Specialist
Former Executive at Apex Clearing Corp
Agenda
- Operating environment for Apex Clearing, touching on TAM growth rate
- Competitive positioning – Apex Clearing vs DriveWealth, Embedded Financial Technologies and other upstarts in addition to legacy players
- Customer perception around Apex Clearing's decision to outsource vs insource, including whether it has customer insourcing risks ahead
- January 2022 acquisition of PDQ Enterprises and fallout of attempt to go public
- Apex Clearing's guidance on clients, customer accounts, revenue, adjusted EBITDA and more
- Outlook for 2022 and beyond, highlighting potential M&A and regulatory considerations
Questions
1.
What are your thoughts on the brokerage-as-a-service industry and Apex Clearing’s operating environment? What are some key trends or drivers we should pay attention to?
2.
How would you size the market or potential growth rates across Apex’s customer types, end types, end markets or offerings? You mentioned the assets shift is probably early innings and that there’s a large addressable market.
3.
Where could the growth story go wrong? You mentioned the market’s weight and size is essentially retail investing and that you think it’s more so that the assets will grow, if I’ve got that correct. However, new account activity has had some slowdowns, particularly in H2 2021 and into 2022. Even other indirect indicators, for instance Robinhood has now fallen in terms of app downloads on the iOS store. Is the market at risk from a reduced steady-state or post-pandemic growth rate from here on out?
4.
Could you estimate how market growth might develop? If the market was growing at X% during coronavirus, could it revert down to Y% over the next 3-5 years?
5.
What are your thoughts on customer insourcing risks for Apex? Customer insourcing has come up historically with Apex or DriveWealth and we have seen large customers such as Robinhood choose to insource. What are the puts and takes for Apex’s customers – such as Stash or Webull – of outsourcing vs insourcing functionality?
6.
Are there any large material customers which might be at risk of churning out over the next 3-5 years, given the hurdles you mentioned about needing the balance sheet and technical know-how? I know you said insourcing is more attractive economically so more customers might do this.
7.
How would you assess Apex’s positioning vs more tech-forward peers? There are established players such as DriveWealth but also those in earlier stages such as Embedded or Alpaca. How does Apex compare against legacy players such as Fidelity, Pershing or Schwab?
8.
How might the competitive dynamics between Apex and DriveWealth develop if the latter executes a more holistic product set? It sounds as if DriveWealth’s easy-to-integrate solution has helped it gain, but our previous experts noted its lack of options products as a real gap and big drawback. Product expansion has reportedly been on the roadmap for years. Would you expect more head-to-head competition between Apex and DriveWealth or potential customer churn from Apex to DriveWealth?
9.
Do you think Apex still has an edge after being the first clearing firm to quickly onboard clients with KYC [know-your-customer], AML [anti-money laundering], fraud and so forth? Where is the company still ahead of DriveWealth and where might it be at risk of falling behind?
10.
How do you think about the risks of new entrants or Broadridge potentially disintermediating Apex Clearing over the next 3-5 years? You mentioned expecting less competition for new entrants, but previous experts [see Apex Clearing – Customer Insourcing Risks & Growth Outlook – 17 May 2021, DriveWealth – Fintech Brokerage Infrastructure – 13 July 2021] have suggested StoneX or Wedbush could pursue retail. Broadridge, where I believe Apex and other clearing firms currently sit on top, could become more direct-to-customer and disintermediate clearing firms.
11.
How high are the barriers to market entry?
12.
Do you think Apex could successfully compete for RIAs [registered investment advisors] vs legacy or incumbent players? The RIA segment is a complex market requiring a different level of service, such as those of Schwab or Fidelity. Mutual funds are still in great demand for RIAs and Apex seems to have a limited product offering there.
13.
Where is Apex after the plan to go public with a SPAC [special purpose acquisition company] fell through in December 2021? This move would have included an additional liquidity injection. How might the company’s strategy develop under the new circumstances?
14.
What do you think Apex’s team want to do with the company? You mentioned the same teams are in place, but there has been a lot of shuffling at that C-level. What actions might you expect?
15.
Could you expand on Apex’s January 2022 acquisition of PDQ Enterprises, parent company of Coda Markets? What does this mean for Apex, given it has more of an auction-based ATS [alternative trading system] and smart order router?
16.
What’s your outlook on Apex’s growth? Assets in custody have tripled since 2017 to about USD 100bn. The company announced more than 200 firms use it as a clearing house, custodian or both, which is a 35% CAGR over the last three years. The revenue growth projection for the proposed SPAC deal was a 21% CAGR through 2023. What do you expect from the company over the next 3-5 years? Do you think the current growth rate is sustainable and what’s the risk with hitting some of those predicted targets?
17.
How do you think about the cryptocurrency opportunity for Apex? The company announced more than a million crypto accounts opened in 2021. How would you compare it as a monetisation opportunity vs the existing revenue lines?
18.
How do you think about potential M&A for Apex and competitors such as DriveWealth? Apex is now an acquirer but could it be a longer-term acquisition target by a larger strategic or financial sponsor?
19.
How do you think about potential industry disruptors? Our previous experts have suggested tokenised securities could turn the industry upside-down, given the technology is built on batch processes as you mentioned. Would the clearing firms exist or go away, or could there be broader price compression on commission on options or payment for order flow? Where might the growth story go wrong and what are some potential risks that could develop?
20.
Is there anything that you feel the investment community commonly gets wrong?
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