Michael Katchen, Wealthsimple’s chief executive officer, seen here in their Toronto office on April 27, 2017, said last year that raising non-Power Corp. capital would increase investor confidence as the company works toward an initial public offering.Nathan Denette/The Canadian Press
Wealthsimple Technologies Inc. is in talks with several U.S. venture capital firms to raise $100-million-plus in a deal that would increase the valuation of the online financial services startup to more than US$1-billion, sources have told The Globe and Mail.
Sources familiar with the situation say Wealthsimple, which is trying to establish itself as an alternative to the big banks for millennial customers, has received at least five term sheets – summaries of the key elements of a proposed investment – from U.S. venture capital (VC) firms seeking to lead the investment. Their proposed terms would value the company at more than US$1-billion before the funds are received, they said.
The company hasn’t yet formalized its funding plans, and it’s possible no deal will happen, the sources said. The Globe is not identifying the sources because they are not authorized to speak publicly about the matter.
A spokesperson for Toronto-based Wealthsimple declined to comment.
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A financing led by a large U.S. VC company could help validate the six-year-old startup’s progress and reduce perceptions that it is too dependent on Power Corp. of Canada, which indirectly owns most of the company through three affiliates. Mike Katchen, Wealthsimple’s chief executive officer, said last year that raising non-Power capital would increase investor confidence as the company works toward an initial public offering.
With $8.4-billion in assets under management, Wealthsimple provides automated wealth management services that quickly design an investor’s portfolio based on age, financial goals and risk tolerance. Mr. Katchen has attempted to broaden Wealthsimple’s offerings, adding a high-interest savings account, a tax-filing service and an online digital stock-trading platform that also offers direct access to cryptocurrencies.
While Wealthsimple’s robo-adviser business still accounts for most of its assets under management, the sources said VC firms are particularly drawn to its online brokerage business, which has seen a huge spike in demand this year.
According to the research company Investor Economics, Wealthsimple accounted for 18 per cent of new trading accounts in Canada in the second quarter, second over all nationally, and up from the 12 per cent reported in the first quarter. The sources said Wealthsimple’s brokerage business is on pace to triple in size this year compared with 2019. Before the pandemic, the company had projected it would double.
Wealthsimple is Power’s biggest bet on a fintech (a financial technology startup), and Power company officials have said in previous interviews it is a way to reach a younger segment of investors that aren’t typically clients in Power’s other companies/ subsidiaries.
Three Power-controlled entities - Power Financial Corp., wealth management firm IGM Financial Inc. and VC firm Portag3 Ventures - have collectively invested $315-million in Wealthsimple, and hold a combined 70.1 per cent of its equity and 85.3 voting control.
The growth in Canadian do-it-yourself investing echoes a similar push into stock trading this year in the United States through the platform Robinhood, as young investors looked to take advantage of the early pandemic-related sell-off and the surge in prices for technology stocks.
Like Wealthsimple, Robinhood provides commission-free trades for stocks, exchange traded funds and cryptocurrencies. But Robinhood also offers access to risker option trading. The U.S. company – which surpassed 13 million users this year- has been described as looking more like a video game, with vibrant colours and digital confetti. Some young investors accumulated big losses after misunderstanding the risks of some trades.
Wealthsimple is more conservative, stressing low-risk funds and long-term investing. But data obtained by The Globe suggest Wealthsimple’s clients – 75 per cent of whom are 18 to 34 – are also frequent traders. The median client makes two trades a day, well above industry averages; some competitors say their own users trade six to eight times monthly.
It’s unclear whether the steady growth in Wealthsimple’s trading business or interest in stock trading will continue if share prices take a sharp downturn.
This raises larger questions about where Wealthsimple fits in for Power, which has posted lacklustre shareholder returns for years.
Power CEO Jeffrey Orr and executive vice-president Paul Desmarais III – the son of Power Corp. chairman Paul Desmarais Jr. – have pushed into alternative assets that promise greater returns, creating funds to invest in venture capital, private equity, private credit such as middle-market lending, and royalties from drugs, medical devices and diagnostics.
Much is riding on the continued success of Wealthsimple, which partnered with Power Financial in 2015. The startup’s first four financings were funded by Power entities; its fifth and largest, in 2019, was led by Allianz X. The digital investment arm of German insurer Allianz Group invested $50-million – for just less than 10 per cent ownership – while IGM and Portag3 contributed $50-million combined.
Future success for many online financial service startups in Canada and the United States depends on how quickly they can build scale and gain profitability for investors. According to Power’s securities filings, Wealthsimple doubled its client count during the first six months of 2020, to more than 500,000 from 250,000 on Dec. 31, as assets under management increased by 33 per cent to $8.4-billion. Wealthsimple also more than doubled its client count in 2018 and 2019, while assets under management nearly quadrupled to $6.3-billion during the two-years ended Dec. 31, 2019.
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