Interviewed By Foo Boon Ping
Donald Lacey, managing director and chief operating officer of Ping An Global Voyager Fund discusses the investment philosophy of the company, the themes that shape its view on the future of finance and the impact that COVID-19 has on the industry
In 2017, Donald Lacey left investment banking after witnessing that deals shifted "inexorably to always have a technology component". He joined Ping An Group in May that year to establish Ping An Global Voyager Fund, a $1 billion growth stage venture investment vehicle with a mandate to invest in tech businesses to accelerate Ping An's technology transformation and build up its expertise in the fintech and healthcare-related areas.
The insurance giant reportedly invested $7 billion in research and development between 2009 and 2019 and will invest RMB100 billion ($15 billion) in the next ten years. It is one of the first financial institutions to move its entire business to the cloud and has developed robust capabilities in artificial intelligence (AI) and blockchain technologies.
Lacey had previously worked at Citigroup, where he was managing director in a variety of corporate and investment banking roles across Asia Pacific. He led the bank’s advisory efforts on numerous cross-border M&A and capital raising transactions for Asian insurance, banking and technology firms. Lacey started his career as a financial analyst at Goldman Sachs in New York, after getting his science and doctor of law degrees from the Massachusetts Institute of Technology, and Harvard Law School.
The following are key points that he discussed with Foo Boon Ping:
Here is the full transcript of the session:
Foo Boon Ping (FBP): Where does Ping An Global Voyager Fund fit into Ping An Group’s overall technology investment strategy and approach?
Donald Lacey (DL): Ping An allocates a tremendous amount of resources every year to research and development. One of the great things about working at Ping An is you're surrounded by absolutely world-class data scientists, programmers, developers, and so we have a lot of capabilities in-house. It was very clear to the founder and management team that you cannot innovate everything in-house and the Voyager fund was originally constituted to make sure that we were accessing interesting opportunities on a global basis. We think of ourselves as a growth stage investment vehicle.
Platformisation of technology functions and digital ecosystems that define the future
DL: It revolves around two key themes and the first overarching theme is that of platformisation of the functional stack of traditional financial institutions. If you look at a bank or an insurance company today, the processes that they use to execute their historical mission of extending credit and underwriting risk, are very idiosyncratic that vary dramatically from one institution to the next. They are generally very clunky from a technological standpoint. Oftentimes you're dealing with a bank that's been around for 200 years. There have been a million different acquisitions and systems that haven't been integrated very well.
There's a lot of papers still in the system. There's a lot of overarching and overlapping technologies, things don't always work, a lot of antiquated technology. There are people within fintech who look at the current tech stack at most banks and insurance companies and say, “This isn't good. I don't like it. My mission in life is to put Citibank out of business”. There are people who think that way. We don't think that way. We think that's a pretty unrealistic way to view the world.
We think that view understates the inherent advantages that the Citibanks, JP Morgans, MetLifes of the world have. For a lot of reasons related to public policy, regulators are unlikely to be supportive of a world where the entire financial infrastructure is just swept away. And there's this new wave of incumbents who take everything over. We think the story of the future is going to be one of dramatic change that affects traditional financial institutions. But it's not going to be a dramatic and wrenching process for traditional financial institutions. It won't be a process that results in their demise in the same way that Blockbuster went away at the hands of Netflix.
What we see is all of those idiosyncratic, manual, paper-based risky processes with potential for slowly going away and being replaced by Amazon Web Services (AWS) style platform processes that generally reside in the cloud. Platformisation, the redefinition of the functional stack of banking and insurance companies away from idiosyncratic, bespoke paper-based processes into a collection of processes that reside in the cloud, and are accessed on a transaction-by-transaction basis by financial institutions, is the way we see the future of the world going. And that's a big part of how we invest.
The other big vision that we have is the direction of travel and financial services around the proximate role of ecosystems in finance. We have 600 million digital users. We don't have that many customers. But we have 600 million digital users of different digital ecosystems across automotive and healthcare finance that we have built at Ping An Bank in China. Those digital users in our ecosystems generate over one third of our new customer traffic into our traditional financial services business. And we see the direction of travel for the entire industry but not everybody is going to own their own ecosystem. That's unrealistic.
We see those digital ecosystems as providing the logical point for origination and maintenance of financial relationships over time. And a lot of our investment strategy revolves around them.
Institutional heft to deal with Ping An and to bring its full resources to bear
DL: There are plenty of smart investors and very clever people with different kinds of advantages. But one thing we have that nobody else has is the ability to bring Ping An to bear upon a situation. We can be an anchor user or consumer of some product or service. We can give a promising fintech company in New York a distribution channel in China that they would never otherwise have.
