Hiten Patel: Thank you for joining me on today's episode, and I am delighted to welcome the co-founder and chairman of Credit Benchmark, Donal Smith.
Donal Smith: Hi there! Thanks for having me.
Hiten: And I'm co-hosting today's episode with my colleague, Archie Stebbings. Hey, Archie.
Archie Stebbings: Hey, Hiten, looking forward to this one.
Hiten: Maybe we start, Donal, with just a brief intro to your current role at Credit Benchmark and a quick overview of the role they play in the market.
Donal: Sure. So, I'm the co-founder of Credit Benchmark. I'm also the non-executive chair. And Credit Benchmark is a contributor data model. And effectively, I suppose what we do is collect data from banks. The banks are creating this data because regulators over the course of the last 12 years, certainly, since the global financial crisis have asked banks, large banks to set up effectively a mini-Moody's, mini-S&Ps inside the bank. And so large banks have got hundreds of people working on credit analytics in order to effectively demonstrate to regulators that they've got a sufficiently good balance sheet to, you know, whether any of the risks they might be taking. Until we arrived, that data was effectively trapped inside the risk department or the credit department of the bank and really wasn't even shared, particularly widely internally.
So, our proposition to the banks was that we would aggregate all of this data. We would anonymize it. We would add a layer of analytics to it and then provide it back to the banks so they could make better-informed credit decisions. And the business very slightly grew out of previous business that I was involved in, which was founded by my co-founder, Mark Faulkner, which was called Data Explorers, now part of S&P. Which also had an aggregated data model where the collective data was more powerful than any individual data set that a bank required. It's not an incredibly new idea. There are lots of them around. But this particular effort was very important, because it really began to provide data on thousands, and now tens of thousands of private companies that don't get rated by what I would call the traditional credit rating agencies, which is the Big 3 that we all know about, and a host of smaller ones. So, S.&P, Moody's and Fitch [Fitch Ratings].
Hiten: Forgive the naive question, but why is it that the Big 3 traditional players were unable or didn't kind of provide that service. And what's allowed you guys to be able to.
Donal: I think we don't really compete with the big credit rating. They're in a very established part of the market where large public companies need to issue debt in order to issue that debt. They get a rating from a credit agency, which then allows the investors to make a better-informed decision or, in some cases, to invest because there will be a threshold for a fund in order to make that investment. I think what we sort of realized was, you know, below that threshold of big public companies, there were hundreds of thousands of companies who were getting debt. You know, from banks and other people, and there were no visible ratings for those people whatsoever.
Now, you know, the model of the big rating agency is, the issuer pays. So, you know, if you're Boeing, and you know you want a rating, you pay somebody to make that rating for you. In fact, if you're Boeing, you probably pay three different people to make the rating. If you're a middle-sized company, but that could be a 300, 400, 500, you know, million-dollar revenue company, you're not going to be paying people to do that. You're not borrowing in the same way.
Hiten: Yep.
Donal: And then, as is often the case when you start a business, we didn’t really know what all the use cases would be when we collected data. We just had an innate feeling that the data was going to be valuable once we collected it. And that, you know, use cases have been proven out where people are using us for capital relief trades, supply chain analytics, KYC [Know Your Customer] customer onboarding. You know, setting credit limits, making credit decisions, Insurance, reinsurance. So, the use cases have sort of proliferated since we started the business. The core of what we do, though, is for the contributing banks because what we do with them is enable them to see where they sit in the whole spectrum of risk.
And to understand what you know, what risk they are taking to make judgments about the risk appetite to talk to their regulators in a sensible way, and so on. So that's the proposition. And the reason we're able to do that is we collect this data. Nobody else collects it. It's quite hard to collect. It's quite hard to concord it, and it's quite hard to calibrate it. And so, as of now, we cooperate with lots of people, and we're very sort of platform agnostic. To some extent, we work with the rating agencies. We certainly work with people like Bloomberg and other platforms to distribute the data. And we are fundamentally platform agnostic about where our data goes, as long as it gets to the customer.
Hiten: So, if I pull out the key themes for the listeners there, there's a improving the capital efficiency, the efficiency which some of these companies get financing as a result of the way you guys almost socialize and collaborate across the data so that there's a more informed decision being able to be made by the banks is that, which bits did I get wrong there?
