Zuza Reda-Jakima: Do you observe any uptick, any trend pointing to a growing interest of private equity and venture capital funds in Luxembourg’s startups?
Nasir Zubairi: Yes, private equity investors are looking more and more into Luxembourg because we have a robust community here, particularly in fintech and the space industry. At the same time, many private equity firms are registered here, but we don’t necessarily have the investors.
Does Luxembourg stand a chance in attracting front office dealmakers?
If we focus specifically on venture capital companies, Luxembourg should have the ambition to attract more of them. Many of those players have the European Investment Fund as one of their principal investors, the so-called limited partner.
The EIF happens to be based here.
The European Investment Fund is the largest fund of funds in the EU and one of the largest in the world. When a new fund is being created, the EIF often acts as a cornerstone investor into those funds. They drive a lot of the venture capital market in the European Union as they ultimately provide the capital that the private equity guys use to invest.
Now, the EIF is an institution and therefore has strict criteria around its investments, one being that when it gives money to venture capital funds, most of it has to be invested in the EU.
And London’s no longer part of the European Union.
Traditionally, the VC community was in London, but now they will have to change how they invest. Luxembourg is strategically placed. We are in the EU, we all speak English, and you’re right next door to one of your major investors--the EIF. So why don’t we try to attract more of these VCs from London that might need to change their strategies and the offices or headquarters’ location to maintain their access to the EIF?
Another argument favouring Luxembourg is that many family offices are based here, offering the chance to find investors.
How are tech companies helping PE firms in becoming more efficient?
Private equity companies suffer the same issues as other funds, and technology helps drive greater efficiency and lower costs.
A number of firms here provide solutions to the private equity sector to help them with productiveness. Some focus on more effective management of data to ease decision-making. Others help with compliance. Luxembourg fintechs often service management companies, custodians or administrators that provide services to PE, for instance, on the reporting side.
Are there any novel solutions from Luxembourg that could revolutionise PE?
Some companies take a slightly different approach to blockchain tokens and look at providing solutions to enable private equity companies to tokenise their existing portfolio.
A PE fund may want to release some of the invested capital to invest in more firms. Traditionally, it would need to sell an entire company. With blockchain tokens, they could tokenise and create an equivalent to shares in those companies and sell off small portions of their portfolio so that they can get more capital and make more investments. It would help them drive more effectiveness again.
Tokenisation could also open PE opportunities to smaller investors. For instance, if, traditionally, the minimum investment is €100,000, not everyone can commit such money. And so a product that generates a robust return only allows rich people to get richer, whereas with tokens, you could create more liquidity and open PE investments to anyone.
Technology is allowing PE companies to focus on their core business. What about the boom in technology-focused PE investments? Should we be worried about a tech bubble?
There’s a lot of capital around and very few alternatives to how to invest the money. Hence, interest in technology companies is not surprising and has been going on for years.
These firms are clearly more efficient. The average return on equity of the European banking sector is at less than 6%, while tech companies deliver way above 20%. The banks are inefficient, with costs killing them; they are resource-intensive, therefore not scalable. Whereas in tech businesses, people are important as well, but ultimately, they have almost infinite scale.
At the same time, we should remember that a lot of the value in a tech stock is what you call the future value of a company, assessed based upon what it will make in five or ten years. When you have an environment where interest rates are really low, like they are today, it means that a company’s future value is much higher than if interest rates were higher.
Can you explain it with a theoretical example?
A company makes $100bn a year, and people expect it to grow by 20% annually. To work out how much a company is worth, you basically divide it by the interest rate, because your alternative is to put the money into a bank.
If the interest rate today is at 0%, the $120bn in a year is worth $120bn today. However, if the interest rate goes, let’s say, to 1%, that $120bn is only worth $110bn. So, if the interest rate goes up, today’s value of all future cash flows decreases, and so does the value of the company. Therefore, if interest rates go up, I’d expect a lot of tech stocks to go down in price.