Sometimes we can take the technology that we have built in China for our own use. We can deploy that into a fast growing but technologically under resourced company that has the right idea somewhere else in the world but doesn't have the kind of technology resources that we do to implement that vision very quickly. So we have the ability to deploy Ping An in ways that can be very helpful to a fast growing company in fintech or healthtech.
The view that we've taken is that if you are a company that is two guys in a garage in California, Berlin, New York, with an idea, you don't really have the institutional heft to interact productively with a business like Ping An.
We are a very agile tech-driven company in financial services. What we do is almost without parallel. We also have 1.4 million employees and agents based in China. We can be painful to interact with if you're two people in a garage halfway around the world.
The vision that we have embraced is one of waiting for companies that have gotten to the series C stage of their life, they have some revenues and a product. Instead of two people in a garage, they have 75 people with somebody in charge of business development. And it's at that point that it feels reasonable for us to expect to do neat things together. So we tend to invest in businesses that are consistent with that vision of the proximate nature of ecosystems, the platformisation of infrastructure, and we try to invest in companies that are at the series C level.
One good example is we have invested in a company in the United States (US) called Better.com. They are a mortgage tech company. The process of getting a mortgage in the US is very idiosyncratic from bank to bank, also very unprofitable, fraught with regulatory risks and errors. Nobody likes it. What Better.com has done is they've reimagined the mortgage origination and issuance process from end to end. They've created a completely digital process to facilitate that.
They're able to issue mortgages faster, cheaper, better than anyone else in the industry in the US. That's a consumer facing proposition but it's also importantly, a bank facing proposition. Because Better.com can go to a large bank and say, "Why don't you outsource your mortgage origination process to us, we'll do it for you on a white label basis?” This will resemble a SaaS relationship. You will have a smoother, cheaper and more efficient process that exposes you to less regulatory risk. This is exactly the kind of platformisation story that we're talking about.
FBP: The companies that you invest in, are you bringing that technology back into China? The mandate to accelerate Ping An transformation. What about all the financial KPIs in terms of returns? You answer to Ping An Group. The vision for venture capital is much longer term. But how much of an objective is on financial return?
Investing for financial return and potential to add value over the longer term
DL: We are absolutely bringing technologies from abroad into Ping An in order to do what we do better. We don't do it for every single company we invest in. There are approaches that different financial institutions take to innovation that I find fascinating. There's a whole range of different strategies that different banks and insurance companies, brokerage houses, asset managers take to innovation. One thing that you see companies all around the world do is they will start a very early stage accelerator incubator programme, “I started a fund with $75 million.
I find interest in very early stage companies that I give $500,000 to." That's an exceptionally risky form of investing. There are professional investors who lose lots of money doing that. And it feels like the height of hubris for a financial institution that doesn't really have a track record in that kind of investing to think that's going to be profitable.
If you are a financial institution looking to get something out of some innovative new company, it's really foolish to give $500,000 to three guys in a garage and expect that that's going to be transformative. And that it is going to give you a product or a service that you're going to be able to credibly deploy across your global trading desk. It's very unrealistic.
We see a lot of those programmes open to great fanfare. They're oftentimes shut down with very little fanfare a couple of years later and they lose a lot of money in the process. That doesn't feel like the right way for any financial institution to approach the topic of innovation.
When you get to banks, insurance companies and others that invest at a slightly later stage, you'll find people engaging in this debate about returns and the strategic impact of an investment. We think of ourselves as an investment vehicle. Our goal is to be a responsible steward of capital.
We've never seen an opportunity that we thought was strategically and incredibly additive but is going to lose a lot of money. There are some bank-, insurance-backed investors who will only invest if somebody in their organisation says, “I'm going to start using this thing tomorrow. And I'm going to sign an MOU (memorandum of understanding)”. That is not our approach.
We invest on the basis of financial returns. We seek companies that are going to be attractive investments. And we seek companies where, over the life of the investment, there's going to be a good chance for us because of who we are to add meaningful value to that company. That means that not every company we invest in we will be doing things with right away. The expectation is that should be a more natural process that emerges over the course of the relationship.
The problem with being too focused on the strategic impact right away is a very slippery slope. The moment you move away from financial return, you begin to find yourself being a cost centre. That doesn't seem like a great place to be. And it is possible to lose a lot of money if you ignore financial returns.
