Addepar – The Ultimate Financial Operating System
A number of our writers here at Nanalyze come from finance backgrounds and some even have MBAs. This means we often need to speak very slowly when we try our best to deprogram them from using all the nomenclature that was etched in their brains during those dreadful CFA exams. While people who work in finance want you to believe what they do is sophisticated (and some of it certainly is), the act of investing and managing your own money is not that sophisticated for most of us. It is however, extremely difficult to beat the market over time as evidenced by 80% of money managers who fail to do so. It makes little sense to pay these “experts” any management fees if they can’t actually help you make money. So why don’t people manage their own money? Generally it’s because they have better things to do with their time. It’s also because people who have lots of money have investments all over the place making it difficult to see what they actually own. Below we can see just how volatile the billionaire population is based on drastic swings in their accumulated wealth:
While above you can see the population of billionaires, you don’t need to have $1 billion dollars in assets to be considered rich. Having $1 million in liquid financial assets means that you are considered to be a “high net worth individual” (HNW). No, your ridiculously expensive house you bought in San Francisco doesn’t count. Liquid assets generally means that you can turn these assets into cash in a matter of hours if need be. Next, we have the “ultra high net worth individual” (UHNW) who has $30 million in liquid assets or more. Here is what that population looks like:
While entrance to this exclusive club is just $30 million in liquid assets, as you can see, the average person in this population has $141 million in liquid assets. The above population of UHNW individuals and all the cool toys that come with that are spread around the globe in the Americas (43%), EMEA (33%), and Asia Pacific (24%). We want you to focus on that $30 trillion number above, so here’s something that will help you wrap your mind around the size of that number:
Right now, that $30 trillion is invested across all kinds of assets like stocks, bonds, real estate, hedge funds, commodities, etc. If you’re a UHNW individual, maybe your assets look something like this:
HouseSmall studio in San Fran
- 8 European mutual funds in GBP
- 6 Asian mutual funds in HKD
- Large Softbank Position
- 20 bonds (municipal and corporate)
- Casa in Mexico
- 401K across 10 funds
- 30-40 stocks holdings on 6 global exchanges
- Several commodity positions
- 8 forex positions
- Company stock options
- Isht Loads of Cash
Let’s say that you owned the above assets and you became concerned about all the saber rattling around North Korea. As part of that concern, you want to know exactly how much exposure you have to Japan. Seems easy enough to simply look for any JPY currency positions or Japanese stocks, but what about Asian mutual funds? You need to measure Japan exposure for each one. What about companies like Aflac which derive a majority of their revenues from Japan? That’s a U.S. company with strong exposure to Japan. A similar problem exists with Softbank which we pointed out before as having a $90 billion position in Alibaba (a Chinese company) and a $27 billion position in Sprint (a U.S. company). These positions need to be broken out for every asset in the above portfolio to find out exactly how much exposure to Japan you have. You can hire some over-priced MBA to make a mess of that in Excel, or you can use an analytics tool like the one seen below from Addepar:
Founded in 2009, Silicon Valley startup Addepar has taken in $205 million in funding so far to develop a “financial operating system” that can handle all asset types denominated in any currency in order to give you a clear picture of what your entire portfolio looks like. Several days ago, Addepar made the news with a $140 million Series D funding round led by Joe Lonsdale’s 8VC. If the name Lonsdale rings a bell, you could be thinking of the well-known line of UK chav wear or perhaps the guy who co-founded Palantir Technologies alongside Peter Thiel and several others. We previously wrote about Palantir, the secretive firm that has had its share of controversies. In 2009, Mr. Lonsdale stopped working at Palantir to found Addepar as he noticed just how much need there was for a “financial operating system” that could be used by people who manage money for UHNW individuals on spreadsheets. It’s safe to assume that that technology being used at Addepar is the same technology that made Palantir the 5th largest startup in the world with a valuation of $20 billion.
Mr. Lonsdale has managed to slip out from under the controversy that has consumed Palantir in order to work 110-hour weeks (that’s 15.7 hour days, 7 days a week) in order to grow this thing fast. The $30 trillion we talked about earlier is the “total addressable market” (TAM) for Addepar and since nobody else seems to be providing such a solution he can grab market share very quickly. The 80/20 rule means that this is the easiest path to getting the most “assets under management” (AUM) on his platform which is something finance people use as validation. If other money managers have already allocated $600 billion to the Addepar platform in such a short period of time, it must be some darn good stuff.
Those of you who work in finance realize just what a complete mess the industry is in when it comes to fragmented technology solutions. Firms are hesitant to use SaaS solutions to manage money because they’re scared of the risk that comes with external partners. They continue to use internal homegrown technology solutions that are built by tech people who didn’t quite make the cut in Silicon Valley or are more risk averse and prefer the “stability” of a finance firm. Consequently, the software they build generally sucks. There are some exceptions though, like Blackrock’s platform “Aladdin” which is described as “an operating system for investment managers that seeks to connect the information, people and technology needed to manage money in real time“. Sounds a whole lot like Addepar, doesn’t it? If you’re not familiar with Blackrock (NYSE:BLK), they’re the world’s largest asset manager controlling around $5 trillion in assets (that’s a huge amount, but still just about 16% of Addepar’s TAM).
Now, the reason we wanted you to get your head around that $30 trillion number is because that’s what stands to make Addepar shareholders incredibly wealthy. According to an article in Fortune way back in 2012, Addepar had switched from fixed fees of .05% to variable fees. That fee of .05% is very small when you consider that Vanguard (which has one of the lowest fees of any firm out there) has an average expense ratio of .12%. If we just estimate potential fees for Addepar based on their previous fixed fee of .05%, then the potential revenues based on a total market of $30 trillion would be around $15 billion per year. That’s simply incredible. Of course Addepar no longer charges a fixed fee but instead charges fees based on the complexity of analysis that needs to be performed on a per-client basis. Addepar works with hundreds of family offices, wealth advisors, and private banks with total AUM of around $600 billion. That’s just around 2% of the total $30 trillion market that Addepar is targeting.
While Addepar is focused on getting the most bang for their buck by targeting the people that have the most money, nothing should stop them from starting to attack companies like MSCI (NYSE:MSCI), Axioma, and Factset (NYSE:FDS) who all offer costly “multi asset class risk management tools” in what is presently a very competitive space. Once Addepar has a run rate in the billions from their UHNW clients, this cash cow should enable them to start attacking smaller clients. While Addepar has their roots in leading-edge technology, companies like MSCI are still suffering from the horrible hangover that comes from once being part of a bureaucratic investment bank. With a fresh funding round of $140 million, Addepar will no doubt be marketing the heck out of their offering so that they can soon say they offer the biggest financial operating system anywhere – “the one financial operating system to rule them all“. At that scale, even Blackrock should be watching over their back.
Here at Nanalyze, we complement our tech investments with a portfolio of 30 dividend growth stocks that pay us increasing income every year. Find out which ones in the Quantigence report freely available to Nanalyze subscribers.