Venture Capital, Risk Management and the Dealing Room

I remember an old spy book from the 1960s that said “if you notice someone once, it’s chance; if you notice them twice, it’s a coincidence; but if you notice them three times, they’re following you”.  So, remembering that type of “pattern recognition”, when I was in New York last week I was interested to come across two situations where major financial institutions are making plans to move away from specific technology providers in order to de-risk their own use of IT for trading.  The reason that they gave was that those two technology providers have been bought up by private equity/venture capital firms.  And then a little lightbulb went on – because I quickly recognised not just three but at least four trading technology providers that are currently in a similar situation.

Having worked with the venture capital industry in the USA and Europe in the 1990s, one thing that I Iearned from that sector was that before a private equity firm invests in anything, it first plans its exit.  The intention is generally not to be a long-term investor but to increase the value of the investment and then to sell it on to someone else (preferably via an IPO to get the best price for it).

With a depressed market for financial technology and a global economic crisis, perhaps now is a good time to buy technology providers while their corporate value is low.  But that also raises the issue for the customers of those firms as to what the future may hold.  In a sector where market regulations like MiFID and industry guidelines like Basel II address operational risk – not just in terms of business operations but in terms of technology operations as well – considering the future of financial technology suppliers also has to be part of an institution’s compliance regime.