Wealthsimple growth stalls in second quarter
Wealthsimple Technologies Inc.’s explosive growth over the past few years that propelled the bank challenger to become one of Canada’s most highly valued startups has stalled as the company attempts to manage through a worsening economy and this year’s selloff in public equities and cryptocurrencies.
Data published Friday by Wealthsimple’s largest shareholder, IGM Financial IGM-T -1.14%decrease, shows that Wealthsimple’s clientele, excluding clients of its tax service, grew just 2 per cent over the course the second quarter ended June 30, to 1.7 million accounts, compared to the end of March. Growth in the first half was 10.4 per cent.
By contrast, the number of accounts at Wealthsimple jumped by 19.4 per cent in the second quarter of 2021, and by 117 per cent in the first half of last year. Wealthsimple’s clientele increased by 173 per cent in all of 2021, more than tripling in 2020.
The slowdown came as Wealthsimple, one of the most prolific advertisers in the Canadian financial services space, slashed its marketing budget and cut jobs in the quarter.
Wealthsimple’s assets under management, meanwhile, dropped by 13 per cent from March 31 to June 30 this year, to $16.9-billion, according to IGM. That reflects a challenging environment for asset managers; IGM, which owns IG Wealth Management and Mackenzie Investments, saw assets under management and advisement drop by 9.8 per cent to US$242.1-billion from the end of March to June 30. IGM CEO James O’Sullivan said on a conference call with analysts Friday that investment industry redemptions exceeded sales by $21.7-billion in the quarter, making it “unfortunately the worst Q2 on record.”
The Wealthsimple data accompanied news that IGM, which is controlled by Power Corp. of Canada, had slashed the valuation of its 24 per cent holding in Wealthsimple, to $492-million as of June 30, down 47-per-cent drop from its $925-million carrying value on March 31.
IGM now carries its Wealthsimple stake at 42.6 per cent of its $1.153-billion valuation last Dec. 31. Power Corp. POW-T -0.80%decrease, whose affiliated entities collectively control Wealthsimple, will reveal the impact of Wealthsimple on its balance sheet when it reports earnings after markets close Friday.
IGM chief financial officer Keith Potter told analysts the Wealthsimple devaluation “reflects a continued decline in what we saw in public peer valuations during the quarter” as well as Wealthsimple’s “revised revenue forecasts.” He pointed out that even with the valuation change, IGM’s average return on the investment to date exceeds 40 per cent, including $300-million his company got when it sold part of its stake last year.
Mr. O’Sullivan said IGM remained “long-term supportive of Wealthsimple,” which he said “should be deeply proud of 1.7 million clients. That’s a big number in Canada.” But he was noncommittal when asked by an analyst if IGM would provide further funding for Wealthsimple, an unprofitable company that has relied on outside funding, largely from IGM and other Power affiliates. “It’s just very difficult for us to say what the future might look like,” he said.
Even with the latest markdown, IGM has cut the value of its stake by less than the 80-per-cent-plus drop in the stock price of Wealthsimple’spublicly traded American analog, Robinhood Markets Inc. HOOD-Q -5.79%decrease, whose stock has sold off by more than 80 per cent from its 52-week high.
Wealthsimple launched as a robo-advisor in 2015, providing automated wealth management services over the internet to a millennial-focused audience. It began to shift to other financial services in 2018, adding a high-interest savings account and tax-filing service in an effort to build what CEO Mike Katchen has called “the financial institution of choice for the future majority of Canadians.”
But the biggest driver of growth became its online digital stock-trading platform, Wealthsimple Trade, which offered direct access to cryptocurrencies and zero-trading commissions. Wealthsimple experienced a surge in new retail clients throughout the pandemic and was one of Canada’s top beneficiaries of soaring valuations and investor interest in tech companies, increasing assets under management by more than 90 per cent, on average, in each of the past three years.
Millennials flocked to upstart trading platforms particularly in the past two years to buy into meme stocks and cryptocurrencies, and in May, 2021, Wealthsimple became one of Canada’s most highly valued private technology companies when it raised $750-million at a $5-billion valuation. At the same time, Wealthsimple pulled back on its global ambitions, selling its nascent businesses in the United States and United Kingdom last year to focus on Canada.
Both Robinhood and Wealthsimple have been hit by bad news this year. Robinhood this week said it would cut its head count by 23 per cent – its second job cut of the year – and revealed in its second quarter report it had experienced a drop in monthly active users and assets under custody.
Meanwhile, Wealthsimple laid off 13 per cent of its work force in June. Mr. Katchen said at the time clients were now “living through a period of market uncertainty they’ve never experienced before.”
In an emailed statement to The Globe and Mail, Wealthsimple spokeswoman Rachael Factor said: “Earlier this year, we made the decision to significantly reduce our growth marketing spending, in order to concentrate our resources on what’s most important in today’s environment. Our focus right now is on our clients: deepening their engagement with us and helping them navigate a difficult time in the financial markets. At some point markets will rebound – they always do – and we’ll respond accordingly.”
The $5-billion valuation afforded to Wealthsimple last year provided the strongest validation to date of Power’s evolution from a staid owner of traditional financial services companies into one of the biggest supporters of upstart digital bank challengers targeting underserved millennials and small businesses.
However, soaring valuations for Power-backed companies, including Wealthsimple and Koho Financial Inc., made Power’s stakes so large on paper that they became a material part of its holdings. Increasingly, Power’s fortunes were tied to the more volatile and risky startups rather than core anchors such as IGM and Canada Life.
The arrival of rising interest rates prompted by soaring inflation, plus the hangover from a pandemic-era spike in values of digital companies, has led to a broad-based drop in valuations for tech stocks.
