DeGiro needs cash. The discount broker is investing heavily in marketing. Advertising on TV and internet is expensive, and their balance sheet is apparently running empty. I got the hand on a confidential prospectus on a certain DeGiro offering. Showing more colour on the broker.

DeGiro figures

The broker has 100.000 clients. They have spent €7.5 million on advertising to convince people to thrust their money with DeGiro. That’s a price of €75 per customer. On average the money earned after regular costs is €150 per customer per year. On a daily basis DeGiro earns €60.000. That’s €15 million a year.

Balance sheet runs empty

Do the math. Spending 75 to earn 150 yearly is a done deal. But apparently, the balance sheet couldn’t afford more expensive advertising. Selling a stake in the firm didn’t work out. Several private capital firms turned them down (“unprofessional, no figures prepared”).

More debt may not be allowed by the regulator. Selling a stake didn’t work out. Where to look next?

HiQ closes the doors

DeGiro happens to know people with a few million to spare. Investors in HiQ have been losing money for years. Give them a small guaranteed carrot to recoup some losses, and they’ll be eager to switch.

Getting most investors out isn’t the same as closing the fund. HiQ will continue as a tiny fund. Closed to outsiders, it will probably function as a private holding for people behind DeGiro. After all, on  a smaller scale it’s a piece of cake to make a profit trading against the DeGiro retail flow. Running the fund is cheap, all infrastructure costs can be covered by DeGiro.

The proposition

The HiQ investors can switch to “acquisition financing participations”. The money will be invested in advertisements for DeGiro. That’s correct. Investors’ money will be spend on TV commercials. They keep track on the new DeGiro customers. The profit these customers make for DeGiro will be passed on to the investors.

The natural inflow of customers is set at 3000 per month. Say 4000 new customers join, all earnings on a thousand of them will flow to investors. Creative. In reality it’s only a small teaser. It’s a kind of subordinated debt instrument with a maturity of 5 years and a guaranteed profit of 180% and capped at 225%.

Like most financial firms, there are no assets to secure the debt. The profit sounds cool these days. The Rabobank certificates have a current yield of 6%. At least the shareholder in DeGiro promise not to withdraw any dividends as long as this debt hasn’t been paid off including the guaranteed profits. When the LPE (DeGiro, HiQ, Fundshare) group folds, investor lose their money.

NoT ALL PROFITS TO PARTICIPANTS

Not everything DeGiro earns on new clients is passed on to the participants. The money earned with internalizing retail flow is kept within DeGiro. Also the margin on automated currency hedge (“AutoFX”) is kept. Another odd thing is the deal is within the personal holdings of the founders.

According to spokesman Niels Klok, this is because of the capital requirements for DeGiro. Personal holdings don’t have this regulation. What happens when the marketing efforts are a failure is difficult to say. Paying back the money can be postponed forever, but no dividends for shareholders sounds like a fair guarantee.

An alternative could be to cut back in advertising, introduce two-factor authentication, stop juggling with fees and get a serious app.

Jack
Jack