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Market Pulse
Monday, March 6, 2023

Fintechs helping millennials onto the property ladder, Buffett supports buybacks, & turbocharged UK fintech

Welcome to this week’s Market Pulse. In this week’s edition we have:

  • Fintech innovation to get millennials on the property ladder
  • Buffett still supports common-sense share buybacks. Not everyone does
  • UK Fintech - turbocharged

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It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Fintech innovation to get millennials on the property ladder

It’s not just in the UK where millennials are struggling to get onto the property ladder. According to a study by Apartment List, 70% of millennials renters in the US can’t afford to buy a house[1]. In an effort to address this issue, Better.com recently announced that Amazon employees will be able to use their vested stock as collateral for home loans[2]

To keep cash expenses lower and to allow employees to participate in long-term growth, companies often reward employees with a mix of cash and shares in the company. But if you want to buy a house, banks usually need a cash down payment before they’ll give you a mortgage. And selling your shares when you need money is not always the best option - there are other factors to consider such as your individual tax liabilities or missing out on future share price appreciation. 

Better.com’s new product, Equity Unlocker, is designed to enable Amazon employees to borrow the down payment using their Amazon shares as collateral. This means employees, in theory, wouldn’t have to sell their valuable shares to raise the necessary cash to get on the property ladder. 

Better.com charges a competitive rate of interest on these loans compared to the rate offered by margin lenders which is another option[3]. With margin loans you also pledge your investments as collateral but, if the value of your investments falls below a certain value, you get a margin call. This means you need to top up with cash.

Borrowing against your investments is a service private banks routinely offer to high-net-worth clients. Now it seems like innovative fintech lenders are getting in on the game and offering the same service to people looking to buy a home. In the future, companies like Amazon, where you have the option to use your stock as collateral, could be viewed as a more desirable place to work and thus have an edge competing for highly skilled talent. Given the UK’s strong position in fintech and millennials’ desire to get on the property ladder, this is a trend that could quickly make its way to this side of the Atlantic. 

2) Buffett still supports common-sense share buybacks. Not everyone does

Warren Buffett recently shared his latest thoughts with shareholders through his annual shareholder letter[4]. As usual it was filled with investment insight and he once again talked about the merits of share buybacks. Corporate share buybacks have however been a contentious issue in the US of late. 

Companies have a few things they can do with excess cash. They can choose to reinvest it into the business, to buy another business, pay down debt, just keep the cash in the bank or can choose to return cash to shareholders via dividends and buybacks. Making sensible, long-term capital allocation decisions is very important for the future of any business. Companies need to constantly decide where their money will be best spent. 

Companies often pay employees by issuing new shares and, to prevent existing shareholders from being diluted, companies often do share buybacks to offset any share issues. When a company buys back more shares than it issues, it reduces the total amount of shares outstanding. Fewer shares outstanding means a higher ownership stake for all the remaining shareholders. 

Companies can also use share buybacks to change their capital structure. The cost of debt is generally lower than the cost of equity[5], so increasing debt in your capital structure can lower your weighted average cost of capital and, assuming interest payments on debt are tax deductible, increase your valuation. Apple, one of Warren Buffett’s largest holdings, has done substantial buybacks over the last few years and this has materially changed their capital structure[6]

According to Buffett, owning more of an undervalued asset is a good thing but the caveat here is important. Companies must buy back their shares at a ‘value-accretive’ price. If a company overpays when it buys back its own shares it is destroying value for the remaining shareholders. 

Not everyone agrees that share buybacks add value. Some US politicians [7] feel the cash can be better spent investing back into the company, developing innovative new products or even raising wages for employees. As senior management often gets paid a portion of their compensation in company shares[8], there are some who believe that buybacks, especially when funded by borrowings, are boosting share prices in the short term while potentially jeopardising long-term growth[9]. In response to some of these concerns, the US recently introduced a relatively modest 1% tax on corporate buybacks. While 1% doesn’t seem like much, if this is the start of a trend towards higher taxes on buybacks, it could push companies to revisit their capital allocation policies.

3) UK Fintech - turbocharged

The UK government formally launched a new initiative aimed at boosting growth and innovation in the UK fintech sector. The goal of the new Center for Finance, Innovation and Technology (CFIT) is to boost fintech startups in the UK to achieve global scale[10]

Over the last decade, the UK has emerged as one of the global fintech hubs with more than 2,500 fintech companies(11]. In 2020, only two UK fintechs achieved the much coveted unicorn status, companies valued at more than $1bn. Today, there are more than 20 [12]. In 2021, the Kalifa Review of UK Fintech set out recommendations for how the UK can build on its existing fintech strengths and create the right framework for continued innovation. CFIT is a direct result of the findings and recommendations of the review[13].

One of the objectives of CFIT is to work with the government, regulators and the Bank of England to make sure rulemaking is aligned with longer term goals to support growth and innovation in the sector. There are also plans to establish a fund to allow UK pensions funds to invest into some of these higher growth areas. 

CFIT also wants to make sure the next generation of entrepreneurs are being supported across the UK, not just in London. To achieve this they are setting up financial innovation hubs across cities in the UK. And, in partnership with leading universities, CFIT wants to offer placements for students at some of the UK’s top financial services firms to develop local talent. 

The UK fintech sector is vibrant and it attracts talent from all over the world. Included in the recommendations from the Kalifa review was a fast-track visa system to help fintech startups find the talent they need. As it stands, more than 42% of all fintech workers are from overseas[14]

Over the last decade the UK fintech sector has grown 12x faster than small-and-medium enterprises more generally[15]. To maintain this strong momentum the government and regulators can’t rest on their laurels. CFIT is a strong indication that they don’t intend to. 


[1]  https://www.apartmentlist.com/research/2019-millennial-homeownership-report

[2] https://www.wsj.com/articles/amazon-employees-will-be-able-to-use-stock-as-collateral-for-home-loans-183b6acc?mod=hp_lead_pos7 

[3]  https://www.businesswire.com/news/home/20230228005684/en/Better-Launches-Newest-Mortgage-Innovation-%E2%80%98Equity-Unlocker%E2%80%99-to-Help-Tech-Employees-Purchase-Homes 

[4]   https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2023/02/25/2022ar.pdf 

[5]  https://corporatefinanceinstitute.com/resources/commercial-lending/debt-vs-equity/ 

[6]  https://www.forbes.com/sites/greatspeculations/2020/02/03/a-closer-look-at-apples-debt--changing-capital-structure/?sh=3f3dd04e7b65 

[7]  https://www.nytimes.com/2022/03/28/business/dealbook/biden-stock-buybacks.html 

[8] https://corpgov.law.harvard.edu/2021/10/07/ceo-and-executive-compensation-practices-in-the-russell-3000-and-sp-500/#:~:text=In%202019%2C%20stock%20options%20comprised,for%20both%20CEOs%20and%20NEOs

[9] https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-economy 

[10] https://www.gov.uk/government/news/new-national-hub-for-fintech-to-be-launched-at-leeds-event

[11] https://www.gov.uk/government/news/new-national-hub-for-fintech-to-be-launched-at-leeds-event

[12] https://www.gov.uk/government/news/new-national-hub-for-fintech-to-be-launched-at-leeds-event

[13] https://www.gov.uk/government/publications/the-kalifa-review-of-uk-fintech 

[14] https://www.theglobalcity.uk/fintech 

[15] https://www2.deloitte.com/uk/en/pages/financial-services/articles/uk-fintech-landscape.html 

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