Donal: I don’t think it’s just the banks, or somebody who's looking at the supply chain and wondering where the risk in the supply chain is, or an insurance company deciding whether or not to reinsure a trade credit, or a supply chain risk of some sort. So, there's a huge world, you know. I would say there's a world in which, you know, if you're a very small business, you get a Dun & Bradstreet rating, and if you're an enormous business you get S&P, or Moody's. But in the middle, there are models available, but not that many other independent sources, and I think it's probably worth pointing out. You know we employ less than 50 people. The number of people in the banks who are creating the ratings we collect is probably 20,000, and maybe more. And so, we are benefiting from the work of lots and lots of people out there, and it really is a good example of how if you aggregate previously disaggregated information, you can create something of genuine value from it.
Hiten: Yeah, a bit like how the insurance industry probably centralizes some of the claims’ data to improve the whole industry.
Donal: Very much so. Or some of the consumer credit companies. Obviously, the banks share a lot of the data, and then it's sort of aggregated and it becomes more valuable as a result of that.
Archie: And to that point, Donal, there was a spate of, I guess, KYC-focused utility models that were attempted over the last couple of decades in various geographies. How important is it that a sort of independent entity is leading the charge of delivering this solution versus it being a consortium of the banks themselves, and maybe why do you think they didn't come together to try and deliver something like this in the first place.
Donal: I think it's quite hard to do. I think manipulating the data into a usable format and concording it is extraordinarily difficult. So that's been one of the reasons. You know, I think the KYC, we're involved in that market to some extent, but it's fairly specialized, so it could be a prime broker onboarding a hedge fund. So, it's a fairly important but niche sort of application of our data. And I also don't know that these sort of bank consortiums, you know, are that fashionable anymore, should I say? You know, they don't always work. It's not the core business of a bank. If somebody else can do it in a way which is economically sensible, and we believe it is, then it's probably better to let a smaller private company innovate.
Hiten: I'm just going to rewind the tape a little bit, Donal. This is not your first foray in this space, and you've had a remarkably successful career founding companies, data companies in and around the financial service ecosystem. Could you just walk us through the journey today? I guess, starting all the way back right from the FT electronic publishing, through to Data Explorers through the various roles. Would be good just to get a little bit of the potted history in your words. What's kind of got us where you are today.
Donal: The FT sort of all happened by accident. We had a business which was effectively a media monitoring business which I had started with some partners, and our customers fundamentally were the UK Government. So, the Foreign Office, number 10, Downing Street and the Home Office.
Hiten: And this is when, this is the 90-s?
Donal: It was a very long time ago. Let's not get too precise. But yes, in the nineties, and we sold that to the FT. And I, because that company had a website at a time when having a website was fairly unusual, I was asked to write a paper on how the FT might go online. And the FT already had some really impressive digital assets of various sorts, sort of news’ retrieval databases, and so on. So, they were all put together in a package, and they had an existing website. And then I became the publisher and CEO of ft.com. and that was sort of hugely exciting. It's still a product I use every day.
And, you know, went from no users to sort of 20 million users in a very quick period. I don't think I'll ever see anything quite as sort of rapidly growing as that again, certainly in my career. But it was very good fun, and then I spent some time investing in smaller businesses quite successfully. But then accepted an offer to go and work for the Thomson Corporation, which then bought Reuters. So, I was running a large chunk of what they did. So, I've had experience of starting smaller data businesses but also running billion-dollar sort of franchises for people like Thomson Reuters, big complex companies with, you know, thousands of people working with them. But my real interest is in working with smaller companies and management teams, and I've done a lot of that via co-investing with, or private equity companies into businesses like BI-SAM, which was a performance attribution business, which is now part of FactSet. Obviously, Data Explorers, which is now part of S&P. I chair a business called Rimes, which is a systemically important data management business here in London. I am on the Board of Pirum [Pirum Systems Ltf], which sort of runs the post trade of securities financing, and is global leader in that. So that's been quite satisfying working alongside those people.
Hiten: What do you think the common thread is? I'm just trying to go back to the start, where you were quite avant-garde, right, to be taking a well-established print publication, putting that online versus, through that decade where it wasn't always that trendy to be doing the data side of financial services, right, through the 00s-10s.. Was there a common thread that kind of, I guess, motivated, inspired, like drew you to that when you're almost at least a decade ahead of, when everyone else is now obsessing over this space. Right? You can't get into conferences now, because everyone wants to talk about data and financial services. But you were doing this two decades ago, unlocking tons of value, like, I'm just trying to think what theme or thread when you look back on your journey.
