You Raized Me Up

George Lucas is the Founder and CEO of Raiz, which used to be Acorns. It was a joint venture with the American business called Acorns and they dissolved that joint venture a couple of years ago and changed the name to Raiz and IPO’d quite recently. Shares came on at $1.80 and they’re now $1.07, so they’ve come down a fair bit, quite a lot from the IPO. But George Lucas reckons he’s still buying and they’re growing pretty quickly it’s fair to say. He says it’s a growth play, not an income play, and that’s clearly the case. They’re burning about $300,000 cash per month but they reckon they can get to cash breakeven on a run rate basis by the end of this FY, so that’s nearly 12 months’ time. 

They’ve got 164,000 customers, $214 million dollars’ funds under management. Fundamentally, they are an investment management business. He says they’re a platform and that’s fair enough because they don’t actually manage the money, they hand it off to ETFs and the ETF fees are embedded in the product. Their fees are spelt out by George in the interview which is worth listening to and they’ve got a super fund as well which they market to their existing users of the platform, which is a savings platform, so the marketing costs are quite low as well.

The result of all that is quite good operating leverage through a high level of fixed costs. When they do breakeven, which it seems that they inevitably will, a lot of the extra revenue just goes straight to the bottom line. It looks like an interesting business. He reckons it is a buy and he is buying at this price. 

Here’s George Lucas, the CEO of Raiz. 

George, perhaps we could start with a bit of background because you launched the business as a joint venture with Acorns of the US in 2016, but that was then unwound.  Can you tell us about how that came about and why you unwound that joint venture?

Sure.  In 2014, we started talking to the US Acorns even before they launched in the US.  They launched in August of that year, 2014, and in early 2015 we entered a 50-50 joint venture with them...

What were you doing at the time?  In 2014, why did you talk to them, what were you doing?

We ran a company called Instreet Investment Limited, which was restructured and brought up into the company that listed and Instreet Investment has been, since 2012-2013, beginning to explore – we were in the retail funds management game anyway and we had begun exploring how to attract clients online because we could see that as a future.  Then when I got presented the Acorns app it was like, this is better than sliced bread, this is the way of the future.  So I pursued it aggressively and then Instreet entered the joint venture with them in early 2015.  We went through all the processes of getting the right approval from ASIC and developing the app for the Australian market and then we launched in February 2016.

As Acorns?

As Acorns, initially as Acorns.  After April this year we traded as Acorns.  In the end of late 2017 we began to see that they had a different product road map than we had.  They were going more into becoming like a neo-bank I guess in some ways and that wasn’t on our pipeline and we didn’t feel that it would be right for the Australian market.  We came to an agreement to part ways and that was executed in early 2018 and part of that agreement was that we had to rebrand, so we rebranded from Acorns to Raiz and that’s where we are today.

You wanted to remain more of a fund manager and they wanted to be a bank?

In the US they’ve got the ability to put money into a bank account with them and they issue debit cards, etcetera… We wanted to remain more of a fund manager type path, that’s correct.  Also, we had aspirations to expand into South East Asia, that was always in our original agreement with them and the Americans weren’t as keen to do that.

What about America, do you have a keep off the grass agreement with them?

Yeah, we have a keep off the grass agreement with America.  We can only go what was originally given to us which is South East Asia and that’s where we’re looking at.

When you parted ways with Acorns, what was your funds under management at the time?

When we parted ways with Acorns, when we started discussing it with them we were about $85 million funds under management.  That was in late June, 2017.  We’re now at $214 million plus funds under management.  We would have been around $150 million at the beginning of 2018.

I think you paid them $17 million for the initial tranche of their holding and then another $5m at the end, is that right?  A total of about $22 million?

No, no.  We paid them just over $17 million which took them down to only owning just under 9% of the company.  But once we listed and raised more capital, they now own about 8.6%, just over 8% of the listed vehicle.  They’re still a shareholder in the listed vehicle.

Okay, I thought they got bought out of that too?

No, they’re still there and like me, they’re escrowed for two years.

Where did you get the money to pay them $17 million?

So, in late 2017 we began raising capital, like pre-IPF and pre-IPO funds, to fund the purchase of the US out of the…

Right, and that was clearly explicitly at the time a pre-IPO raising?

Correct.  It was explicitly a pre-IPO raising but with no date on an IPO. 

Okay, you’ve moved fairly quickly I guess, six months or so? 

Yeah, we’ve moved very quickly.  It was not just that we also had to restructure because Instreet was the RE for the Acorns fund and we wanted to bring the licence into the business as well.  And we rebranded, so there was a lot going on in the six months of the beginning of this year.

Yes, I see that Instreet’s now inside the group as the responsible entity and so it’s all under one roof and you’ve now got the super fund in there as well.

