Dealmaking in Financial Services Investments and Growth and Buyout Opportunities in Emerging Markets

Bryan Wagner: 

Thank you for having me. 

Elana Margulies-Snyderman: 

Absolutely. So, to kick off the conversation, tell us a little about yourself and how you got to where you are today. 

Bryan Wagner: 

That sounds great. So again, I'm Bryan Wagner, I'm one of the Partners here at Creation Investments. I think you gave a great overview of our focus. My background is really in investment banking and emerging markets. I spent the first ten years in my career at Morgan Stanley. I started off in the Latin American Investment Banking Group, had the opportunity to live overseas and then came to Creation in 2013. I've been here for 11 years. And I think my trajectory really mirrors that of my colleagues, which is most of us have training largely in investment banking. We have a passion for emerging markets and really what's brought us to Creation Investments is this opportunity to use this technical training in a job where we feel real purpose for what we do. You referenced that we're an impact investor. That's a huge part of our focus and really trying to find these opportunities that have both compelling financial returns, but also social impact. 

Elana Margulies-Snyderman: 

Great, Bryan. And I would love to hear from start to finish, a couple of the transactions you completed, DD360 and Vastu Housing. 

Bryan Wagner: 

Great. Yeah, so these two opportunities both are in the affordable housing finance space. And it's really not a coincidence. This is a sector that we have been investing in more and more that we've been focused on more and more. And in general, I'll start with Vastu to describe that process. We had been following the affordable housing space in India for some time. There are several companies there that have gone public, so there's a lot of data. Remika Agarwal, our country manager in India, had a relationship with a member of the senior management team at Vastu and became aware that there was a capital raise that was going to be happening soon, and that really gave our team the opportunity ahead of the transaction to spend time with management, get to know the founders and really figure out if there would be a fit. One of the things the Vastu team says a lot about Creation is that we were the only investors who were willing to show up in their offices in 2021. This was still during the COVID period. Our team was vaccinated, anxious to travel, took all the right precautions, but all that work ahead of the formal process really allowed us to move quite quickly. And then as is the case in most of these processes, at some point we put forward a non-binding term sheet with terms around valuation and other shareholder terms. And then from there we were invited to be part of a consortium. Vastu was a rather large transaction, it was a $200,000,000 round. We invested $70,000,000 as part of that round. It was our largest investment up to that time. And so that's what allowed us to complete the transaction, but from start to finish, an initial contact towards the end of 2020, and then that transaction closed in late 2021. So that was the overview for Vastu. And then DD360 in Mexico, something similar. So, in Mexico as well, we have a team on the ground. We have a country manager, Amadeo, with deep, deep relationships. Amadeo was introduced to the founders of DD360 through an investment-banking relationship, and that transaction actually moved quite quickly. That introduction happened around March of 2022, and then by August we were able to close that transaction. And there, the company had already done a small closing in its Series A round, but they were really looking for an institutional investor to finish out the round and to really drive all the preparation of the shareholders agreement and all those things that the first-time institutional investor does. So, we were able to come in towards the end of that round as part of what overall was a $90,000,000 Series A round. 

Elana Margulies-Snyderman: 

And Bryan, what were some of the specific greatest opportunities you saw with respect to those transactions? 

Bryan Wagner: 

Yeah, great. So, in general, the affordable housing sector has so much room to grow, and it's really just a question of finding the right business models and the right business teams that can go after this opportunity. To give it some context, mortgage penetration in the U.S. is about 50% of GDP. That number in India is 10%. So, it's a very under-penetrated market. Just going from 10% to 30% in India means $800 billion of credit. The banking sector really can't provide that kind of credit, largely because the banking sector doesn't know how to underwrite clients that are outside of the tier one cities, clients who don't have formal sources of income. And so when we met Vastu and got to understand their business model, we were incredibly excited because we were seeing a business model where the company already was present across India, focused on Tier 2 and Tier 3 cities, and had developed a specific underwriting methodology to be able to assess that self-employed worker. And so, we knew there'd be an opportunity for significant growth, for profitability, and the company has really delivered there. They've tripled in loan portfolio, they now have over a billion dollars of mortgage credit, done very well in terms of profitability. And in fact, we just added on with an additional $50 million here in the last few months. So, continue to be extremely excited there. And I'd say that situation in Mexico is very similar. Actually, that number of 10% mortgage to GDP, mortgage credit to GDP in India is 4% in Mexico. So even a lower level of penetration, same opportunity as hundreds of billions of dollars of need. And what we loved about DD360 was a focus on the ecosystem. And so actually the name DD360, the 360 comes from a 360 degree view of the system in terms of understanding what is the developer need to build affordable housing, what is the consumer need to be able to purchase affordable housing, and then how can you serve the ecosystem around that? And so DD360 has developed a really interesting FinTech product where they provide credit to developers, they provide credit to consumers to obtain mortgages, but they also have a prop tech business where they're able to serve brokers with a hosting service where brokers can have their own website to promote their properties. And then DD360 has also built the Zillow of Mexico. If you've ever been on Zillow or one of those websites, you can look at your neighborhood and you can see the value of your home and all the homes around you. DD360 has built that platform in Mexico, it's called Monopolio. And so there they have 200,000 users who are using the platform, and all of that's creating a wealth of information. It's reducing inefficiencies and it's providing a service to all these aspects of the ecosystem. We've seen DD360 do great as well doubling its loan portfolio, and I think really just beginning on the proptech side to address the opportunity there. 

Elana Margulies-Snyderman: 

Bryan, on the other hand, what are some of the greatest challenges you face with respect to those transactions? 