Donal: You know, I would love to claim massive prescience. And you know, seeing, having a vision of the market because life's not really like that. I think I kind of played the ball that was in front of me, but it did seem to me that capital markets, particularly benefit from scale and from, you know, data runs the capital markets. And certainly, if I look at Data Explorers, a very important part of that was people understanding what the right price to pay was. And you know, kind of democratizing a market that previously had all been inside a closed space where four or five brokers knew what the price was. They knew where the inventory was. And they didn't like it at first that a company like Data Explorers came in. But in the end, I think everybody accepted that it had made it easier to do business and enlarge the size of the market, because, as with credit, I think people are more comfortable if they think they know what's going on, or they have an idea that they're getting better information they had previously. They're more likely to do business, they're more likely to take controlled and measured risks.
It's easier to explain to your Risk Committee or your boss why you're doing something. If you've got some data to evidence that you know it's not just a hunch, and you're making the right decision. So, I think I always felt there was more and more there. And then frankly, if you look at the ecosystem, you'll see that people like Thomson, Fact Set, to some extent, Bloomberg, but not as so much. You know, look at these innovators, and then, you know, absorb them into their business. And that's how the UK system works. And some of those large businesses are very good at innovating, but having run one, it's a bit of a, you know, potluck. And you're better off waiting until somebody's built something of scale, and then you can sort of plug it into your system. So I think you know, there will always be an evolving need for new and different forms of data in financial markets, because everybody is looking for that extra edge, or the arbitrage, or the safety, or the regulatory, you know, consensus where you want to know that you're doing the right thing.
Hiten: I'm going to take that image you've put in front of me of you, just playing the ball in front of you and I'm going to lob you in the Ryan Giggs category. Now, Donal, you're in your third decade of doing this so well, so I hope you take that as a compliment, but I guess when you look at the ball in front of you now, and you're still active, you're quite humble in your insights, but it's clearly there's decades of experience. Where do you think the ball needs to go next? Given, there's a lot of hype. There's a lot of noise about it. But in your mind, where are you most focused, or see greatest opportunity, for, as you say, pushing the ball forward?
Donal: So, I still think there are frontiers of capital markets that have not been digitized. And therefore, you know, banks, investment managers are doing lots of things that are not cool to what they should be doing. If you take investment managers, it’s very good example. It would be managing data. They shouldn't really be doing that. They're probably not very good at it. They can get other people to do it. So that's one thing. The big area will be around the application of artificial intelligence (AI) to data and what that means for business analysts and investment analysts. And on the buy side, you've got to guess that AI and data-driven tools are going to become much more important. The number of people doing those sort of jobs in the sell side or the buy side is going to decrease very steadily over the next ten years and be replaced with platforms that are data and AI driven. So, I still think there's tons of opportunity in that.
And then the other thing is, you know, we're in a period of uncertainty, and, therefore, you know, there are businesses that can benefit from volatility. And you know, to measure volatility you need data to measure that volatility. A good example, you know, and then we'll talk about this later is something like Kpler, you know, which tracks commodities, and you know, shipping around the world has grown phenomenally well. One of the greatest businesses, data businesses sort of ever. And it's hit its moment because, you know, the world is becoming multipolar. There are going to be loads of disruptions to supply chains. We've seen the beginning of that already with the new administration in the US. And so, you know, knowing what's happening is becoming more and more important. And I think there will be a period of volatility for quite a long time. So, to me, that sort of data becomes more important. I've not been so involved in the world of consumer financial technology. But clearly, you know, the way in which companies like Revolut have changed the way we do banking is incredible, and I think they weren't the first, but they've been one of the most successful.
For example, I think everyone I know uses it everywhere I know, which is fairly remarkable. So, I can see a lot of opportunity. Of course, out of the back of all of that, for people like Revolut, comes a stream of data which in itself then becomes a hugely valuable commodity to traders, hedge funds and everybody else. So, I don't think this ecosystem is kind of atrophying. I think it continues to involve, it's so competitive, and people are looking for an edge all the time. I think there's always going to be an angle for people who understand how to, you know, get data into workflow at the right place in the right town for the right person. That's always going to be a valuable service to provide to customers. And you know, I think in the end consumers benefit from this, because if you reduce risk reduce costs, you know that's better. And in the end, what is everybody in this market doing? They're kind of running everybody's pensions, right? And so, you know, it is important that that system works properly.