Financial institutions set up corporate venture funds because they perceive these seismic shifts once in a lifetime changes that are sweeping this industry. They want to be at the cutting edge of those giant transformative shifts. If you force yourself and your investing rubric into a mode of existence, where you only put money to work in things where some guy in accounting the agency force or the credit department says, “I want to use this tomorrow,” you subscribe to a very incrementalist thinking.
You're getting better at moving paper from point A to point B but you are missing the bigger trend that is going to completely upend the entirety of that process. For the things that we invest in now, for about half of them, we have meaningful engagement with.
We invested in a company called H2O.ai based in California. They do machine learning as a service, they have a product. Think of it as Microsoft Excel but for data science. We invested in that company over a year ago, and there are different use cases deep within Ping An, Ping An Bank, Ping An Securities, Ping An Life, and Ping An Property and Casualty Insurance where there are lots of individuals who are not data scientists who can make use of this tool to do much more interesting things with our data than we were able to do before because of this bottleneck of limited data scientists. So that's one cool thing that we've done.
FBP: Does it go the other way around? Does it open up opportunity for Ping An to be in the US in order to further businesses in those regions - in the US and Europe?
DL: Personally, I would be surprised if Ping An were to acquire a big balance sheet heavy traditional financial institution in Europe or the US. I would not imagine that would be on Ping An’s roadmap. There are a lot of really interesting ways for us to lead with technology. And I will give you one very tangible example.
We have partnered with one of our investee companies in Germany to develop a solution, an app and we have taken Ping An’s AI damage detection technology and we have incorporated that to a collection of databases in Europe that estimate repair costs and also estimate premium costs. We hit the database and estimate the damage using Ping An’s AI technology. It addresses a pain point that many people have around the world. That's the first app of its kind in Europe. And it's all powered by Ping An technology. So to be able to do that in partnership with a portfolio company of ours in Germany is kind of cool. That's one example of us taking China to the rest of the world, not just taking the rest of the world to China.
FBP: How does COVID-19 impact the thinking behind some of the business valuation models of the fintech that you invest in? Traditionally, fintechs are known for high burn rate, in order to build users with the hope of increasing valuation, rather than the actual business of earning revenue. How has that change?
COVID-19 has changed the landscape
DL: COVID has really changed the landscape. We all like to be retrospectively clever. I would love to tell you that this is something that we had mapped out in our grand plan and evolution. I can guarantee you that none of the many investment proposals I have submitted to our investment committee had a long list of risk factors that, prior to January, ever had potential worldwide pandemic as one of the risk factors to be aware of. We can't claim any credit for foresight. COVID has the effect of accelerating many of the themes that we have brought into long-term trends for the industry.
The idea of modernising your tech stack, moving to a more platformised modern system of infrastructure for financial institutions, has just been dramatically accelerated by virtue of everyone having to work from home. The concept of digital ecosystems playing an ever more important role in the life of the everyday consumer has only become true before COVID. I haven't talked at all about what we do in healthtech. A lot of what we do in healthtech is centred on telemedicine delivery of care and diagnosis at a distance. And that obviously has only accelerated because of COVID.
The developments of the first six months of 2020 have been beneficial for our theses. We cannot claim any credit for having seen this coming in advance. In terms of what it means for fintech, you really have to divide the world between the infrastructure enablement oriented opportunities and those stories that are more consumer facing.
Consumer facing fintech has been characterised by generally very high customer acquisition costs that give rise to the burn rate. It's not always easy to see how a lot of those businesses are sustainable. In particular, in Southeast Asia, many of the fintech stories there are not the infrastructure oriented fintech plays. Voyager would love to deploy some capital into Southeast Asia.
But frankly, there are very few fintechs in Southeast Asia that dovetail particularly well with our thesis of platformisation. Most of what you see in Southeast Asia, one hesitates to generalise but, a lot of the stories there are consumer or SME facing lending vehicles sometimes with a peer-to-peer or an on balance sheet component. And oftentimes the narrative there is, “I have some funding source, a collection of individuals I've dredged up and who participate on a peer-to-peer basis. Sometimes it's a giant credit line that I have from some big bank in Southeast Asia. What I have is an algorithm that, trust me, is really good at underwriting risk.
And then I go out and acquire customers who are oftentimes very expensive for me to acquire”. If that's all the story is, that really feels like a mono line consumer finance company or a mono line commercial finance company with an unproven credit underwriting strategy.
For many of the businesses that are in that space in Southeast Asia, areseeing quite disruptive credit events. A lot of businesses that are run by technologists is not a bad thing. But if the kind of business that you're running is a dressed-up version of an SME, consumer, commercial finance mono line, you really ought to have people in there with real financial institution experience.
