Divisa Capital’s $100 million boost. Why so quiet, and was it really an investment? – FinanceFeeds research
After being provided with several corroborating accounts of how Divisa Capital received $100 million in funding, FinanceFeeds went to Divisa Capital’s London head office to meet CEO Mushegh Tovmasyan and take a close look at the company’s structure and what the deal really represents.
The prime of prime brokerage sector has been an area of tremendous growth within the non-bank institutional financial sector over the past year, especially here in London, the interbank and institutional liquidity distribution heartlands of the world.
As a result of the enormous focus of commercial energy on developing non-bank prime of prime business and the current curtailing of counterparty credit to OTC derivatives firms by the Tier 1 banks whose towers are consistently visible from every edge of the Square Mile, competition and the need to refine product ranges and reduce development cycles, along with a very important requirement to diversify and not just concentrate on technological changes, but to lead them, has emerged.
In January this year, a case in point came to light, as Divisa Capital announced the raising of $100 million in capital, with CEO Mushegh Tovmasyan having explained to FinanceFeeds at the time that the larger balance sheet will allow us to increase our access to liquidity via Prime Brokerage & Bilateral relationships and pass it downstream. It will also allow us to increase market penetration due to larger market appeal.
Since then, a degree of discourse within several sectors of the industry emerged, FinanceFeeds having been made aware of dialog between many sides of the business ranging from brokerages in many continents, as well as other liquidity providers and technology vendors having speculated that this $100 million was far from an actual mergers and acquisitions deal in which equity in the company was provided for the $100 million, but instead have suggested that it resembles the Fortress Prime situation in which a Middle Eastern investor credited a trading account with a large sum.One particular dissenting viewpoint from a very senior industry executive said “It’s unfair that people can use the press to make these announcements unvetted and then provide no proof. It makes the portals almost complicit in the scams like Fortress Prime.”
Various indicators to this effect were provided by several industry executives to the point that FinanceFeeds arranged to meet CEO Mushegh Tovmasyan at the company’s offices in London today in order to take a close look into the firm’s operations and what the investment constitutes.
“We, too, are aware of this sentiment and have heard from several sources that our investment is being considered to be an account rather than a genuine merger and acquisition deal. It is strange how this type of rumor propagates” said Mr. Tovmasyan, with relaxed demeanour.
Mr. Tovmasyan explained another viewpoint that has been heard recently. “One of the rumors which made its way through the FX industry after our investment was divulged was that we had a big loss which is why we raised the $100 million.”
“This is a very bizarre claim to make” said Mr. Tovmasyan. “If a firm approaches an investor to ask for a large amount of investment capital when having taken a loss, that is the first thing the investor will look at and will never advance the capital” he said. “Divisa Capital group had been growing profitably year on year when investment talks started”
This is a matter with which FinanceFeeds concurs. It is virtually impossible nowadays to raise capital from within the OTC derivatives brokerage business, whether an institutional provider or retail brokerage, and this has manifested itself right the way through from raising operational capital to having to display balance sheets demonstrating between $50 million and $100 million to a bank in order to obtain a prime brokerage agreement. Any less means no credit.
Addressing the industry perspective that Divisa’s $100 million investment was a helping hand from a Saudi Arabian or Emerati Sheik, oil magnate, or similar, from a purely criterial perspective, Mr. Tovmasyan said “Any executive who has genuinely engaged in any form of a capital raise would agree that is a fairy tale to think that there are wealthy people in this world that would blindly invest large sums of money without serious research, due diligence and legal advice. On top of this we are a long standing regulated business and cannot get that type of transaction past the auditors, the Financial Conduct Authority (FCA), Central Bank of Armenia, etc.”
In this respect, it is important to distinguish the difference between Fortress Prime’s Middle Eastern investors and Divisa’s raising of capital. Fortress Prime was based in the United Arab Emirates, and unlike ADS Securities never held an actual financial services license in UAE or elsewhere, hence any regulatory aspects that a British, American or Australian company would be subject to in terms of how they fund their businesses and capitalize their operations would never have existed for Fortress Prime.
Essentially, Fortress Prime was allowed, unchecked, to take the money of wealthy Middle Eastern individuals, use it to operate a firm that was never a prime brokerage and simply b-book the flow of all of the brokers that used their ‘liquidity’ which ultimately did not exist as there was never a liquidity source.
Divisa UK is a British, FCA regulated firm, and is obliged to report to the FCA and to the British government when investments and shareholder changes are made, and is subject to auditing and legal documentation for that purpose. As has been the case with many dubious investments of much smaller amounts than $100 million within the retail sector recently, any doubt over the operations of the investor would result in the FCA vetoing the entire deal.
As far as large scale acquisitions are concerned, in Europe, the Central Bank of Ireland vetoed AvaTrade’s M&A plans with Playtech which was set to provide the firm with a $105 million injection for the entire company. The regulators also stepped in and put a stop to Plus500’s proposed acquisition by Playtech for $460 million.
