CLSA, a unit of CITIC Securities, has launched a venture-capital business, AlphaLabs, to make strategic and commercial investments into global fintech businesses.
The brainstorm of CLSA chief technology officer Max Nam-Storm, AlphaLabs will broaden the Hong Kong-based bank’s reach in proprietary investments; and it will support CLSA’s ambitions to go from being an Asia equities boutique to becoming a global investment bank with Chinese ownership.
Nam-Storm, who has held CTO and COO roles at J.P. Morgan, Lehman Brothers, Nomura and UBS, oversaw building CLSA’s electronic execution for equities, which is now being extended to fixed income. But he saw the opportunity at CLSA to do something more fundamental, which is to create a modern technology stack for a financial institution.
The firm isn’t about to shut down its legacy systems, but Nam-Storm wants to phase them out. “The lesson I learned from working at the bulge brackets is: don’t let a lack of discipline let you turn into an inflexible and archaic incumbent burdened with layers of legacy systems. Most of the major players are still running software written in COBOL on Windows 95. How are they supposed to innovate?”
Investing in change
Banks can’t modernize on their own, however. They need to work more with third-party fintechs. That’s where AlphaLabs comes in.
Nam-Storm says large enterprises traditionally struggle to deal with small vendors, but this is becoming a competitive issue because the entire economy is transforming into one in which smaller players thrive on platforms-as-a-service models, plugged in through APIs.
But too many fintechs find it impossible to build in the resilience and security that banks require, and can’t endure the multi-year path to adoption that is the norm – and when they ultimately fail, the enterprises loses the tech they liked in the first place.
AlphaLabs is commercial, but its strategic side comes with an advisory function meant to shepherd portfolio companies through CLSA’s compliance, ops, finance and other hoops.
Understanding B2B
Shiau Sin-Yen, who co-founded AlphaLabs as chief investment officer after running his own V.C. firm, Ventris Capital Advisors, says its first investment was in Symphony, the U.S.-based communications and collaboration platform for banks. CLSA is the first large-scale Asian firm to deploy Symphony.
Shiau says a V.C. backed by a financial institution is better positioned to evaluate B2B fintechs with specialist capabilities than general venture-capital firms. “The tech is more industry-specific when it comes to enterprise tech, like KYC onboarding or cybersecurity,” he said, in contrast to the more consumer-focused fintechs that general VCs follow.
AlphaLabs builds on CLSA’s other asset-management business, CLSA Capital Partners, which invests in private equity, credit, real estate and special situations. It will invest in early-stage deals, from seed to Series B funding rounds. It will look at B2B fintechs in Hong Kong and Singapore, and consumer plays in other Asian markets.
It is also designed to attract more fintech expertise from North America and Europe. Fintechs in the West tend to focus their attention on partnering with banks there, because they can scale more quickly than in fragmented Asia.
The power of open
Nam-Storm says working with fintechs will also keep CLSA on the right side of the growing trend toward open-source technology – a trend that many banks struggle with, given their cultures of internal builds (and the mini internal empires that go with the budgets and headcounts).
“West Coast open-source tech has come of age,” Nam-Storm said. “Though we assemble everything internally, I’m a massive believer in open source, for all parts of the firm. If you don’t develop an open-source culture, you’re at risk of open-source exposures.”
He says bank I.T. departments can either get deep into the tech and becoming contributors to the code (suggesting de-bugging solutions and such) – or they can passively wait for a problem to arise that even closed I.T. departments may be vulnerable to.
“Companies have no way to stop open-source libraries from entering your proprietary systems if you’re writing in Java, JavaScript” or other common coding languages, he said.
Such intrusions are usually innocuous, but can also be dangerous, especially to enterprises that aren’t part of the open-source community: “You might end up onboarding something that’s not proved by the community without your knowing its quality – because you’re not in that community.” Companies therefore end up importing bugs or, worse, give away back-door access to their systems.
Of course, banks don’t just go open-source willy-nilly: CLSA’s trading algos, for example, will remain proprietary.
Although the initial focus of AlphaLabs will be specific, gritty plays such as in RegTech, Nam-Storm says blockchain and artificial intelligence will fundamentally change the business model.
On blockchain, he said, “The most interesting macro development is in the decentralized, trustless digital realm.” He sees distributed ledgers as a major enabler for financial firms that figure out how to use it. Blockchain won’t change what banks do: they’ll still trade, make markets, underwrite companies, manage risk. “But it opens new ways of doing the same things – in financing, in new asset classes, and in efficiencies,” he said.
He expressed similar views regarding A.I., but in both cases, notes that many startups have great technologists but lack in-depth knowledge of financial markets and regulation. He sees a competitive advantage in a bank using its security and compliance culture to underpin blockchain and A.I. capabilities. “We’re looking for people out there who are connecting these dots,” he said.