And it's been striking to me to have conversations in the last three months where I talked to different people who run businesses like this and they really don't know how to think about leverage. It's just not a concept that they've thought about. They don't seem to fully appreciate that an NPL ratio is an inherently backwards looking metric. And many of those businesses are going to struggle because there will be significant credit issues that may lead to liquidity issues. It'll be a challenge.
FBP: The Voyager fund is about one third invested. With COVID-19, where are you extending your view of where the opportunities would be?
DL: One of a number of profoundly negative impacts of COVID is that you see small businesses around the world particularly stretched. Access to reasonable finance and financing solutions has always been a challenge for SMEs and it's a challenge that has only gotten worse in 2020. One of the things that is very interesting is finding intelligent ways to address that need. Different parts of trade finance and supply chain finance are ideal avenues to democratise access to finance for SMEs.
A lot of our focus right now is on finding companies that operate in supply chain finance and trade finance and finding ways to partner with them in ways that are mutually beneficial. If you think of the different sleeves of the functional stack of financial institutions, core banking software, we've made an investment there. Different kinds of credit mortgage origination would be another example. Different ways of accessing alternative investments would be another core area of function for a brokerage house. SME finance is an area where we have not historically put a lot of capital to work and we'd like to change that.
There are a lot of globally oriented supply chain finance software companies that have deep robust relationships with big anchor buyers like Procter and Gamble, IBM, Toyota. And you've got a couple of links further into the chain. And you have very small companies that oftentimes are in parts of the world where a US bank, for instance, couldn't appropriately serve them. The need is so small that you need better technology for accessing that opportunity. And addressing the long tail is a global exercise because many supply chains are multinational by nature. Anything that we do to address SME finance needs will have a China flavour to it but will also be global.
FBP: Talking about Platform-as-a-service (PaaS) in Asia, when Ping An has its own in terms of One Connect. And it's been looking for partners and potential collaborators in Southeast Asia. What would be the strategy in Asia to focus on OneConnect as the platform solution that you invested in?
DL: We spend a tonne of our time working with OneConnect and one of the things that I'm proudest at Voyager is, in a few cases, we've been able to use OneConnect technology. And we've been able to partner with OneConnect to internationalise that to different markets including Europe to do really neat and pathbreaking things in new markets that Ping An wouldn't have had the inherent ability to address directly.
We are expanding our auto claims technology to Europe and I think that's a cool thing - it makes customers’ lives in Europe better. It's a great example of how the technology that we have built in China is really pathbreaking on a global basis. We do a lot of work with OneConnect. It's hard to imagine a world where there is just one platform for financial institutions.
We don't see the future of the world as one where there is AWS or Salesforce and you, as the legacy bank, are locked into an omnibus relationship with just us. The world is an exceptionally diverse place with respect to customer behaviour, regulation, of entrenched local financial customs, and it's highly unlikely that you're going to have one platform to rule over everyone in the world. OneConnect absolutely has a role to play.
FBP: Talk about this trend towards embracing technology enablement instead of directly dealing with the business of providing finance.
China presages the trajectory of technology and financial services worldwide
DL: It is a very cool time to take a job at Ping An to establish a fund like Voyager. In my previous job, I was an investment banker. Over time, the flavour of the deals just shifted inexorably to always have a technology component. If it was a bancassurance deal, what everyone cared most about was the bank's online capabilities. If it was a life insurance company, the people who were interested in buying the life insurance company oftentimes were people who liked the app. If you were a property casualty company, all of a sudden you were very interested in partnering with online digital ecosystems.
And it just felt like the direction of travel was inexorably bringing technology and traditional finance together. I think that China really presages the trajectory of financial services to the rest of the world. You have very competent and credible competitors of ours in BAT (Baidu, Alibaba, Tencent) who are moving into finance. And you have financial institutions who are ahead of Western counterparts.
One of the big lies about finance is that “our data will save us”. I had a meeting about a year ago with the CEO of a big reinsurance company in Europe. He was complaining about all the problems he had accessing data. And I said, “Have you thought about transitioning to the cloud? That's something you could and should do”. And he said, “I don't want to do that because I'm afraid that I'll be too reliant on the cloud companies if I do that”. But in 2020, that's a lot like me telling, “My factory would work a lot better if I turned on the electricity, but I don't want to be beholden to the electric companies”.
There’s a point where you have to be more intelligent in your approach to the way you architect and access data. And if you're not, you're really in a compromised position. A great thing about Ping An is that there was transition to the cloud a long time ago and that you will see that elsewhere in the world. I think China presages that.