Correct.  The super fund, we’re not the trustee for, the super fund is just a wrapper that sits over the current portfolios and that’s provided by a trustee there and then you invest into the existing six funds that we have at the moment.  It’s just a wrapper over the current six funds that we have.

Do you pool all the money in your raise investment accounts as well as in super?  Does that get pooled or do you keep the money separate?

No, because we have a fractional ability people can be fully invested from the first $5 dollars they invest.  For example, one of the ETFs we buy is the IVV which is the SMP 500 tracker by Blackrock and that’s got a $300 face value for one unit.  Part of the technology is this legal structuring that allows us to deliver fractional units so that you can be fully invested from $5 dollars, but to do that we need a full back end and so it is an MIS scheme and everything’s held by the custodian, so there’s not direct in.

Investors I presume should look at your business as purely a fund manager but with a few wrinkles obviously, the way that you collect the money.  Is that right?  I mean, we should judge you as an investment manager?

I would judge us more as a platform than a fund manager and the reasons why is that the six funds are very passive that we look after and the rates are set.  There’s no real fund management activity, like no one’s coming in and deciding we’re going to buy and sell shares today.  The platform is all about providing access to the market and then the customer communication backed via both the app, but also your tax returns are all done and you get daily reports if you’re putting money in about what was bought and what was sold and then also we do monthly statements, which list everything that’s happened for the month.

We would actually internally see ourselves more as a platform because of all this other functionality.  We do about a million direct debits a month for our customer base at no cost to them and it’s much more a platform activity than a normal fund manager where you would send them the money rather than setting up an automatic savings plan where we direct debit for you.

Leaving the super aside, the business basically involves rounding up purchases to the nearest dollar, is that right?  Just take us through exactly how that works.

Well, there’s three ways to get money in and that’s the most attractive value proposition but not necessarily the biggest inflow of our FUM.  But the way that works is that you link your spending cards, and you don’t have to do that but if you choose to link your spending cards then if you spend $3.50 on a coffee, 50 cents will be rounded up and invested into your Acorns account.  We don’t take the money out until you have over $5 dollars of round-ups, so we kind of virtually track it and then when you hit this over $5 level or whatever your threshold, because you can actually change the threshold in the app, we withdraw that money from your funding account and we invest it into the market for you.  That’s the value proposition.

Can it be off the credit card as well as an EFTPOS?

It can be off your credit card, EFTPOS, you can link your Amex card.  On average, there’s probably about two and a half cards linked for the people using round-up.  You can also use the app without linking your spending accounts because you can setup a reoccurring – like a savings plan where you say I want to invest $5 dollars a week or I want to invest $10 dollars a month.  It’ll just happen automatically and you don’t need a spending card linked in that situation and you can also just go to the app and say, ‘I want to put $500 dollars in today.’  and invest it.  It’s really about a dollar cost averaging type philosophy where you invest small amounts on a regular basis to try and help you manage the market volatility.  But also, from a point of view of saving, by doing that in small increments, you kind of don’t necessarily notice that you’re saying at the same time.  We hope that it doesn’t really affect your lifestyle.  Then at the end of the year when you look at it, you’ve accumulated an okay balance. 

And the money goes entirely into ETFs that you don’t run, you buy the access to the ETFs, right? 

Correct.  We have a possibility of nine ETFs and they run from various managers from Blackrock, State Street, etcetera… We don’t run the ETFs, we just follow the allocation that’s set in each portfolio whether conservative to aggressive or the socially responsible one and then just buy those ETFs on the market.  

Can you just take us through the fees?  I had a bit of trouble getting my head around how the fees work.

The fees are really simple.  For people with balances under $5,000 dollars it’s a subscription model where you pay $1.25 a month and that covers everything.  That covers all the costs of direct debits and credits, it covers all your brokerage costs, it’s just $1.25, $15 dollars a year, the cost of a beer and a half type thing to run the app for balances under $5,000 dollars.  But then for balances over $5,000 you get charged 27.5 basis points on funds under management, which for $5,000 dollars works out about roughly $15 dollars a year.

Okay, that’s your fee, right?  Then on top of that is the ETF fees?

On top of that, the ETF fees which the customer doesn’t pay but they’re embedded into the ETFs, so they affect the performance of the ETFs and we only obviously quote the fees on them, we don’t quote the other things that boost the performance of the ETFs, but the ETFs all have underlying fees which comes out to be somewhere between 25 and 30 basis points depending on which portfolio you’re invested in.  If we use your ASIC prescribed format, you add that onto the 27.5 basis points and you’re going to come around – depending on what portfolio you’re in – around 55-56 basis points.  The customer doesn’t actually pay those fees, they’re just the fees embedded into the ETFs which may affect the tracking performance of those ETFs.