Bryan Wagner: 

Yeah, so again, I'll start with Vastu. We were trying to close a transaction in the middle of COVID, and that was hard. I think there was a lot of questions about would this self-employed family be able to pay back a mortgage loan during a global pandemic? And so the data-driven approach of our team, I think the ability of Vastu to provide that data, our team's willingness to travel, to go out in the field and do field visits, I think gave us a lot of comfort that this particular product, a secured lending product, was really viable even in a time of distress. So that was the challenge in the case of Vastu. I think in the case of DD360, firstly, we were the first institutional investor, and so we had a due diligence requirement, I think information demands that the company wasn't used to. And so that was certainly a challenge. And then we were the first institutional investor, which meant we were the first ones to really sit down with the founders and work on a shareholder's agreement that was of institutional quality, really defining what corporate governance would look like, what shareholder rights would look like, and also defining what an exit process would look like for the investors. I think it speaks very highly of both institutions, DD360 and Vastu, that we were able to get through those processes with ease and I think really give us a lot of comfort that we had found the right management teams and the right companies to go after this opportunity in housing finance. 

Elana Margulies-Snyderman:

Bryan, to shift gears a bit, I'd love for you to walk us through the due diligence processes you used on both of those transactions. 

Bryan Wagner: 

Yeah. And again, I think these cases, the process is pretty similar to what we generally do, which is there's three types of due diligence. There's the legal due diligence and there we're going to work with a local law firm with a lot of transaction experience, ideally in financial services. And we'll hire that law firm to come in and look at everything from corporate affairs to make sure they're in order to regulatory compliance and give us full comfort around that. The second part of due diligence is the financial due diligence, which is really understanding the balance sheet, the income statement, and specific to financial services, understanding the loan portfolio. And I think that's where our financial services expertise is really critical. In our transactions, we get access to the actual loan tape, we analyze the loan tape, which has every individual loan and all the information around that loan, and we analyze that to make sure that we have confidence that it's a good portfolio, to make sure the loan loss reserves are calculated correctly. So, we did that in both these cases and as a general thumb. But then I'd say the most important, and the third piece of the due diligence is the business due diligence. And this is where our team, in conjunction with our local offices will show up. We'll be on site for one to two weeks. We will do field visits to go out and meet clients. In the case of DD360, we went out and saw housing projects, and it's spending a lot of time with both the senior management team, but also that next layer of management to really understand how the business functions, how the different areas of the company work together. And ultimately what we're aiming to do is to get comfort that the company can execute a business plan that we've agreed to over the next three to five years. And that's critical, both in getting us comfortable from an underwriting perspective, but then once the investment closes, because we've spent all that time during due diligence with the management team, we have great relationship with the team members, and I think we're also able to add value in board meetings and in committee meetings because we understand the business. 

Elana Margulies-Snyderman:

Bryan, as a follow-up, what do you look for in the buy-side process to ensure seamless transactions in today's economic and transaction market environment? 

Bryan Wagner: 

Yeah, if I had to narrow it down, I'd say one really important thing is information flow. We focus on financial services. We have certain analyses that we like to do in every single company to be able to compare across other opportunities. We certainly don't expect companies to have that analysis prepared, but we do expect them to be able to provide us the information that we need to do the analysis. And so that's something, I think some companies are ready for that and some aren't, but I think that's for us, that's a critical piece. And then the second one would be, as I mentioned in the case of DD360, I think a real commitment from the founders and from the existing shareholders to put together an institutional investor quality shareholders' agreement. And really thinking about governance, having outside voices on the board, shareholder rights, having exit rights where investors can find ways to trigger an ability to exit their investment several years down the road. I think often founders aren't adequately prepared as to what that means and what's standard for institutional investors to request. So, I think those are the biggest challenges. I think companies that are ready for that and are well-advised can get through that quite easily. 

Elana Margulies-Snyderman: 

Bryan, we've covered a lot of ground today and wanted to see if you have any final thoughts you'd like to share with us about future transactions you're contemplating. 

Bryan Wagner: 

Yeah, I think if I had to again narrow it down, I think we generally look for a few things that, again, I think are readily apparent in DD360 and Vastu, but the first is a niche focus. So, if you talk to the founders of DD360, they are absolutely obsessed with the residential real estate market in Mexico, and with all the inefficiencies and all the business opportunities there are to serve those parts of the ecosystem. If you talk to the team at Vastu, they're obsessed with the self-employed family, individual who lives in Tier 2, Tier 3 cities of India, who wants to get a mortgage loan to be able to build on property that they own. And so, management teams that really have a niche focus are able to serve that client better. And then we'll often find all sorts of other products, income generating ways to serve those clients. The second is profitability. We are growth equity investors, and that's really a staging part. So, we need to come in at that stage where the company's profitable. Again, as a growth equity investor, we want to know that our money can be put to work to grow. And so that means that there needs to be a growth opportunity. There needs to be a business plan, there needs to be a commitment from the founders to grow. And then last but not least, and again, very, very evident in these two transactions that are profiled, is having a tech-enabled platform. It's important to have technology as a backbone to everything that these companies do in order to ensure processes, ensure information, ensure reporting, but also to drive efficiency. Really being able to grow at 2, 3, 4 times in terms of the clients and portfolio without having operating expenses that increase at the same rate. And that's really what drives profitability in most of the investments that we make. 

Elana Margulies-Snyderman: 

Bryan, I wanted to thank you so much for sharing your perspective with our listeners. 

Bryan Wagner: 

Thank you so much for having me. It's been a great conversation. Thank you. 

Elana Margulies-Snyderman: 

And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business. 

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