Lessons from eToro: How Digital Adaptation is the Key to Growth

In September 2023, Jefferies hosted its seventh annual Tech Trek, Israel’s largest institutional investor conference. The three-day event connects leading global investors with the Israeli tech ecosystem through a series of panels, presentations, and meetings.

During the conference, Jefferies spoke with Yoni Assia, Co-Founder and CEO of eToro, the world’s leading social investment network. Headquartered in Tel Aviv, eToro offers smart investing tools, multiple asset classes, and a social networking community to over 30 million users worldwide.

Assia discussed the genesis of eToro and its journey to success, highlighting his early inspiration, commitment to digital adaptation, and Israel’s growing role in the global financial and technology sectors. His insights offer a powerful roadmap to young entrepreneurs, detailing the strategies that drove eToro’s steady growth through shifting markets and continuous waves of innovation.

Note: Assia’s comments on Israel were made before the events of Oct. 7. The ongoing conflict may influence the region’s tech ecosystem and investment landscape.

The Founder’s Journey: Complementary Skills Support Innovation

Assia’s passion for finance and technology started in his early teens, as he learned to trade and develop software. While pursuing his master’s degree, he recognized the financial industry’s need for innovation.

“I was conducting research for Bloomberg on ways to simplify their terminal interface,” Assia shared. “I quickly realized the limitations of these platforms’ user experience. There was a huge opportunity to introduce internet innovation to the world of trading and investing.”

Assia brought a background in finance and computer science, and his brother, Ronen, was studying design. Their complementary skill sets laid the foundation for eToro: a user-friendly, visually engaging digital trading platform.

eToro’s Ethos: Embrace Digital Change

Founded on a bedrock of innovation, eToro’s 15-year journey has been marked by continual evolution and growth. The company’s success underlines the necessity of digital adaptation for long-term market leadership.

In 2010, tapping into the burgeoning world of social networking, eToro launched OpenBook, the world’s first social investment platform. The company continued to adapt in 2012, launching mobile apps to align with the rise of Apple and Android smartphones. Since then, eToro has consistently adapted its offerings, adding a diverse range of asset classes and enhancing its platform capabilities.

“Running a global company in a competitive sector isn’t easy,” Assia said. “Our vision has always been innovation, and that guides the design of our user experience; the new technologies we introduced; our integration of cryptocurrencies and machine learning; and more.”

The Market’s Future: AI Empowers Retail Investors

Looking ahead, Assia is particularly excited about artificial intelligence (AI) and its potential to support retail investors. With the growth of platforms like ChatGPT, everyday customers gain access to the sophisticated analytical tools once only available to large investment funds.

The democratization of technology and information is integral to eToro’s mission – and adopting new AI capabilities is the next big step.

“Suddenly, we have technologies that enable users to harness the wisdom of the crowd and leverage amazing analytical insights,” said Assia.  “At eToro, we’re integrating these technologies quickly, rolling out platforms designed to empower better investment decisions.”

Israel’s Entrepreneurial Ecosystem

When Assia launched eToro, he faced skepticism about the possibility of creating a global financial and tech institution out of Israel. He drew inspiration from his father, who faced similar challenges with his own Israel-based tech startup, Magic Software, in the 1990s. Both companies helped prove Israel’s potential as a tech hub, with Tel Aviv now a global center for innovation and entrepreneurship.

“Over the past 30 years, Israel has developed a robust entrepreneurial ecosystem,” Assia shared. “Today, people are building businesses, being inspired by their peers, and finding mentors to guide them. There are investors and talented entrepreneurs everywhere in Israel.” 

Yoni Assia’s journey with eToro reflects the remarkable evolution of both his company and Israel’s tech landscape. His experience – blending finance, technology, and a relentless pursuit of innovation – offers invaluable lessons for entrepreneurs everywhere.

The Voice of Asset Owners

How Allocators Aim to Invest in the Transition

The Industrial Revolution, the Information Revolution and now the Energy Transition. Despite challenges and skepticism from many corners, it is inarguable that the global energy transition is upon us. We spoke with global Asset Owners overseeing more than $10 trillion to understand how they are navigating one of the critical secular trends of our time.

The-Voice-of-Asset-OwnersDownload

The Delicate Pact Between Consumers and Corporates & Victory Cuts 

As he looks to 2024, US Economist Tom Simons believes that the extremely resilient post-COVID expansion is unlikely to continue for much longer. While the US consumer has defied nearly all expectations to this point, their sustained spending has largely been driven by under saving and consumers’ confidence in their ability to remain employed, leading them to spend a large portion of income. Although the business sector is currently confident enough in the consumer to avoid significant layoffs, Tom expects this confidence could begin to wobble as we enter 2024. While Tom expects some components of inflation will remain firm due to a lack of labor and a continually shrinking prime age workforce, he believes the overall reading should approach the Fed’s 2% target in 2H24. This, combined with increases in unemployment, should enable the Fed to make significant cuts to the Fed funds rate, which he sees bottoming at 3.0-3.25% in September. As a result of these cuts, Tom anticipates that the 1H24 growth slowdown will be short-lived, aided by both lower rates and a US consumer that is well-positioned for the long-term. 