In that way the customer pays them, doesn’t it?  That’s what happens?

Correct.  They don’t pay it directly, while the $1.25 they would pay directly from their bank account to us.

What’s your average yield on your FUM, funds under management?

The average customer has made about, since inception, excluding the $1.25 fee but including all other costs, the average customer has made about 11% per annum since inception and up to May 2017, because that was the last time we ran it, we’re about to run the ones for June early next week, they’ve made last year was about 10.1% for the average Raiz customer.  It’s been okay, we think.

Sure, there’s nothing wrong with that.  What’s your total FUM now?

Our total FUM now is around $214 million, which as of the report that we did on the 21^st of July to the market.  

What do you make from that?  I don’t know how to look at it, per month or per year?

We make the $15 subscription fee and we make some money on the customers who have balances over $5,000, which is that 27.5 basis points.

I’m just trying to get a sense of what your average income is because obviously I don’t know how many people have got more than $5,000 dollars.

The average revenue for the last quarter was just over $700,000 dollars for us.

And that’s for the quarter?

Yeah.

Tell us about the super now, that’s a separate account, separate funds under management?

We don’t separate it because it’s just a wrapper over the current structure.  Actually, you’re going through the super to invest in a normal Raiz portfolio, so we don’t actually separate it.  But on the app it will be separated.  You will see this is the amount of money you’ve got outside super and this is the amount of money you’ve got inside super.  It’s separated on the app and it was only launched in July and it’s had quite a good take-up, we’re very happy with the take-up at the moment and but from the point of view of what the customer sees, it’s separated and it sits in the super space. 

And there’s an extra set of fees as well for super, isn’t there?  There’s a member fee of $2 dollars a week, plus a compliance fee of 8.8 basis points?

8.8 basis points, that’s correct.  It is more expensive than just being in the investment space in terms of all the compliance associated with managing a super fund.  If we use an ASIC descriptive model it works out to be roughly $425 dollars for the balanced fund, which is 50% equities, 50% cash and bonds on every $50,000 dollars, so just over 80 basis points in total even when you include all the indirect fees as well.

With the super you seem to have something called an Emerald portfolio which has a higher fee, it’s up at 42.8 basis points for that.  What’s that about? 

We have that both in super and outside super, and the reason it’s higher is it’s a socially responsible portfolio.  We still just charge the $15 dollars or 27.5 basis points, but the indirect costs inside the ETFs, the ETF managers, charge a higher fee.  When you add up our cost and the manager’s cost I think it gets over like maybe 62 basis points or something.

Just give us a sense of where you think the growth comes from?  Is it from average balance increases?  I suppose it’s a matter of thinking about the growth because you’re obviously getting more and more millennial customers all the time but also their balances are growing as well aren’t they?

Correct.  We’ve got 164,000 paying customers after two and a bit years, which makes us from a customer base type of thing, the size of a medium sized credit union in Australia and we’re about 20% the size of ING in the number of customers after two years of operation.  The customer growth is very important to us and it’s still growing and it’s still growing at a healthy clip.

What is the growth rate of the customers?

We’re adding about 6-8,000 new customers a month.

Right.

Then on top of that, it’s what you pointed out, we get two types of FUM growth.  One is from super because when people do transfer their money in, the average balance coming in is around $25,000-30,000 dollars from a transfer compared to a new customer who starts off outside the space and their first investment might be $5 or $10 dollars.  Then we get the people who sign up for super guarantee, so that will grow and then for the Raiz, the other customers, it’ll start approaching the average balance which is about $1,250 dollars.  

And I presume your super customers mainly come from those who are using the app?

Super customers come mainly from those, but pretty much only from those, because we’re really only marketing to the customers who use the app, who have an understanding of our portfolio and who are happy with how our portfolios have been performing.  That’s a benefit for us because it also reduces our cost of marketing the super product outside, which is quite expensive.  An average super fund may pay $250-300 dollars plus for each customer and so it’s quite expensive to attract a customer into a super fund.

In fact, there’s a couple of millennial super funds been started up, Spaceship and Zuper and I think they’re getting eaten up by marketing. 

Marketing is very expensive, yep.  I think Morgan Stanley’s research showed it was $500 dollars a customer plus to attract people into these types of products.

Right, and what’s yours?

We’re not spending anything, we’ve got our normal digital channels and we just market it down to our customer base.  Because as I said, we’ve got quite a large customer base now of people who are happy with the product and so we just continue marketing down to them and so we’re not really paying anything for the cost of acquisition for a super client.

What does the experience of Acorns in the US tell you about what your potential customer base is here?

