Catalyst To Target Changing Financial Services Industry

The European financial services sector is entering a period of unprecedented change, when its transformation will be driven by new entrants attacking the weaknesses of incumbents, a trend which technological advances, deregulation and the advent of a Single European Currency will serve to accelerate. Or so say Rodney Schwartz and Jussi Laurimaa, who are launching a dedicated venture fund to capitalise on the expected restructuring of retail financial services over the coming years.

The pair are co-founders of Catalyst Fund Management and Research, which seeks to raise GBP50 million plus (ecu 75 million+) for the European Financial Services Venture Fund (EFSV Fund). The partners bring a wealth of sector knowledge to the venture.

Rodney Schwartz was ranked the Number One US financial services analyst over three years, and then became Number Two in Europe, before becoming head of Lehman’s European equity business. He subsequently moved to Paribas to head financial institutions banking. While there, he linked up with Jussi Laurimaa, a former Price Waterhouse and McKinsey consultant.

Jussi Laurimaa outlined the Catalyst co-founders’ belief that their in-depth knowledge of the financial services sector will enable them to predict the future structure of the industry as it enters on a period of change, and thus “to deduce business formulae that make sense and pinpoint successful companies”. Catalyst, he said, will adopt an research-driven approach rather than the “deal-driven” mind-set of the majority of private equity players – in this context, it seems inappropriate to call other investment houses “the competition”, since the vast majority are precluded from investing in, or avoid, financial services. Indeed, Catalyst believes itself to be the only focused fund operating in the financial services sector in Europe.

The EFSV Fund will target investments in two broad categories of company. The first category covers retail financial services players proper, including: “conventional” groups already active in the sector but exploring new market niches such as telephone or Internet banking; companies moving into financial services from other industries, as supermarkets and telecoms groups are now doing; and providers of specialist products, such as personal insurance underwriting.

Jussi Laurimaa described the fund’s second area of interest as “weapons manufacturers – the companies that provide specialist technologies, processes or services which make financial services developments happen”. Clearly, the majority of these are likely to be IT companies providing specialist tools for the new-style retail financial services industry. Here, Catalyst could bring an interesting slant to the investment appraisal process. “If you’re looking at investing in an Internet banking tool, for example, you don’t necessarily have to believe that it is a good idea – only that the banks will”, Laurimaa pointed out.

The EFSV Fund will theoretically invest in companies at any stage of their development; in practice, any start-up and early stage investments are likely to be in financial service companies, while deals involving technology or service providers are more likely to be expansion fundings or buyouts. “For all the fund’s investments, our goal is to find opportunities we can allow to develop fully”, said Jussi Laurimaa, adding that Catalyst believes “the rush to exit doesn’t necessarily maximise value”.

Few Competitors Exist

For a brief period at least, Catalyst could enjoy a virtual monopoly in its chosen niche. Many of the business opportunities the EFSV Fund will target could experience considerable difficulty raising funds from other sources. Most venture funds, as previously mentioned, eschew the financial services sector. Banks, meanwhile, whose own businesses are potentially threatened by the emergence of new financial services providers, might regard backing such enterprises as analogous to turkeys voting for Christmas, Catalyst suggests.

The fund’s geographic remit covers the whole of Europe, including Central and Eastern European markets, where Catalyst expects to find rich pickings on the IT front. A number of advanced financial services technologies are being developed in Central and Eastern Europe, yet it is “still possible to invest in such companies at reasonable prices”, according to Jussi Laurimaa.

Catalyst expects to hold a first closing on the fund in March at around GBP25 million, drawn from a small number of core investors. So far, the group has adopted a rifle-shooting approach to fund raising, approaching only selected key players in “relevant” industry sectors.

Jussi Laurimaa said Catalyst expects both the insurance and banking sectors to be represented in the core shareholder group, with at least one player from each of the UK, the US and Continental Europe. He declined to name the institutions Catalyst is negotiating with at present, but said Catalyst is “looking for the ‘Wow!’ factor” for its core shareholder group – prominent, credible institutions in today’s financial services market who look set to maintain a leading position in the industry as it evolves. In turn, the core shareholders will enjoy access to Catalyst’s research and potential co-investment rights.

After the first closing, the EFSV Fund will be offered to a broader range of institutional investors, before closing on a probable maximum of GBP70 million.

Catalyst will be able to draw on additional sector expertise from its board members. It has signed up three non-executive directors: Keith Carby, one of the architects of Allied Dunbar and J Rothschild Assurance; Oliver Fox-Pitt, a founder of financial services stockbroker Fox-Pitt Kelton; and Jimmy West, who moved on from venture capital to manage Globe Investment Trust and Lazard Investment Management.

Co-founders Schwartz and Laurimaa have been joined by associate Peter Globokar, who already has venture industry experience. Catalyst also plans to recruit a third partner, in all probability a senior figure from the private equity industry, to take responsibility for the structuring and execution side of the business.