Archie: Donal, just picking up on something you mentioned there around in a riskier world, in a more volatile world, knowing what's going on is important. I think it's a powerful statement. And I guess, listening to your journey and the career that you've had starting at the FT and helping to put that online. And now we're in this AI empowered new era, and we hear a lot about the power of unstructured information, and how AI can help us interpret all of that news that you helped put online, and the forums, and the dark web, and the other sources that exist that have useful signals within them. Maybe from a credit standpoint, or even just from a from an informational standpoint, into that ecosystem. How do you see that kind of, you know, words to signals, words to data, evolving.
Donal: Well, look if I look at it from the narrow point of view of the way in which people in financial services, particularly hedge funds think about, you know, noise to signal. It is still the preserve of a very small group of very elite firms to be able to create value from data, and I'm not going to say who they are. But they are people who have access to all the data they need. And in general, you find them buying everything. Secondly, massive computing power. Thirdly, lots of mathematicians, and, fourthly, proprietary data of their own that they can use to do all of that. The idea that AI, on its own, let loose on completely unstructured data, would produce a trading signal of any sort is difficult. Because even if it did, that signal would fade over time, because, you know, if you can get sort of grok to do it, then anybody can have it, and therefore the value disappears quite quickly.
But in terms of information, you know, we have to be quite careful. I think people have to, you know, we are all going to have to learn how to use AI in a world where the kind of standard beacons of truth, you know, while slightly disappearing, that's kind of, I think that should be almost what people have been taught to do at school now, if you can. But in the financial markets, I sort of have a belief that truth will come out, because most of their stuff is about understanding what the risk is, discovering the price, you know, finding a willing buyer or a seller, and those things are kind of immutable.
Archie: Should ask about your crypto wallet in the back of that statement.
Donal: The story I always tell, which is a very sad one, is that somebody gave me one Bitcoin when Bitcoin was worth $60 to pay for his share of a meal in a restaurant and I lost the wallet. So don't ask me about crypto. But if you find the iPhone I had 15 years ago, whatever it was, can I have it back please?
Hiten: Awesome. I want to just go back to some of the reflections you might have on your own career and journey, Donal, and I'm conscious at the time we're having this conversation. Right? You've just got this new elected leader in the US. Europe's having a little bit of an introspection about growth and how can we put the right number of entrepreneurs and scale up and grow companies on the map? What do you think, from your experience of founding, supporting, investing in a whole swathe of successful companies, which, to my mind, a lot of them had pretty European heritage, what bits do we need to emphasize better in the narrative? And what we're doing? Which bits do we need to change the thinking to ultimately create kind of, you know the next generation of Donal Smiths? Right? We need 10, or 20, or 50 of you coming through the ranks. What would your musings be on that.
Donal: Well, I sort of think some of the answer lies around regulation, certainly in the UK. Allowing pension funds much more latitude in terms of investing in venture capital. I mean, obviously, they all invest in private equity. So, I think that could make a big difference. I think the regulators could do a better job of engaging with earlier stage companies. I think they perhaps haven't had the right department to do that, or sometimes the right people to do that in terms of engaging. I think private equity has a big role to play in it, especially in the sort of mid-market, not the sort of gigantic buyouts, but you know, to the extent to which I've been involved with private equity companies.
They have fueled innovation. Not quite the same way as VCs, but I think they're both part of a kind of, you know continuum, which makes a lot of sense. And to the extent that it's possible getting, you know, people investing from their own personal savings into private equity, maybe less so into VC. I think would be good, and we need more capital into those sectors. I think London's in a good place. Obviously, you know, leaving the EU didn't particularly help but we still could have, you know, a globally important, and we do have a globally important sort of tech and investing sector in the UK. And some very good universities, and so on. I think there are other centers in Europe which can do very well, but I do think London's still got an edge and is quite a special place.