The problem, however, is that, in Europe, we hardly have any companies that would reach such valuations, and so investors look for opportunities in the US. Why is that? Are we less entrepreneurial in Europe?
The most important factor is that entrepreneurial spirit does not exist in Europe. We still don’t accept failure, and so we don’t accept risk.
This leads to Europe lagging behind in innovation. In the past 50 years, Europe only produced three companies worth more than $100bn. In the US, a dozen or so tech companies are nearing a trillion-dollar mark.
There are firms that started life in Europe that could become $100bn companies at some point. But when it comes to a certain point, they go to the US to gather funding.
With some 400 million people in Europe, technically, we’re a bigger market, but we’re not cohesive in any way. Some would argue it’s simply the scale of available capital, but I think it has more to do with Europeans being risk averse.
From an investment perspective, Italians are the biggest risk-takers in Europe, with the highest percentage of people investing in the stock market. Still, the level and knowledge in Europe about investing, for instance, via private equity, is much lower than in the US.
What should we do about it?
Education is a big part of the problem. Look at Luxembourg; the last major education reforms were in 1975. I find the whole testing of children nonsensical. We have to memorise anything and regurgitate it in an exam. How does that replicate the real world? Our kids all work on mobile phones. If they need to look something up, they google it. If you fail in your exams, you are held back. How does it encourage a child to be better next year? When all your mates go up, you feel stupid, alienated, resentful and embarrassed. We don’t tolerate failure.
The same goes with starting a business. If your criminal record says you went bankrupt, you can’t start a new business in Luxembourg. I’m not talking about fraudsters, but hardworking people who took the risk of being an entrepreneur.
Yet, there are exceptions to the rule. For example, Sweden is one of the most prolific markets in terms of producing tech giants like Spotify, Klarna and Trustly.
Sweden produces a lot of unicorns. They’ve created an environment that matters a big deal as it creates a culture. If you have a culture of innovation and creativity, all the dots come together.
You need to have an open environment where firms and the entire ecosystem embrace the new solutions and want to adopt them and work to adopt them. One example is payments. Sweden is probably going to be the first country in Europe to eradicate cash. Then you look at Germany, where 50% of transactions are still cash.
In September, you moderated a panel at Amsterdam’s Money20/20 conference that asked a provocative question, if fintech B2B companies needed a brand.
Regardless of company size and industry, a firm needs a brand because it’s so much more than just a logo. A brand is the identity of a company, and it’s important externally but also internally.
Even if technologies are very often only working behind the scenes, you still want to communicate the brand that is responsible for the smooth functioning of different end-user services. As a consumer, you don’t buy an Intel chip, but you put trust into a computer powered by Intel because--as the slogan goes--it has Intel inside. You don’t buy a Boeing engine, but you trust the engines that fly the plane you’re sitting on.
A lot of fintech now are building more agile services in the payments sector for instance, where they act as the back end in a B2B2C model. They sell the service to another business, and that business will provide the service to the end customer. But even if you are the in-between B, you still need a brand.
Say you’re a manufacturer of screws. The end consumer buying furniture with these screws used to assemble a chair has no idea who produced them, but that brand is critically important to the staff to motivate and inspire people. A good brand needs to have a set of values attached to it and an identity so the staff can believe in it. It’s critical.
How do you define a fintech brand?
You should look at a brand as you look at a person. People are described as thoughtful, innovative, creative, introspective, etc. And that creates a certain image of a person, it creates a certain resonance of that person. It’s an identity for that person, and the brand must have a similar identity, and it should be consistent.
Apple is the gold standard, because it has created a masterful brand to the consumer, which creates a particular perception, but critically what drove a lot of Apple’s growth was the identity of the brand to its staff that became absolutely loyal to Apple. All is intermixed.
Does a consistent brand help when you pitch to investors? Do they care about the brand they invest in?
Absolutely. As the company grows from a startup to a scale-up and continues through various rounds of funding, you will see multiple iterations of the brand, the logo, the colour schemes, and eventually, the identity becomes much more pronounced. The critical element that must happen at some stage is to disassociate that brand from the founder.