New VC fund focuses on growth of fintech

“This is an exciting time for the larger [financial services] institutions, as well as the fintech companies,” says Gregory Smith, national wealth- and asset-management practices leader with Ernst & Young LLP in Toronto.

Indeed, financial advisors and their firms must take notice of these changing technologies, says Adam Felesky, president of Portag3, because these innovations have a role to play in how the financial services sector will meet the coming challenges, such as price sensitivity driven by the second phase of the client relationship model.

“Technology is going to have to be a part of the solution,” adds Felesky, co-founder and former CEO of Toronto-based Horizons ETFs Management (Canada) Inc.

There are three large financial services firms – Montreal-based Power Financial Corp. and its Winnipeg-based subsidiaries IGM Financial Inc. and Great-West Lifeco Inc. – looking to invest in this space, and are backing Portag3 financially.

Portag3 will invest in early-stage startups with the goal of helping to build “the next great Canadian financial services company,” says Felesky.

The fund is invested in some well-known names in Canada’s fintech space, covering areas from wealth management and lending to insurance, such as Wealthsimple Financial Inc., Borrowell Inc. and League Inc., all of which are based in Toronto, as well as Vancouver-based Koho Financial, an online banking service.

Portag3’s mandate is to invest primarily in Canadian companies, but the fund may look to other countries on occasion for potential investments. Case in point: the fund currently invests in San Francisco-based Clearbanc, which provides alternative investment products to self-employed Americans, and in Paris-based Alan, a health insurance company.

When Portag3 invests, it takes only a minority stake in the startup and, for the most part, focuses solely on working with the new companies to help them stand on their own.

“We’re just looking to get to know the company and the company to get to know us,” Felesky says. “We feel [that] if we were forceful in terms of active control or majority, we probably wouldn’t get to participate with the best entrepreneurs and the best companies.”

Yet, startups included in the fund will be given introductions, where appropriate, to the backing companies’ distribution channels, which include Winnipeg-based Investors Group Inc., London, Ont.-based Freedom 55 Financial and Mississauga, Ont.-based Investment Planning Counsel Inc.

These startups are just the beginning of Portag3’s investments in fintech, Felesky says: “We believe that the current portfolio will grow substantially in size, and we’ll be committing tens of millions more in capital to those new companies.”

Portag3 is not the only VC fund making sizable investments in fintech. A report from Toronto-based PricewaterhouseCoopers LLP notes that fintech has attracted $1 billion in capital since 2010. As well, the MaRs Discovery District in Toronto estimates that Canada’s financial services sector will be spending $14.8 billion on technology in general by 2018, up from $12 billion in 2013.

Banks, even though they’re large behemoths with many legacy platforms, have long been investing in technology in one form or another and have worked to establish platforms to allow customers to interact with the banks as they would like, such as through apps.

“There’s been an awful lot of innovation,” says Smith, adding that the growing enthusiasm for fintech companies is a “call to action” for banks to work more closely with these new firms.

This growing interest and financial commitment to fintech is happening largely as a result of the changing landscape in the financial services sector, along with changing client expectations. For example, the Ontario Securities Commission (OSC) recently launched the OSC LaunchPad to foster and support fintech startups from a regulatory standpoint. As well, people are becoming more comfortable with technology and are a looking to interact with their financial services providers through digital means.

In turn, the financial services sector’s attitude toward fintech seems to be changing from one focused on disruption to one focused on partnership.

“In a way, I think what you’re seeing is a convergence,” says Felesky, “where innovators are meeting distributors in the middle and beginning to realize that there’s a symbiotic relationship there in which you can co-exist.”

Advisors will need to look closely at these new fintech offerings and find ways to work with, not against these new players.

Says Will Cornelissen, financial services consulting partner with Deloitte LLP in Toronto: “[Advisors] will have to adjust to the changes in the market in the long term.”

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