Hiten: Yeah, I was just reflecting. I mean, we were both at a conference last week. We sat at a conference in London. There's lots of investors, lots of advisors, lots of early-stage companies, all in a European setting. But everything seems to need to go through the Americas route to scale or fulfill potential. I guess I didn't know, just reflecting on that situation, how can more be done in region? How can more value creation stay in continent? And is that even the right thing to be aiming for as the world kind of deglobalizes a little?
Donal: I mean, it's often said about the UK that people sell out too early, and they didn't create, you know, Google here, or whatever. I think the problem is, you know, it's really the market dynamics. I mean, the USs the biggest market in the world for everything, practically, certainly in terms of information, media, data. financial services. It's sort of 60%. So, if you don't have an ambition to get big there, you're not getting big. And so that's, you know, I think, what matters. It's maybe easier there to hold on to if a company is doing well for founders to want to hold on to their shares for longer, and to IPO the companies. And then, you know, there are more examples of very successful IPOs in the US.
And they certainly have been in London. So, you know, I think we just have to accept that. I don't think they should be, at the moment you start thinking about, you know, outside of it. If you're thinking about technology or financial technology, you can't really build European champions. It's not like making aircraft or something. I just think most of these businesses need to be global. And certainly, all the businesses I've been involved in over the last 10 years. The US has been a central plank of our strategy, and everybody has spent a ton of time there, and the things that really worked were things where we managed to persuade US customers that we were a global business that they should be trading with.
Hiten: Yeah. Helpful reflection. Archie, any points you want to jump in on around the wider space.
Archie: I guess, would the advice on the back of that answer be: you should be thinking about that market earlier on in the development cycle of your business.
Donal: Yes.
Archie: Occasionally. Yeah, occasionally we're seeing it, as you know, a part of the next wave value creation story for an organization that perhaps should have already put the boots on the ground and thought about that market several years previously.
Donal: I think that's right. I mean, look, I can only really speak to the sort of capital markets. But when you think about it, the top 10 banks in the world, probably 6 of them are in the US. Right, the top 100 hedge funds. 80 of them are in the US. And if you've got a product that's useful for sort of even smaller banks, there are like 2,000 regional banks in the US which are, you know, bigger than the 5th largest bank in the UK. So, it's a kind of very big market. And I should mention obviously that we are looking to attract those banks in conjunction with you guys at OW, because, you know, one of the things we're doing is helping those banks, OW, with the sort of balance sheet expertise and us with the data to help them manage their balance sheets more effectively on a global basis. And so, or yeah, people should think about it since almost day one, I think.
Hiten: I'm going to just switch gears, Donal, and we like to get guests to just share on some of their personal learnings for the benefit of the audience. I'm going to invite you to just reflect on most interesting challenge you've faced across that journey, and the lessons learned from it that you think could be beneficial to others who are applying their trade in this space.
Donal: Well, I think, and this is based on my current experience. I think my co-founder Mark would say the same thing. Sometimes things take a lot longer than you expect them to or want them to, and you've got to be prepared to sort of dig in quite deep on that. And in the case of, you know, Credit Benchmark, we've been going for sort of 10 years, not quite. And I had thought that two things. One is that a critical mass of banks which would give us a sufficient amount of data to be meaningful was 20 banks - wrong. It was 30, maybe 35, and I had thought we'd get 20 banks in four years - completely wrong, because it took us about seven years to get to 30 banks. And so that's quite a lot of time. But I sort of reflected on that, and I looked at businesses, you know, like Rimes or Preqin.
Quite often you look at them and say, oh, wow! That somebody founded that 22 years ago, you know. And so, for every business that you see, which is, you know, sort of flash to bang is three years, and they sell it, or something. Every other business can take quite a lot of time to do it, so I think my thought for people who want to be entrepreneurs is, if you believe in it, be prepared to stay there for quite a long time, and, you know, it will work out in the end, probably. And the thing is, after four years, if something's not working, you can still not do it. But if you still think it's going to work, you should want to keep at it. So, I think I think patience is a good thing, because we all make a ton of mistakes in the early stages of these businesses.
Hiten: Yeah, what gives you that confidence to persist when everyone's banging on about, you know, failed fast and test and learn, etc. And is it just you've got a track record, so you've got greater conviction than the average. Or what is it? That's it's clearly working out for you.
