iCapital buys structured note provider Axio Financial

Nearly two months after a round of fundraising valued iCapital Network at $4 billion, the alternative investments company is deploying some of the money to acquire Axio Financial, which provides financial advisors with access to the U.S. structured notes market.

Founded in 2010, Axio lets advisors evaluate, select and purchase structured notes. The company’s technology is integrated with domestic and international bank issuers of structured notes to provide the real-time data, analytics and reporting interfaces needed to service the complex investments.

Terms of the agreement were not disclosed, and iCapital expects the transaction to close in the fourth quarter of 2021.

Structured notes are debt securities that use derivatives to provide exposure to an underlying asset, like a basket of stocks or an ETF, according to Bloomberg. The market has boomed lately as big banks like JPMorgan Chase and Morgan Stanley package up popular strategies, such as ETFs from Cathie Wood’s Ark Investment Management.

According to data from trade publication Prospect News cited by iCapital, $72 billion in structured notes were issued in 2020, an increase of 36% over 2019. Issuances are expected to reach $86 billion in 2021, with $9 billion coming on Axio, the company said.

The acquisition expands iCapital’s menu of alternative investments, which started with private equity and has grown over time to include private credit, hedge funds and, most recently, cryptocurrency via partnership with Grayscale Investments. Structured products are new for iCapital, but fit with the firm’s overall strategy to become a full-service platform to fulfill all advisors’ alternative investment needs, said CEO Lawrence Calcano.

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“Advisors are much more actively using structured products to create the exposure they’re looking for for their clients,” Calcano said. “I think there’s a lot of flexibility inherent in these products that advisors have been able to take advantage of to solve client problems.”

Access to structured notes is something traditionally only available to advisors working for the banks who issue them, Calcano said. Bringing Axio into the fold can ultimately increase iCapital’s value to independent advisors.

Some of those bank issuers are also clients of, and investors in, iCapital. As the firms scale up the number of structured notes they issue, a firm like iCapital can help a greater number of advisors, and their clients, access the investments.

“The best relationships are the ones where you can create win-win outcomes,” Calcano said.

While structured notes can offer attractive discounts or leverage, they also charge high fees and can be difficult to exit. JPMorgan Chase has been criticized in the past for overstating the value of some of its structured products, while the SEC expressed concern about these complex products being sold to unsophisticated retail investors.

Calcano isn’t worried that iCapital is making these complex products too risky. Working with financial advisors — rather than making the products available directly to retail investors — and providing a suite of information about alternative investments is a core component of the company, Calcano said.

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“Concerns about complex products will always be there, which is why we think education is so critical,” he added. “There are a set of obstacles [to investing in alternatives] that should exist, and a set that doesn’t serve anybody’s interests … Complex paperwork, high minimums, a lack of due diligence, a lack of education — those are very big friction points that we are explicitly trying to address.”

Having structured notes on a platform like iCapital can be helpful for advisors to better understand the products, said Nicholas Olesen, the director of private wealth at Kathmere Capital Management, a Philadelphia-based RIA with $2 billion in assets under management. While the firm isn’t currently working with structured notes — the terms just aren’t as good as they were in the past, Olesen said — it uses iCapital for research and due diligence on other alternative investments. Adding structured investments can help more advisors understand how the complex products work, and whether or not they are a fit for clients, Olesen said.

“As we all know, there are so many products out there. There’s an overabundance of information, so having a place like iCapital that has done a good job in helping advisors know the ins and outs of [alternative investments], that’s really helpful,” he said.

Olesen hopes iCapital can leverage its size to help bring prices down on the investments, and maybe help improve the products’ reputation in the industry.

“Structured went through a period where they got a bad rap a few years ago. Advisors sold them poorly," Olesen said. “I hope iCapital and issuers clean up some of that mess, and hopefully this merger can help some of that as well.”

In addition to Axio’s technology and support services, the firm’s staff will also join iCapital. Axio CEO Marc Paley will assume the role of managing director and head of distribution, reporting to Calcano and continuing to lead the Axio team.

iCapital isn’t the only firm hoping to meet a growing advisor demand for structured notes. Earlier this month, Financial Independence Group partnered with Simon Markets, a wealthtech company spun out of Goldman Sachs, to power an advisor dashboard that brings together annuities and structured investments.