A fintech company that aims to open the controversial practice of securities lending to a much wider market of investors has begun targeting asset managers. Sharegain, a UK-Israeli start-up, says it has already signed up one European fund manager to its platform. Though long established, securities lending is a practice that is rarely acknowledged by the investment industry.
Up to $2.3tn of assets are lent globally, generating more than $9bn of revenue for owners. Asset managers that have suffered declining fee revenue and squeezed profit margins this year are increasingly looking at securities lending to provide additional income. But the practice has attracted controversy, with Elon Musk, chief executive of Tesla, railing against short selling borrowers of his company’s stock, while the largest US banks have been hit by an antitrust lawsuit over their tight hold on the lending market.
Mick McAteer, co-director of the Financial Inclusion Centre, a consumer rights research group, said individual investors engaging in securities lending would need to be aware of the risks.
“Much fintech innovation is harmless if socially useless,” he said. “But from time to time there are ‘innovations’ that are clearly risky. Anyone using this would need to go into it with their eyes wide open.”
Boaz Yaari, chief executive of Sharegain, denied that his service was risky for users.
“Lending is very simple — it’s the borrowers who need to be sophisticated,” he said.
The principal borrower of the securities on the platform is Barclays, which uses BNY Mellon for collateral services. Sharegain launched last year and focused on individuals with more than £500,000 of tradeable assets and their advisers. It has attracted more than $1bn of securities on its platform. So far it has raised $12m in two funding rounds from four venture capital funds and received approval from the UK’s Financial Conduct Authority.
It receives an average of 20 per cent of stock lending revenue from its customers. The company has now turned its attention to bringing asset managers on to the platform and has already signed up one unnamed European retail fund manager. Securities lending revenue has become increasingly important for some large asset managers, especially those specialising in low cost index exchange traded funds.
BlackRock, the world’s largest asset manager, made $597m of revenue from the practice last year. Mr Yaari said this showed how securities lending was not only safe but a big opportunity for individual investors.
“If BlackRock are doing it with our assets, why shouldn’t we be able to do it ourselves?” he said.