Donal: I think it is a little contrarian. I think it's more just sort of being stubborn, but it also helped that both I and the co-founder have had several successful exits so far, and therefore we can afford to be patient frankly. And so, we were, and I think at the end there's going to be a very big, you know, sort of outsized reward for that, for the staff of this company, hopefully, but it, you know, it can be difficult. I look at a lot of businesses. I also agree that if you get three people, you know, in their twenties, they have a great idea. They do something for 18 months. It's not gained any traction whatsoever. What are you going to do? So, it's partly a stage of life thing. Having said that, I'm very unlikely to start another business.
Archie: For those people in their twenties who have not had several successful exits, and are maybe looking for funding, and whether it's, you know, angels and friends and family, or VC. Or whatever it may be. I guess the requirement to be patient and think over a longer time period may or may not jar with some of those kinds of cap table constituents. And do you think there are dynamics there? That kind of impact, whether a business makes it in the end.
Donal: I think there are, because no, that's a very good question. I think well; I suppose two things. I think most VCs would probably say this as well. For most people, the best thing to do is to go along on your own steam, or your friends, or family, or second cousin, for as long as humanly possible, because you're going to get a better outcome when you do eventually raise money. And then the second thing is not everything is a venture capital case. So, there's a, you know. Can you find some more long-term capital which is also willing to take early-stage risk? You know it's a bit of it's a bit of a unicorn. But I think the reason for that is venture capital is really effective where things are going to scale very quickly. But if things are going to be a bit more of a slow burn, it's not the greatest place, especially if you sort of raise too much money at the wrong valuation at the beginning. So, I think I would go along the angel smaller investor route if I were in a small company again for as long as humanly possible.
Hiten: And assume you don't want your inbox flooded off the back of this, Donal.
Donal: Actually, I do very little personal investing, because I was completely lectured quite rightly by a friend of mine who is a VC. When I told him about my portfolio of eight things I'd invested in, and I said I'd met 20 companies, and he said, well, he would have met about 200 companies before he'd done eight investments. And he predicted that they wouldn't do that well. And he was right.
Hiten: I was going to challenge that view. I was speaking to an old colleague.
Donal: You can get lucky.
Hiten: The view is out there that if you're hanging around in the right networks, and the things that come to you may be of a higher probability to succeed than just the company there.
Donal: That's right. I'm sure that's right as well. Maybe I am just not in the right networks.
Hiten: If you can’t make it work, then who else? Just next question in this chapter was, you share what you do outside of work. Outside the professional sphere, any other interests that help guide your decision making or do what you do in the day-to-day job.
Donal: I mean none of it helps guide my decision making. But switching off, you know, is incredibly important. We spend a lot of time in Ireland, we go walking in the hills. I hate later on this year to go to Japan to walk in the Japanese Alps. Like, you know, turn off the phone for an extended period of time and just be out there so, as much of that is humanly possible. And then, because I live in London, I try and go to theater and the opera as much as I can. And so that's it. Really, it's not more complicated than that.
Hiten: Last one for us, we invite guests to throw the spotlight and invite you to draw attention to an individual or company that's impressing you right now that listeners should go and look up and learn more about.
Donal: I mentioned Kpler. Health warning: I'm very, very mini shareholder in Kpler, and I just think what they've done is, you know, Really, really good. They've grown more quickly than most businesses I've ever seen. They've hit the moment, as I said earlier, this sort of supply commodities, energy. It's the story of the next 10 years, and, as you can see, with all this stuff about Greenland, because, you know, buried under there is all the stuff that people are going to need to make mobile phones and so on. So, they're great. I really like Octus, which used to be called Re org Research. I think Ken Collier there is hugely outstanding, and I think he's done, you know, an amazing job, really good company. And ComplyAdvantage, which, you know, is serving a real need in the financial market fighting fraud. You know, fighting financial crime happens to have two of the same shareholders as I do, which is index ventures and Bolton Capital, and I think they've done a really good job of growing that business. And making it really part of the sort of financial services ecosystem. So, I think they've done a very good job.
Hiten: Awesome. Any last thoughts from you, Archie?
Archie: Just thank you very much. Really, really enjoyable conversation. Learned a lot in the last half hour or so, so thank you, Donal.
Hiten: Yeah, Donal, thanks for coming on the show. Be so generous with your thoughts. Catch up again soon.
Archie: Talk soon, bye.
Donal: Thank you.
This transcript has been edited for clarity purposes.
