24 Jun 2019 | 02.49 pm
Interview: Barry McCarthy, Assure Hedge
Barry McCarthy wants to democratise foreign currency hedging
24 Jun 2019 | 02.49 pm
Barry McCarthy wants to democratise foreign currency hedging and has raised €2 million to launch Assure Hedge.
Gyrations in the sterling exchange rate against the euro are a major headache for the thousands of Irish business that trade with the UK. Volatility has been exacerbated by the Brexit imbroglio, and in a crash-out scenario there is the prospect of the pound taking a pounding.
Large companies limit the potential downside of foreign currency risk exposure through hedging. This is a form of foreign exchange (FX) insurance that comes at a cost but delivers peace of mind. For many mid-size and small companies, hedging is not an option, as traditionally the banks that provide hedging services will only deal with companies of a certain size.
Barry McCarthy (40) wants to change all that. After graduation from UCD, McCarthy worked all his career on trading desks, for others and on his own account. He spotted an opportunity to develop Assure Hedge, an automated web-based platform and app that opens up hedging to small and medium businesses.
McCarthy has raised €2m in venture capital to progress his idea. His most recent investor is Richard Hayes (70), former founder and CEO of IFG Group, who over the past decade has backed three early stage companies, Global Shares, EFT Controls and BHSL. Hayes has assumed the role of chairman and invested €500,000 in the venture.
Explaining his rationale, Hayes commented: “To have spotted the market opportunity and to have navigated the regulatory hurdles so successfully is an enormous credit to Barry. Assure Hedge provides a unique low-cost protection against currency volatility which can be of benefit to practically every company worldwide which deals outside its own currency jurisdiction either as an exporter, importer or service provider. The opportunities are limitless.” In this interview, McCarthy explains that hedging opportunity.
What does Assure Hedge do, and why should exporters be interested?
The product that we are building is directly challenging one of the services that banks provide – over the counter currency options and currency forwards. We are building a modernised solution to that product. It’s one of the most liquid markets, but it’s very antiquated from a technology perspective.
Hedging is about insuring against currency movements. What are the hedging options at the moment?
Even though it’s 2019, you would think that this hedging process would be modernised, bit it’s not. The analogy I like to draw is when you went to a travel agent years ago to book a holiday. The agent would have to ring around airlines and ring around hotels to try and get a deal together for you. Well that’s actually how the hedging process is today for the most part.
More than that, most businesses are shut out of the market. A bank generally doesn’t want to deal with a small customer in the first place. For the bank, a hedge is a line of credit that they must extend, so generally if you are doing anything less than a million a year, you are not going to get any love from a bank.
Even if the bank does engage, the customer will be offered a product that is very confusing. It’s a complex, slow, old-fashioned process, and our research shows that that over 70% of exporters and importers with currency exposure don’t bother to hedge.
Assure Hedge’s aim is to democratise currency hedging. What is your route to market?
We are a business to business to consumer company, in the sense that we build the tools and the access for others to bring the product to the market. We figure there is no point trying to acquire a million new customers because it would take decades to do that. Instead we let others leverage our technology and our market access and our regulation.
Our primary customers are currency brokers who are already working with corporate clients. The vast majority of brokers don’t offer hedging, as they view the regulation required as too onerous for them operationally. Assure Hedge is regulated as a MiFID firm and we are also regulated to hold clients funds. And imminently we will be regulated as payments company too. Our first two broker partners in the UK are Currency Transfer and Sable FX.
What else is novel in the Assure Hedge offering?
Assure Hedge is not reinventing the wheel. Options and forwards have been around for 150 years. What we’re about is opening up the access through an innovative tech platform. We have also found a way to automate the entire end-to-end process. That includes seven minute customer on-boarding, which is a huge change, because in the banks it can take up to seven months to onboard a customer for hedging. As a result we can come in with a much lower cost base and better efficiency than our banking competitors.
The UK seems to the primary target market. What about Ireland?
There are significant opportunities in Ireland and we are out talking to some potential partners. It’s really important that people hedge, especially in the backdrop of Brexit. The cost of hedging is quite low relative to the potential currency risks, particularly in the case of an Irish exporter to the UK. For example you might want only to protect over the rate of 90p, and right now that’s very low cost to hedge after sterling has firmed against the euro.
What size of business should consider the Assure Hedge offering? Is it only for exporters like beef barons with multi-million annual turnover?
We love SMEs and the smaller the better. Of course we are a commercial entity and we need to make a profit, but it’s also really important to me that the very smallest businesses can access hedging – that’s one of my personal goals with the business. We have actually conducted a live hedge in the market for $10,000 of risk, which cost the customer about €100. That’s probably the smallest over the counter hedge that has ever taken place in the history of the world! We made a very tiny profit on that transaction, but the point is it proves the economics of our business model.
How did veteran financier Richard Hayes become involved with Assure Hedge?
The company has HPSU investment from Enterprise Ireland and Richard came across us at a HPSU showcase. We explained what we were building in terms of opening up currency hedging to everyday businesses, and it really resonated with him.
He approached me shortly after the event and we got on brilliantly. Richard was able to give me a load of advice and he offered to invest €500,000. He also opened up his network in a big way to me, which helped us secure some additional investment. He has vast amount of experience, and he has really turned the business around, by virtue of his advice and his network and his investment.
Assure Hedge has raised €2m in capital to date. What do you need the money for?
I would consider €2m as a very small amount for the problem that we are solving. We have done remarkably well to assemble a talented team, to secure MiFID regulation from a zero starting point, and to now start on-boarding FX brokers. It’s an enormous market opportunity, and we are going to need a substantial amount of follow-on funding to execute the business to its full potential.
We are regulated in 31 countries around Europe through passporting, so we’ll be looking at finding some partners in all those countries. Our target market is big FX brokers in Germany, Belgium, Poland, Norway, and elsewhere.
What are your main cost lines?
Around two-thirds of all of our outlay so far has been on tech, on salaries for the cost of building our platform. It’s a very modern API-type platform, which means it’s interoperable with other tech platforms. That’s important when we’re talking to digital banks, and when we further scale out with FX brokers. Our partners should be able to on-board with us in a matter of days instead of months.
How important have good advisers been to the development of Assure Hedge?
Where I’m really lucky is our board of directors. Paul Cran, the company secretary, used to be the CFO of the Maxol Group. Our chairman Richard Hayes is extremely well connected too and then there’s Robert Smith. Internationally Rob is renowned as one of the top high frequency trading technologists in the world. He built out the team of technologists at Getco, one of the largest high-frequency trading firms in the world. They had a ten year run where they didn’t have one losing trading day.
Before you established Assure Hedge, you worked for yourself. What’s it like now being answerable to a board of directors?
I absolutely love having Richard, Paul and Rob involved, especially around the structure they bring to corporate governance. There’s a focus on control, performance, and problem solving, all things that will contribute to us maturing into a better and bigger company.
I want to grow and evolve at the same speed as the company, because I don’t want to be in a situation where I’m no longer the best person for the job. We have gone through a significant change in the last year, and I like to feel that I’m growing as a CEO at least as fast as the company is developing and maturing.