have ever filed. Makes it kinda hard to get an idea of the financial health of the entities you are dealing with and what the relationships there are between, for example, Unguis LPE, Unguis B.V. (the personal B.V. of Gijs), DeGiro and LPE.
“In 2015 DEGIRO attracted EUR 7.2 million in investments. This allowed DEGIRO to accelerate growth by increasing the market budget” (bron: voorlopige resultaten 2015). Het zou interessant zijn om te weten tegen welke voorwaarden die investering werd gedaan.
There’s a mistake in the prospectus. It compares IRR of 8.4% with 80% profit.
With a five year horizon, that’s 50%.
Er staat niet dat de marge op AutoFX niet meetelt voor de Bruto Marge. Hiervoor rekenen ze geen expliciet tarief, ze reken je alleen af op een ongunstige prijs. Wat ze bedoelen is dat de ‘omzet’ die ze met FX-transacties genereren (je wisselt 10.000 euro om in dollar=10.000 euro omzet) niet meetelt voor de Bruto Marge. Dat is logisch.
“The money earned with internalizing retail flow is kept within DeGiro”
Preciezer gezegd: als er inhouse wordt gematched, dan belast DeGiro transactiekosten bij de berekening van de Bruto Marge die gemaakt zouden zijn als er via de beurs zou zijn gehandeld. Dat is extra wrang als er gratis transacties worden gedaan (bv. in bepaalde beleggingsfondsen) die inhouse worden afgewikkeld. Geen baten voor de Participanten, wel kosten. Participanten betalen dus feitelijk een straf als er inhouse wordt gematched. Ja hallo!
The average fee income per client is rather misleading. There is one client that generates disproportionately much to De Giro: the HiQ fund. Participants do not benefit from this existing client. As observed above, the normal clients of De Giro contribute substantially less than 150 per year.
Nice. You want to invest in a stable market neutral fund. First the fund doesn´t deliver and then as an alternative you get to invest in a highly risky construction with the same people who did such a bad job the first time. Very attractive……..
Ik twijfel nog of ik mijn geld hierin moet steken of aandelen Value8 bijkopen.
@ 9:32am: Participants may not demand that further payments be made if the return falls short of 180%. §5.6 states that the shareholders may decide to extend such payments, but that is voluntarily (i.e. unlikely).
Moreover, if you read carefully it says that all the revenue from new clients up to May 2020 will be spent on marketing. Only revenue from new clients from May 2020 onwards will be paid out to investors during the next 24 months (§5.4):
De bedragen die gedurende de 24 maanden NA april 2020 aan de Deelnemingsrechten Acquisitiefinanciering worden toegekend worden vanaf dat moment op maandelijkse basis uitbetaald aan Deelnemers.
These payments are capped. Furthermore, a new client only adds to pool of money that can be paid out to the participants during his or her first 24 months. So by May 2020 none of the clients that De Giro hopes to attract over the next two years will put any money in the pockets of the Participants!
One must assume that as De Giro attracts more clients, it becomes increasingly difficult and expensive to add more clients (diminishing returns). And those that are attracted will likely not be as active and profitable as the current client base. For example, 1.6 million euros in marketing in the year 2014 generated 35.000 customers (46 euros per person). For the next 55.000 customers, De Giro spent 5.6 million in 2015 (100 euros p.p.). Of course it should be noted that part of the growth came about autonomously. Assuming autonomous growth of 3.000 customers per month (De Giro’s own estimate), that would mean that about 20.000 customers were attracted thanks to a 5.6 million euro marketing campaign (280 euros p.p.). Remember, it is only the extra new customers above the assumed autonomous growth who generate payments to the participants!
In simple terms: each new customer that is relevant for the participants may cost 200 euros or more in advertising. But their expected extra revenues are probably well below the 83 euros per year average for retail clients. So over the two years during which revenues from recently added customers are paid to the participants, I’m struggling to understand how a return of 180% of the money invested is feasible. By my estimation, you would be lucky to receive 83% of your initial investment. Yikes.
I’ve heard they offered this proposition to employees as well, but it seems they are not that hungry to invest in this construction in their own employer it seems.
You are wrong Michel. It is an offer outside AFM area, what means it can only be offered to 100 people. Since DeGiro/HiQ employ around 150 ppl it is not even allowed to offer the proposition. I know DeDiro/HiQ follow the rules quite heavy, so they wouldn’t risk anything like that.
Michel is right. There is no restriction on the number of people who can invest in an investment outside the AFM’s supervision. For example, more than 300 investors lost money in Palm Invest.
However, for an investment to fall outside of the AFM’s scope, it needs to be for EUR 100.000 or more. Therefore HiQ can only offer it to their largest clients, namely those with more than EUR 100.000 invested in the Market Neutral Fund (notice the minimum subscription requirement on the last page of the Prospectus that is completely consistent with a total investment of more than EUR 100.000).
Besides that, DeGiro may want to offer to some of their employees this ‘opportunity of a lifetime’ to invest. There is no rule that requires such offers to be made to all employees (same with stock options). Obviously the poor saps that they hired in Bulgaria can’t afford to cough up 100k. Hence the Prospectus is simply in Dutch only. In fact, the Prospectus (section 7.2) clearly states that some employees of LPE entities ARE already investing through a prior, similar offer and that some MAY decide to participate in the present offering. So there can be no doubt that DeGiro has offered this deal to some employees.
If the investment were within the AFM’s scope, the Prospectus would have to contain a list of risk factors. In the case of DeGiro, that would be quite a lengthy list I reckon. Most certainly one risk factor would be that in the future, DeGiro may not service certain countries with their EU passport. 😉
@ ano 10:15 i’m definitely not wrong, i dont know to how much people its offered but it has been offered. Maybe only as an investment of the 2015 bonus some got, that would probably be less than 100?! I dont know about previous year or any rules about max 100 people. Its forbidden to offer such a construction (i wont call it an investment opportunity, something LPE probably would do) to every employee?
It could give some alignment of interest or some BS managers terms
The shareholders that were eligible for this investment were mainly to be expected among the “C” class of Hiq investors. At the end of May (when the offer ended) there was a sharp drop in the number of outstanding shares in the C class: from 367 thousand at the end of April down to 287 thousand. It seems reasonable to assume that some 80 thousand shares in the Hiq MNF Fund worth around 900 thousand euros were lured into DEGIRO’s offer. There’s your proof that Hiq investors don’t qualify as ‘smart money.’ Not quite the 3 million that Niels Klok hoped to attract according to a blurb in the press. I expect to see another great offer soon when the money runs out again, no doubt thanks to ‘overwhelming demand’.