Mr. Tovmasyan on this point said “It is impossible for rich Sheikhs to close their eyes and throw money at firms in London, they have to go through stringent due diligence by regulators.”
“We had top 5 auditing firms KPMG & Grant Thornton conduct valuations for this deal to come together” he said.
“We have a global structure, and the balance sheet is spread throughout the company as they all need to be funded, those divisions include our operations in New Zealand, Armenia, UAE the United States and Britain” said Mr. Tovmasyan.
It is a fairytale belief that it is a easy to raise money as rumors suggest. We went through a full valuation and auditing process with KPMG and Grant Thornton, and the lawyers structuring the whole deal where specialists DLA Piper. This process is neither cheap nor fast – Mushegh Tovmasyan, CEO, Divisa Capital
When put on the spot by FinanceFeeds regarding the percentage of equity purchased by the investors, Mr Tovmasyan confirmed that it was indeed an equity purchase, structured under a newly establish SPV holding company, the full make up of which has been detailed to FinanceFeeds at the offices of Divisa Capital, however in the interests of corporate discretion, FinanceFeeds agreed not to publicize this amount.
“The shareholding structure is something legally revealed to regulators, bankers and trading counter parties but as it is very common in large conglomerates, it wont become public knowledge” said Mr Tovmasyan.
“As far as the structure of the deal is concerned, divisions of the firm which are subject to filing company records to public entities will show different figures to that of the holdings company. Divisa group of companies is a network of financial services entities which includes our different international offices, as well as FinTech companies whether client facing or internally facing, for example the divisions which service trading infrastructure to ones developing proprietary software & big data analysis” said Mr. Tovmasyan.
“At the moment, money is held in the holdings firm because of the series of companies under the Divisa Group, hence some require transfer of capital only after regulatory approval and some do not, however the deal has been done and the money is available” confirmed Mr. Tovmasyan.
Increasing the firm’s presence and scale is one aspect that Divisa Group is concentrating on. “We have made big name hires, some serving gardening leaves at existing firms, some already joined. When taking a large investment, things take time. Launching a new trading platform very soon among other items” he said.
Looking at current growth rate, Divisa Capital expects to reach full utilisation of invested capital, so it is already in the works to raise additional funds to fuel further business growth past year one.
Transparency can often be achieved by becoming a public company, hence when asked if there were plans to issue an initial public offering (IPO), Mr. Tovmasyan said “Not at this point. This is a commercially viable business, and we are focused on making returns on investment for our shareholders, therefore we are scaling up. We believe that we are fully involved in the FinTech wave and the credit crunch will continue to remain a theme in the mid term.”
“The vanilla Spot FX & CFD business still has room for a lot more development so exploring new ideas is still far down the line for us” said Mr Tovmasyan.
FinanceFeeds believes that now is a very good time to enter the US market, and Divisa Capital’s management team has the capital and the understanding to do just that – Gary Dennison was a senior executive at an NFA regulated brokerage for many years, and Mr. Tovmasyan has well documented experience in taking retail firms into North America, however this is not on Divisa Capital’s schedule.
In terms of client base, Mr. Tovmasyan has been very quiet with regard to who is currently taking Divisa Capital’s liquidity.
“We have clients consisting of funds, family offices, and retail brokerages, and some of them hold 8 figure deposits with us, therefore you need a serious pipeline to be able to clear that level of business so we are looking to grow in that space” said Mr Tovmasyan.
“We have been very quiet thus far, but we will be scaling up the marketing presence a little bit. We did have a booth at the most important Asian industry conference in Hong Kong, will also have presence at the forthcoming Shanghai conference as well as at the London Summit produced by Finance Magnates, and have a large presence in Cyprus at the iFX EXPO” he said.
“Unfortunately, as a result of various scams, including the Fortress Prime disaster and the recent binary scams, the reputational damage that they have done is not just to the clients that had losses, but completely unrelated participants are now becoming scrutinized unfairly and damaging the reputation of the industry as a whole. On the institutional side, Fortress Prime was offering zero commission, choice spreads, and revenue share deals. How is this possible unless they were just rolling the dice?” asked Mr Tovmasyan.
“The due diligence that has to be carried out with regard to raising capital and choosing a trading counterparty is stricter than ever now” said Mr Tovmasyan.
FinanceFeeds then approached the subject of what Mr. Tovmasyan’s ownership now stands at, bearing in mind that he was a founder of the company. “I took a dilution of shares in equity, as well as partly cashed out. In terms of structure we have created an equity plan for our global employee base across all ranks to be able to participate in the ownership and growth alongside investors” he said.
Finally, Mr. Tovmasyan demonstrated the new 6000 square foot office space that Divisa Capital will occupy in the Square Mile, near Broadgate circle.