Arx: we fill the areas where banks are not doing enough

Arx Financial Engineering finished 2021 on a positive note after structuring and issuing a US$40 million credit-linked note (CLN) linked to the private debt to a company providing goods and services to the oil & gas industry.

Nine months since its launch the Dubai-based firm is on track with its plan to help growth companies in their capital raising efforts, and entering the capital markets space by securitising private debts and listing those on recognised exchanges.

We’re looking at developing an ethical finance business focused on impact investing - Danny Skutelis

SRP caught up with the company’s CEO, Danny Skutelis (pictured), to discuss progress on the three core focus business lines and where the growth is coming from.

Over the last few months Arx launched its fixed income trading desk with the addition of Younes El Bejjaji a former Natixis investment banker who has managed to bring large local accounts and some international accounts as well.

Arx’s Ethical Finance Desk which was launched in September with the addition of Dermot O’Reilly, is also progressing quite well, and is waiting for the Islamic endorsement of the paperwork to start the activity with a focus on Islamic finance, among other things.

“We’re looking at developing an ethical finance business focused on impact investing because there's a lot of demand and is only going to increase from what we see,” said Skutelis.

“Our structured solutions business remains our flagship and is helping us to increase the book of business and establish ourselves in emerging markets.”

What themes, product ideas are coming up in conversations with clients and prospects?

Danny Skutelis: We just came back from a trip to the US, Panama, and Colombia, and every country is working on ESG, they are putting stricter guidelines to align themselves with the UN SDG 2030 Agenda.

We are now dealing with a company called Tigress, which is majority women and disabled women owned. Another company that we are dealing with is Muriel Siebert in the US who was the first woman CEO of a publicly-traded company.

Asset managers in Colombia are considering projects now to support real estate development because banks are kind of shying away and there are people willing to step in and do things differently, in a fully ESG compliant manner - more environmentally friendly, more sustainable, using solar power etc.

Ethical finance is a strategic business for us and there is cross-over with some of things we are doing. We are working on Sharia compliant AMCs [actively managed certifiates] and doing Sharia compliant products, but we are now looking into doing ethical AMCs with some of our clients.

How would you describe the competitive landscape in your patch of the market?

Danny Skutelis: Some players in the market seem to be stagnating and doing more of the same, with the same approach. There are others (like Marex) are trying to be a bit more innovative with the products they offer to institutional investors. We want to take a similar route and leverage our technology not to offer a factory approach or products off-the-shelf but to build up relationships and deliver a good service.

In the institutional space, the hardcore sales approach does not work anymore. People want to spend time and see innovative ideas and financial solutions. We can offer them that with structured solutions. Our bread and butter is the flow structured products business, which is very simple, and our pricing platform, which was initially developed by CAT has been improved with several tools and functionalities like automated forward testing, factsheets, etc.

What would you highlight from the two most recent trades?

Danny Skutelis: The core value of what we offer is understanding the client’s needs and deliver to those needs. We have managed to land some large mandates because, frankly, the banks are lacking that approach and that makes us an appealing partner for many investors.

These companies had a seed investor and we knew we could cover the cost with a very simple structure issued through our SPV. Then we placed it with our other clients. That transaction was picked up by another investor who led us to Bedford Row Capital in the UK which introduced us to Deshbandhu Group.

That is how the Sukuk came about. Bedfordrow Capital which offers structured debt used its SPV and an external Sharia advisor to put the product together - a US$250 million Sukuk for Bangladesh, one of the fastest growing economies in Asia and South Pacific. We are leveraging our local and emerging market presence to do the book building.

We think we can fill the gap in those areas where banks are not doing enough. Panama and Colombia are big markets for AMCs, and there are huge opportunities. In Europe, AMCs are not as popular and people are not as familiar, but in some emerging markets these are the products resonating with investors.

Is the fund wrapper falling out of favour to deliver opportunistic access to investment ideas?

Danny Skutelis: AMCs are relatively fast to bring to market and a cost-efficient way to start your own strategy or fund alternative. You cannot start a fund with US$5 million. One of our sister companies did one recently and the cost of setting it up was around US$250,000, then you want a good prime broker and if you want a good custodian too and a good auditor etc. that is going to cost you money - the setup and the ongoing costs make the AMC the perfect alternative - you can be up and running in three weeks.

The number two consideration is that investors in emerging markets do not want to hold assets in the country. You can have an asset manager in Panama managing $2 billion with a lot of expertise and knowledge on private equity, private debt or private placements or just direct bonds or structured products but nobody wants to give them money physically into their custody so with an AMC they overcome that problem they can have Julius Baer or Credit Suisse as a custodian and earn their fees by running the strategy underlying the AMC.

You cannot get this with a fund unless it is a mutual fund or a Ucits fund.

What is the appeal for banks to deal with AMCs?

Danny Skutelis: AMCs also work for custodians because if the bank is also a custodian of clients’ private portfolio assets when the client subscribes into the AMC, the bank basically doubles its assets because now they don't just retain the assets of the client, they also retain the assets of the SPV of the actively managed certificate. Suddenly US$1 million becomes US$2 million.

Another attribute of AMCs is that if the bank is comfortable with the assets that are held within the AMC you can also obtain the LTV on the private portfolio side so suddenly clients can actually do a cash release mechanism etc. So, it's actually a win-win product for quite for quite a lot of parties.

That is how we are positioning our AMCs and how we choose the custodians.

We feel that the AMC wrapper has a huge momentum and frankly, I do not think discretionary managed funds offering an outperformance of 0.3% or 0.5% are very competitive. We're not saying that every AMC is fantastic or the asset manager behind is a maverick - we're not selling the asset manager but a service for them which includes the setup for the AMC distribution, market making and even the execution within the AMC, if it's linked towards a fixed income or structured products.

Which assets are you seeking to bring to your clients via structured products and AMCs?

Danny Skutelis: Some people are still looking at near default bonds because they think there is potential for yield but when you show them a structured product on Tesla or on bitcoin, their eyes light up. These asset managers understand the risks and are looking for this kind of products for their clients. We can price structures in front of them, and the yields of around 20% you can get with some structured products you cannot get elsewhere.

Crytptos are the same and the AMC route is proving to be ideal for some of the asset managers we have met. They didn't think that this was possible, and they cannot open an account with Coinbase or Kraken to trade directly for their clients, and not have the custody.

We are helping them to set up an AMC they can link to Crypto Broker in Switzerland, which is Finra regulated. They can then access the Crypto Broker online platform, and trade on one platform. They do not need to be positioned across multiple different exchanges. Crypto Broker has a cold storage facility in the Swiss Alps, and in World War 2 bunker which are only disclosed to trustees of the bank as part of their contingency plan.

There is a pipeline of people wanting to access investments that way.

Arx Financial Engineering announced the release on 21 January of Warhunt, a movie it has co-produced as part of its financing activities through a securitised vehicle to issue transferable securities enabling access ‘unique investment opportunities via a traditional instrument’.