FBP: There is continuing skepticism about blockchain, whether it is a technology, solution looking for a problem, where current technology and processes that are industrialised cannot deal with efficiently? Is there skepticism about that technology having been developed, researched and applied in China?
DL: It's one of these somewhat controversial buzzwords. I don't think it is a buzzword that is quite the same currency as it did a few years ago. And part of that is because people have learned more about blockchain. It's become clear that there are some solutions that blockchain is exceptionally well suited to addressing. And there are other solutions where it's really not. There are a lot of latency issues in blockchain. There are a lot of areas of finance or commerce where blockchain is not likely to be a particularly good solution. So, it's definitely not a panacea.
There are undeniably areas where blockchain can play a role. Ping An has 600 dedicated blockchain engineers so we spend a lot of resources on blockchain. One area where we've had success in implementing blockchain is a low trust, not super high, frequency system. In China, banks will trade loans back and forth with one another quite a lot. We have built a blockchain-based platform to support that. That platform does about RMB12 trillion ($1.73 trillion) a year in volume. It's quite a scale application of blockchain. So, there are solutions. It's not going to be a solution for everything. Absolutely not.
FBP: What do you think of the rest of the world adopting some of these practices of Chinese banks? Would they shun it because it's coming out of China even though it is as efficient or more effective?
DL: How receptive is the rest of the world to fintech that originates in China? We're all about infrastructure-oriented solutions. When you engage with any international financial institution, they're going to have exceptionally competent and well qualified tech people who will crawl all over your solution and make sure that it meets all of their standards. And their standards are, by and large, exceptionally stringent. And once you get through that, there's a high comfort level with the solution no matter where it originates. So I don't see a tremendous amount of reluctance to engage with robust world-class fintech solutions from China. I don't see that as a real issue.
FBP: Is there this belief in the technology that it cannot be applied outside of China?
DL: We play host to a tremendous number of financial institutions from all around the world because China, for various reasons, is presaging the development of technology and financial services worldwide. Many people buy into that. I don't think that's a controversial statement. Lots of board directors from Europe and the US want to go to Shenzhen and see what that's all about. When I started at Ping An about three years ago, there was a clear undertone in those meetings that this technology is neat but it's irrelevant to Europe and to the US. It's irrelevant to Brazil because China is a different place.
There are different standards about privacy and I think that view has evaporated over time. I think it's evaporated for a few reasons. First of all, there's a broader acceptance of the reality that Chinese privacy standards are not so different from privacy regulation around the world. There are going to be small players who flout the rules. But if you're Ping An, you're not going to flout the rules. The standards that we have built do not represent an approach to privacy that is fundamentally foreign or different from what you might see in Europe or the US.
And people see the power of digital ecosystems in their home countries. And once you see the power of a digital ecosystem and originating new consumer financial services, relationships, you start thinking, "How am I going to intelligently retool my systems so that I am able to capture some new pipeline, that new deal flow?” If you have an antiquated infrastructure, you're not going to be particularly agile in embracing those new opportunities through new digital distribution channels. And that leads you naturally to wanting to revamp your infrastructure and learn more about what Ping An has done.
FBP: What do you see lying ahead for the future of open banking, its impact on your organisation, industry structure, and jobs?
DL: Open banking is a fun term. It's one of those terms that is very much in the eye of the beholder. It means different things to different jurisdictions around the world. It's very easy to say we have open banking in country X when you peel under the hood. And you ask yourself what does that really mean? You see digital banking licenses in a variety of jurisdictions around Asia. Retail banking is not an intrinsically high margin business. It is a business with certain scale advantages. And if all you're going to do is hand out a couple of digital licenses, I find it very hard to see how many of those digital banks are going to be particularly successful.
Without underlying regulatory support, Open Banking is only in name
I wonder how the neo banks are going to play out. But that's a different conversation from open banking. You can have digital bank licenses and not have anything that really resembles true open banking. What open banking means in many Asian markets, it doesn't mean much. In Europe, open banking is slightly better defined. But if a regulator just says, “You have to have open banking and we define open banking as you can check your accounts from different banks”. That's not interesting. It's not transformative. It's one of the reasons you see so few quality platformisation solutions, fintech infrastructure solutions coming out of the market in Southeast Asia and Hong Kong. It's because you don't have the underlying regulatory support for those. You have open banking in name but when you look at what you actually get, it's quite thin still.
FBP: Thank you so much, Don, for speaking with us.