Great-West Life parent sets up fintech fund

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(Bloomberg) --Canada’s billionaire Desmarais family has come up with a novel approach to fend off the technology startups that threaten its financial services empire: Bring the enemies in and invite them to attack.

Power Corp. of Canada, the Montreal-based holding company that runs one of the country’s biggest insurers and mutual-fund companies, has set aside C$250 million ($186 million) to spend on fintech startups in various stages of development. The plan is to have them compete with Power’s older businesses, permeate the corporate culture and accelerate the transformation of the firm from within.

“We want you to attack our group, because we want you to do the job that other people are going to do to us,” said Paul Desmarais Jr., the chairman and co-chief executive officer of Power Corp. “We want to do it from the inside, and we want to give you a big budget.”

In a rare press briefing following Power’s annual meeting in Toronto last month, Desmarais Jr. described the mission the company gave Portag3, the in-house venture fund set up in October that’s spearheading the effort.

“Fintech is changing the financial services world,” he said. “It’s big, it’s coming, it’s there and we want to be part of that.”

Desmarais Jr. says Power’s strategy stands out in the industry as a hybrid model between companies that try to change on their own but face resistance internally, and others that subcontract work to startups. Its Power Financial Corp. unit has invested C$100 million in robo-adviser Wealthsimple Financial Inc., a direct competitor to some of Power’s wealth-management companies that targets millennials. Power owns a majority stake in the startup, according to its website.

“I don’t think many institutions would have had the foresight to let that company continue to operate on its own despite the capital investment that we’ve made,” Adam Felesky, Portag3’s president, said in a phone interview, referring to Wealthsimple.

Digital Edge

Faced with their customers’ shift toward online banking and investing, Canada’s big lenders are all trying to get a digital edge by setting up their own software labs, collaborating with fintech companies, or investing in them. Toronto financial startups raised about C$160 million in 2016, double the rate of 2014, according to a report by the Toronto Financial Services Alliance and Accenture Plc. Still, most of that money came from venture capital firms, not the banks themselves.

Power’s recent fintech investments are helping make the stock more unique and compelling, though improving the earnings outlook of its insurer Great-West Lifeco Inc. and its struggling Putnam Investments unit in the U.S. would have a more immediate impact, said Jim Shanahan, an analyst at Edward Jones. Including reinvested dividends, Power Corp. shares have fallen 3.2 percent over the past two years, compared with a 21 percent gain for a sub-index of Canadian financial shares in the S&P/TSX Index.

Power Corp. dropped as much as 1.5 percent to C$28.40 on Wednesday before paring the decline to 0.2 percent as of 1:39 p.m. in Toronto.

Portag3 is backed by Power units including Power Financial, IGM Financial Inc. and Great-West, and is chaired by Desmarais Jr’s son, Paul Desmarais III. The Desmarais family controls the Power group with a majority of voting shares.

The name Portag3 comes from the French word for carrying a canoe overland, usually the toughest part of any canoe trip. The "3" stands for the fund’s three Power business units. Other Portag3 investments include Street Contxt, which helps financial analysts track which clients are reading their material, and Drop, a rewards app for debit and credit cards. Portag3 has also started an incubator for early-stage companies.

That alone is no guarantee of a successful transformation, according to Robert Smythe, a Toronto-based analyst with tech research firm International Data Corp. Canada. The real challenge is to figure out how to use technologies like artificial intelligence and biometrics to seamlessly offer the services people expect from companies like Great-West and IGM. On that front, Power may not be ahead of other major financial institutions, he said.

“While investing in fintech companies gives you some exposure to the fintech world and might be financially lucrative -- if one of them hits a home run -- it does not grow internal fintech expertise,” Smythe said in an email.

Power Renaissance

Desmarais Jr. says his efforts are bigger than that and describes a “renaissance’’ taking place within the holding company through formal and informal meetings with Portag3. Executives from Power’s bigger, older units sit on the investment committee for the fund, meeting twice a month and getting an idea of what the hottest startups are up to, even if they don’t end up investing, Felesky said.

“We convene every two weeks and we have an active dialogue about all the different companies we see around the world,” he said.

Even if the older businesses of the group choose not to work with the startups Felesky invests in, they become more aware of what’s out there and compelled to offer similar services, making the C$250 million investment go a long way, Desmarais said.

“C$250 million, you’re going to say ‘with a group this big, what does that mean?’’’ he said. “But it’s huge because it’s impacting the culture of our companies like never before.’’

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