Chief Market Strategist David Zervos says the most recent FOMC meeting, and resulting Fed commentary, suggests that the risk of overtightening is in balance with the risk of being too accommodative. This was underlined by the additional 50bp drop in the updated Fed funds rate forecast for YE24, despite just a 20bp trim to the core PCE projection, which brought it down to 2.4%. David says this change implies that the Fed’s focus on inflation-fighting credibility no longer needs to take precedence over employment goals going forward. As a result of their policy-making successes, he expects the Fed to make a set of modest “Victory Cuts” beginning next year.

Global Head of Equity Strategy Christopher Wood says the key explanation for the resilience of the American economy in 2023 remains the extraordinary base effect from the historic expansion in M2 supply in 2020. That’s why the recent contraction in US M2, which was the third largest in 103 years, is notable. The markets remain fixated on the Fed’s recent pivot, which Christopher views as bearish for the US dollar and therefore positive for emerging market equities. From a US and developed stock market standpoint, it should also be more bullish for cyclical equities relative to growth equities. However, he continues to believe that US Treasuries are in a structural bear market, especially with both political parties in the US unlikely to embrace meaningful fiscal discipline.

The Demise of ESG-Focused Activism

Earlier this month, prominent activist investor Jeff Ubben announced he was shutting down his environmental and social investing fund, Inclusive Capital, marking a blow to the ESG activism paradigm. Considered a leader in the then-burgeoning ESG activism sphere when it launched under Ubben in 2020, Inclusive shut down because its mission unfortunately has not been rewarded by public markets, according to various media reports.

The decision reflects the view that ESG focused funds can be risky as they seek to achieve investment returns while seeking longer-term ESG objectives. Fewer activist hedge funds have recently used ESG themes as a wedge to extract concessions from target companies given the challenge of aligning a fund’s investment horizon with what could be a much longer timeline for ESG focused themes.

Further evidence is seen in the shift of Engine No. 1’s investment strategy. In 2021, it won three board seats in a landmark proxy fight at Exxon, predicated on critiques of the Company’s environmental and social corporate performance. Recently, Engine announced that it will no longer deploy an activism strategy and voted its shares against a shareholder climate resolution at Exxon last year. The fund now invests in private companies, including mining assets with poor ESG profiles.

Hedge fund activists have for many years targeted public companies’ financial, operational and governance performance as a basis for demanding corporate finance changes. Though we believe the pure ESG activist is waning, we believe ESG critiques will still appear if directly impacting a target company’s performance. It is still imperative companies take a rigorous and proactive approach to investor engagement well before the arrival of an activist.

Recent Trends in Global China Business Restructuring

There is a burgeoning trend of multinational corporations (“MNC”) actively restructuring their China businesses through any number of divestitures and / or carve-outs to realign their balance sheets and maximize shareholder value.

It’s a departure from the start of the new millennium through 2018, when one of the fundamental pillars of every good corporate business plan was growing exposure to China. In accordance with predictions that the 21st century belonged to China, this massive, homogenous market of over one billion people was opening up, gentrifying rapidly, and presenting almost limitless potential to global corporates. It seemed that every Fortune 500 CEO was constantly thinking about how to capitalize on and secure their company’s share of the China dream. 

Fast forward to 2023, and China now finds itself often at odds with former western trade partners resulting in an entirely different state of play:

The result is that every MNC board of directors is now focused on its “China Plan B” strategy. Board members are asking themselves what the best way is to handle an onshore China business that, for multiple reasons, has failed to live up to expectations and faces severe headwinds for the foreseeable future.  It’s led to a wave of restructuring, including:

  • In 2012, a joint venture between Guangzhou Automobile Group Co., Ltd. (“GAC”), Mitsubishi Motors and Mitsubishi Corporation (“Mitsubishi”), was established and started its operations as the company responsible for production and sales of Mitsubishi Motors products in China.
    • The ownership breakdown: GAC (50%), Mitsubishi Motors (30%) and Mitsubishi (20%).
    • On September 27, 2023, it was reported that Mitsubishi had decided to withdraw from automobile production in China and exit the JV with GAC. GAC will take full control of the joint venture and convert the plant to produce EVs.
  • Cargill, one of the top poultry producers in the U.S., has operated in China for more than 50 years in the field of food and agricultural products.
  • In 2011, privately-owned Cargill started its China poultry business, including breeding, raising, and processing chickens in Chuzhou in eastern Anhui province.  In 2019, Cargill announced the opening of an additional $48.8 million poultry plant in Chuzhou to address the growing demand for poultry in the country.
  • Recent factors such as the Ukraine-Russia war and COVID-19 have greatly compressed the margins of livestock farms in China.
  • In May 2023, Cargill announced it agreed to sell its China poultry business unit, Cargill Protein China, to the Greater China-focused private equity firm DCP Capital.