The thing is, from a population point of view – Australia’s only got 23-24 million people, the US has 330 million people, so if you multiply everything by 14 or 15 in Australia you bring it into size.  Australia has performed better in funds under management and client acquisition.  Australians have taken much better to the Raiz product than the equivalent in the US.  They kind of asked themselves what was happening here and why were we getting better market penetration than in the US, for example, as a percentage of population.  Our modelling shows potential market’s probably 8.5 million people that could use this product and so our big audacious hairy goal is maybe to have a million users on the platform within 10 years.

Right, and you reckon that’s possible?  Obviously you do.

That is our goal, at the moment that’s what we’re working towards. 

Just remind me what the average balance is at the moment?

$1,250 dollars, but if we were having this conversation a year ago it was significantly less than that.  The customers are engaging with the app, 80% of them invest at least once a month and the average balance continues to grow every month. 

Well, if you get a million people with $1,200 bucks on the balance, you’ll have quite a lot of money.

Yeah, well we think we’ve got quite a lot of money now, but yeah, we’ll keep working at it.

Well, perhaps a more relevant thing is, what FUM do you need to breakeven?

We kind of don’t look at a FUM.  We’re working as hard as we can to start to be cash flow breakeven by the end of this financial year.  The whole financial year, won’t be, but by the end of this financial year we should be cash flow even.

What’s your current burn rate per month?

The current burn rate will go up and down.  This month we’re still spending a lot on advertising and we’re going to spend significantly more on advertising because we’re still beating down the brand.  If you have a look at what we put out to the market, we said expenses will only be around $2.7 million which included $1 million dollars’ worth of advertising which will come down significantly over time.   A lot of that is to get the brand embedded from the change that happened in April.  Then if you drop that down to a more realistic number which is probably around $2 million dollars a quarter, out of that we’re going to probably end up this quarter with over $800,000 dollars of revenue.  You’re talking about $300,000 dollars a month at the moment.

I note that in your quarterly, the June quarter, you reported $1.4-ish million in corporate costs, which I presume had to do with the IPO?

Correct.  But we also reported $1.5 million in revenue, which is while we would have only been internally aiming for around the $700,000 type revenue level.

That’s right.  Your staff costs were just a bit short of $2 million.  How many people do you have on board and will that have to increase as you grow very much?

The staff costs, etcetera, and the corporate costs will come down significantly because part of that staff cost included a bonus pay-out as well to staff for all the extra work that they had to do during the last six months to get rebranding, restructuring, listing, etcetera, on top of running the day to day operations of Raiz.

How much did you give them?

It was disclosed in the prospectus, it was a $2 million dollar figure in total.

Okay, well that’s nice, very nice, they would have been happy with that. 

Yeah, they were happy with that.

I bet they were.

They definitely were happy. 

How many staff do you have?

We have roughly about 16 staff including contractors.

Can you just give us a sense of the extent to which your costs are fixed and variable?

Sure.  Sorry, I just have to get my notes on this one.

You don’t have to be too specific, just in general.

I always get scared that I’m going to be too specific.  It’s probably nearly 50-50 at the moment between the two when you take out advertising.  Advertising at the moment is still quite large just because we’re trying to get it down to get this rebranding better down, which is going to take a little bit longer.

Right.  I’m just trying to give my subscribers a bit of a sense of your operating leverage and how much of the revenue growth, once you start hitting breakeven, falls to the bottom line?

Yeah, I once kind of did an analysis on it and it’s probably about a two time leverage.

Right.  Well that’s what I would have expected with a business like yours.

Yeah.

Okay, well I think I’m pretty much done.  Is there anything else I should know?

No, not really.  I think people just have to understand that we’re a growth play.  We’re not an earnings play, we’re a growth play.  We’re very proud that we’ve been able to acquire so many financial services customers.  I think there’d be a lot of financial services companies which would hope that they had as many customers that we have in general, not just after two years of operation.  They are millennials and we have to grow with them and we are a growth play and it’s a long term relationship that we’re looking for with our shareholders but mainly with our customers we don’t see as a short term play where they’re going to leave the app, we want to be with them for their entire life journey.  

Obviously, those who came in on the float are probably feeling a little bit disappointed now that the stock’s just above a dollar, but you’d probably say it’s a buy at this price, wouldn’t you?

Well, I have bought and I would be buying but I’m in my blackout period at the moment.  I have to wait until my results in late August to put out and then I can come back to the market.

I note that you’ve got more than 6 million shares already so I imagine you’re pretty fully invested in the business?

I have always been fully invested in the business.  As you said, I think it’s quite good value here as do other directors, believe it’s good value as well.

Okay, good to talk to you, George, thank you.

No, thank you.

That was George Lucas, the CEO of Raiz.