Why Balderton are partnering with Premialab
We are delighted today to announce Balderton’s strategic partnership with Premialab.
As always a huge reason for our partnership is the founders. Adrien and Pierre are incredibly deep in this sector, having worked at pioneers in systematic investing such as Societe Generale and Julius Baer. Both are super-smart and well-connected. They are first-time entrepreneurs coming from large companies but have demonstrated an ability to hire great people, iterate product rapidly and cut through sales cycles. They also complement each other well, with Adrien as the commercial lead and Pierre deeper in the product and operations. Both founders are French but they have built an organization that is global from day one, with Adrien between Paris and Stockholm, Pierre in Hong Kong, and further offices in New York and now London. That they already have clients in three continents is a testament to the quality and universal appeal of their product. We are yet to meet in person but we have overcompensated by spending a lot of time on video calls together (once I persuaded them to turn their cameras on).
This is Balderton’s second investment in the capital markets data & analytics sector following our investment in Credit Benchmark a few years ago. For me personally this is a new sector but I was fortunate to be able to lean on the deep experience and networks of my partners Rana Yared and Tim Bunting.
For those of you new to systematic and factor-based investing let me first give a quick intro to the sector and then talk about why we are so excited by Premialab.
Quantitative or systematic investing includes any form of investment which is based on an encoded strategy rather than human discretion. It has been around since the 1970s, in its most simple form as index tracking funds that track for example the performance of the S&P 500. The simplicity, robust performance and low fees of systematic strategies have led to the dramatic growth of this type of investing. Over one trillion dollars are held in systematic strategies today.
One of the developments in systematic investing in more recent years has been risk factors. The performance of any investments can be explained to some extent by the underlying risk factors. This started with the Capital Asset Pricing Model that I learned in my MBA: expected return on an asset is proportional to the underlying volatility of that asset. It developed into the Fama French three factor model and over time into many underlying factors such as Momentum, Size, Value, Quality and Carry.
Increasing numbers of investors are building portfolios composed of systematic factor-based strategies. Fund managers aim to maximise returns while minimising their exposure to any one risk factor. All the major investment banks now offer factor-based strategies. The challenge for the asset manager is that different US equity momentum strategies all have different compositions and performance. Until now there has been no single place where investors can compare across strategies. Premialab have done the hard work to collate and normalise all this data to allow a holistic view across fund types and asset classes (equity, credit, commodity, fixed income, foreign exchange).
Even for investors who are not investing in systematic strategies it is important to understand their exposure to different risk factors. For example, perhaps their outperformance in 2020 was because they were long Quality factor risk. The challenge is how to define the different risk factors. There are academic definitions but what you really want is a real-world consensus across factor-based strategies. Premialab provide this with their Pure Factors. This allows the performance of any portfolio to be decomposed into the underlying risk factors.
Premialab is the first company to bring together data from the leading 17 providers of factor-based strategies. This has taken all of their experience and network in the sector and five years of intensive work. On top of this they have built a world-class analytics and risk engine which clients tell us they would love to use as a standalone product.
All of the above is highly impressive but our experience in software over the years is that it means nothing unless you can sell it. Happily Premialab have already shown an ability to sell into some of the smartest asset managers, insurers, pensions and sovereign wealth funds. We have rarely heard such glowing client references.
We are still in the early stages of the journey but we at Balderton are loving working with Pierre, Adrien and team so far. And I look forward to one day finally meeting them in person.