Most MNCs still believe in the long-term potential of China’s marketplace and many have chosen to retain a minority stake in the original business, enabling them a “second bite at the apple,” assuming the business thrives under its new owner. Many MNCs also don’t characterize these restructurings as “exits” from China, instead describing them as strategic decisions to structure the business in a way that is more flexible and adaptable to the fast-changing dynamics of the China market. Regardless of which route or structure the MNC decides, the engagement of a financial advisor deeply familiar with the MNC’s business, the local competitors in China and the local Greater China-focused PE network, can provide a company with the insight required to make the most well-informed decision to meet their strategic needs.

Expect a More Active IPO Market in 2024

After two years of limited IPO activity, we are cautiously optimistic about 2024. 

  • The strong equity market performance in 2023 (S&P 500 +[23]%, Nasdaq [+42%], and Euro Stoxx 50 +[20%]), combined with reduced volatility has companies and financial sponsors reevaluating their IPO plans and timing. 
  • We have recently seen an acceleration in private companies starting, or in some cases, re-starting their IPO processes. 
    • With US elections later in 2024, we expect Q2 and Q3 to be the most active windows for IPO execution.
    • While the increase in IPO activity will be gradual, we recommend that anyone considering a 2024 IPO should engage in timing discussions now. 

Performing Issuers should take advantage of the strong market window

Issuers should take advantage of strong technicals and robust investor demand to pursue a variety of opportunistic transactions including refinancings, repricings, and dividend deals.

  • As of December 15th, YTD dividend volume was up 170%+ from the full period the year prior, from $5.9 billion to $16.1 billion, still low compared to historical levels.
  • For the week ending December 15th, there was $11.2 billion in gross launched loan volume all for opportunistic transactions.
  • Following the dovish Fed meeting in December, secondary levels surged to YTD highs, which will allow issuers to pursue further opportunistic transactions in January.
  • The broad loan index is at 96, the highest level since May 2022.
  • with 54% at 99 or higher, the highest levels since January 2022.

Here are a few examples of transactions Jefferies has recently led that capitalized on these more favorable conditions:

  • Jefferies was Sole Arranger on Medallion Midland’s repricing of their $872 million First Lien Term Loan.
  • Medallion, backed by Global Infrastructure Partners, is a crude oil gathering/intra-basin transport system in the core of the Midland Basin of the Permian, with 1,240 miles of pipeline.
  • The loan was repriced to S+350 from S+CSA+375, allowing the company to lower its weighted average cost of debt.
  • Due to strong investor demand the loan was upsized by $50 million in market.
  • Jefferies was Left Lead Arranger on CPM Holdings’ $1.215 billion First Lien Term loan, with proceeds from the deal used to refinance existing debt and fund a distribution to shareholders.
  • The First Lien Term Loan priced at S+450, 0.50% floor and 98.5 OID.
  • As a result of oversubscription from investors, the First Lien Term Loan was upsized by $85 million to $1.215 billion, and pricing was tightened from S+475 to S+450 and OID was tightened from 98.0 to 98.5.
  • The Company was able to address its upcoming 2025 maturity while opportunistically funding a dividend to shareholders.

Issuers should also look to raise incremental debt, which enables them to refinance expensive second lien debt and add cash to the balance sheet for future M&A. As of December 18th, YTD incremental / add on volume was up 71.16% from the full period the year prior, from $50.77 billion to $86.90 billion. There are several recent examples of Jefferies facilitating incremental debt transactions including:

  • Jefferies was Lead Left Arranger on Summit Behavioral’s $200 million incremental First Lien Term Loan, with proceeds used to refinance the company’s Second Lien Term Loan.
  • Summit Behavioral Healthcare is a behavioral health services provider with a focus on substance use disorders and acute psychiatric treatment.
  • The incremental First Lien Term Loan priced at S+CSA+475, 0.75% floor and 99.25 OID.
  • Due to strong market demand the add-on priced tight of talk.
  • Jefferies was Sole Bookrunner on the recently completed $200 million add-on for Icahn Enterprises to the Company’s existing 9.750% Senior Secured Notes.
  • Jefferies priced $500 million of 5-year Senior Notes on December 12th and was able to tap the market a few days later for an additional $200 million on December 15th.
  • Icahn Enterprises took advantage of the strong market to clean up its capital structure by refinancing its existing notes due in 2024 while adding additional cash to the balance sheet.
  • Jefferies was Sole Arranger on Fairbanks Morse Defense’s $210 million non-fungible incremental First Lien Term Loan, with proceeds used to refinance an acquisition bridge loan, pay down the company’s ABL revolver, and add cash to the balance sheet for general corporate purposes.
  • Fairbanks Morse Defense, backed by Arcline Investment Management, provides propulsion systems, ancillary power, motors and controllers for the US Navy and US Coast Guard.
  • The First Lien Term Loan priced tight of talk at S+CSA+525, 0.75% floor and 98.0 OID.
  • The Loan was met with strong lender demand and was upsized by $25 million in market

“Hybrid” Capital as a Solution in an Elevated Interest Environment

In the current elevated interest rate environment, highly levered companies with floating-rate debt are facing increased debt service burdens that can potentially strain the company’s liquidity. In these circumstances, companies that require new capital to refinance upcoming debt maturities, fund ongoing business, and/or fund incremental growth should consider raising “hybrid” capital in the form of structured/preferred equity as an alternative to raising secured debt.

This capital can be structured to meet the idiosyncratic needs of a company as “hybrid” capital providers are typically sophisticated investors with flexible mandates that allow them to design bespoke solutions. This capital can also be provided directly by sponsors. Proceeds from the financing can be used in variety of ways depending on the circumstances, including the repayment of high-cost debt, the funding of cashflow deficits, or fund acquisitions.

Hybrid capital can:

  • Reduce cash interest burden to extend liquidity runway;
  • Help achieve amendments/waivers from existing lenders related to covenants or upcoming maturities;
  • Reduce overall leverage to facilitate the refinancing of an upcoming maturity;
  • Provide financing for growth investments that otherwise might not be available under the constraints of existing debt; and
  • Be structured to limit dilution to existing equity holders.

Pari Plus Transactions: Advancing Beyond Double Dips in Liability Management Transactions

As discussed previously, “Double Dip” financing transactions have gained significant traction in the last year as a new liability management tool that highly levered companies use to raise incremental capital to fund liquidity and/or refinance existing debt. Companies in need of new capital that are evaluating a Double Dip transaction should consider whether structuring the Double Dip as a “Pari Plus” financing is a viable alternative.

Like a Double Dip, a Pari Plus financing is structured to provide a new money loan with additional credit support beyond a pari passu secured claim in the amount outstanding on the loan. The difference is in the nature of the additional credit support provided to the new money loan.

  • In a Double Dip transaction, the new loan receives a pari claim against the credit group’s assets via an intercompany loan (1st dip), and duplicate claims in the form of a pari guarantee from the existing credit group (2nd dip).
  • In a Pari Plus financing, the new loan receives a pari claim against the credit group’s assets via an intercompany loan (1st dip), PLUS a guarantee from additional guarantors outside the credit group (2nd dip).

In both instances, recovery on the new money loan remains limited to the amount owed on the loan, but the additional claims/guarantees provide significant credit enhancement for lenders, particularly in distressed situations where there is a risk of below par recovery.

A Pari Plus transaction would have different considerations for existing creditors and new money lenders as compared to a Double Dip:

  • New money lenders would have a more favorable view of a Pari Plus structure, as the new loan’s recovery benefits from the value of additional assets from outside the credit group in addition to the pari claims.
  • Existing lenders would have a less favorable view of a Pari Plus, as the additional guarantees provided in the 2nd dip are structurally senior to existing debt.

A Pari Plus transaction provides many benefits for companies, sponsors and creditors over the traditional liability management tools (uptiers and dropdowns):

  • Allows company to raise new capital which might not otherwise be available;
  • Lower cost of capital than would be available for pari secured debt;
  • Not required to be implemented in a non-pro rata fashion;
  • In contrast to an Uptier, the new loan does not prime existing secured creditors on their collateral; instead the new loan has a structurally senior claim on assets outside the credit group; and
  • In contrast to a Drop Down, no assets are transferred away from the existing secured creditors’ collateral package.

Similar to a Double Dip, a company’s ability to implement Pari Plus transaction largely depends on a company having sufficient secured debt capacity, flexibility on how pari debt capacity can be used, and asset value outside the credit group.

Sponsor-backed companies that employed the Pari Plus variant of Double Dip transactions in 2023 include Sabre and Trinseo.

The recent wave of Double Dip and Pari Plus transactions have not yet been tested in bankruptcy court. In the meantime, companies, sponsors and creditors should incorporate the Double Dip and Pari Plus structures into their liability management playbooks.