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Michael Katchen, CEO of Wealthsimple, at his office in Toronto on April 27, 2017.Nathan Denette/The Canadian Press

Wealthsimple Technologies Inc. is closing in on a landmark financing deal, backed by some of Silicon Valley’s leading venture funds, which will make the Toronto-based online bank challenger one of Canada’s most highly valued private technology companies.

Sources close to the transaction say several new investors are in the advanced stages of completing a deal to invest $700-million or more for an equity stake in Wealthsimple. These include Dragoneer Investment Group, DST Global and Iconiq Capital and Canada’s Inovia Capital, as well as existing investors. The deal is being led by past investors and U.S. venture-capital heavyweights Greylock Partners and Meritech Capital Partners.

The transaction, which could be announced as early as Monday, would value the seven-year-old company, led by CEO Mike Katchen, at roughly $5-billion.

A spokesperson for Wealthsimple declined to comment.

The deal represents a substantial bump in valuation from Wealthsimple’s last financing just seven months ago when it raised $114-million led by TCV, Greylock and Meritech, valuing the company at the time at $1.4-billion. The Globe and Mail is not identifying the sources because they are not authorized to speak on the matter.

The investment would represent what is believed to be the largest private financing of a Canadian startup and cement Wealthsimple’s status as a serious challenger to incumbent financial giants, particularly among the millennial-aged customers it has heavily courted through online advertising and marketing.

Dragoneer is an investor in one of Canada’s largest and most valuable private technology companies, PointClickCare Technologies Inc., and a past backer of Airbnb, Alibaba, Facebook, Netflix, Spotify and Uber. Hong Kong-based DST, led by internet entrepreneur Yuri Milner, has backed many of the same companies and specializes in buying into later-stage internet companies.

Inovia is one of this country’s leading venture-capital companies and a backer of some of the most valuable startups based in Canada or led by Canadians, including Sonder Holdings, Inc., AppDirect Inc. Hopper Inc. and Lightspeed POS Inc.

Iconiq manages funds from U.S. tech billionaires including Facebook Inc.’s Mark Zuckerberg and Sheryl Sandberg, LinkedIn co-founder Reid Hoffman and Jack Dorsey, the CEO of Twitter and Square.

Notably, Iconiq is an investor in Robinhood Markets, Inc., the U.S. online trading platform that has spiked in popularity. The boost has been driven by the en masse arrival of millennial-aged investors between the ages of 18 and 34 to stock-market investing, which helped increase prices of internet stocks. Robinhood announced three months ago that it had raised US$3.4-billion in fresh capital.

Wealthsimple has benefited from a similar trend in Canada. The company began as what is known as a “robo-adviser,” providing automated wealth-management services over the internet that quickly design an investor’s portfolio based on age, financial goals and risk tolerance.

Such services have proved particularly popular in other markets: Vanguard Personal Advisor Services and Charles Schwab, based in the U.S., have more than US$212-billion and US$57.9-billion in assets under management, respectively.

Wealthsimple has focused on younger, digitally savvy customers, making it the largest potential domestic disruptor of Canada’s banking oligopoly, although the company only has a fraction of the assets of the banks. Its investing platform is still not yet profitable, although Mr. Katchen has stated that these services can take years to reach that goal.

In the meantime, Wealthsimple has expanded beyond digital portfolio-management services, adding a high-interest savings account and tax-filing service. But the biggest driver of growth recently has been its online digital stock-trading platform, Wealthsimple Trade, launched in 2018, which also offers direct access to cryptocurrencies and zero-trading commissions.

Last year, as do-it-yourself investors rushed to offer new trading accounts during the pandemic, Wealthsimple’s assets under management nearly doubled to $9.7-billion compared with 2019 levels, according to security filings from Power Corp. of Canada, its largest shareholder. Industry data shows that Wealthsimple accounted for 43 per cent of new trading accounts opened in January, more than any other Canadian brokerage.

The company, which initially set out to expand to the U.S. and Britain, has focused more on its home market, selling its U.S. book of business in March to New York-based robo-adviser Betterment Holdings Inc.

But unlike Robinhood in the U.S., Wealthsimple hasn’t bought into derivatives trading like other platforms, making it more conservative and durable should the derivatives craze among retail investors in the past year subside.

Wealthsimple says it has more than a million clients, excluding tax clients, across all markets. That is up from the 500,000 clients it reported five months ago.

With zero commissions on its trading platform, the company makes money off currency-conversion fees – charging investors a 1.5-per-cent fee on all U.S. trades.

Its cost to service clients is also significantly less than its competitors, stemming from its 2015 purchase of Shareowner. The acquisition is an advantage for Wealthsimple as it enables the company to conduct its own back-office trading, making Wealthsimple Trade a vertically integrated platform – unlike Robinhood, which outsources trading.

The new financing of Wealthsimple, which has not been completed and is subject to changes in both the total and shareholder composition, has been circulated this weekend for final signatures by investors.

Sources say the deal, coming on the heels of Robinhood’s recent financing, has been heavily oversubscribed and that the bulk of the investment would go to buy shares from earlier investors, with roughly $250-million being invested directly in the company. It is understood that entities affiliated with publicly traded Power Corp., including publicly traded IGM Financial, and venture-capital company Portag3 Ventures are not investing in this round, given their significant prior backing.

But it would amount to a material impact on Power and IGM: The three Power entities have collectively invested $315-million in Wealthsimple in five of its six previous financings from 2015 to 2019 (the fifth, in 2019, was led by the digital investment arm of German insurer Allianz Group). Combined, they hold 61.7 per cent of WealthSimple’s equity and 85.3 per cent voting control.

The value of those investments as of the end of 2020 stood at $934-million, or close to three times the amount invested and represents an internal rate of return of 44 per cent, according to Power security filings.

The financing would also further validate Power’s big push into alternative investing and its embrace of disruptive financial technology startups – and help deliver meaningful returns to the Montreal financial services conglomerate controlled by the billionaire Desmarais family.

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