Canada's billionaire Desmarais family has come up with a novel approach to fend off the technology startups that threaten its financial-services empire: Bring the enemies in and invite them to attack.
Power Corp. of Canada, the Montreal-based holding company that runs one of the country's biggest insurers and mutual-fund companies, has set aside $250-million to spend on fintech startups in various stages of development. The plan is to have them compete with Power's older businesses, permeate the corporate culture and accelerate the transformation of the firm from within.
"We want you to attack our group, because we want you to do the job that other people are going to do to us," said Paul Desmarais Jr., the chairman and co-chief executive officer of Power Corp. "We want to do it from the inside and we want to give you a big budget."
In a rare news briefing following Power's annual meeting in Toronto last month, Mr. Desmarais Jr. described the mission the company gave Portag3, the in-house venture fund set up in October that's spearheading the effort.
"Fintech is changing the financial services world," he said. "It's big, it's coming, it's there and we want to be part of that."
Mr. Desmarais Jr. says Power's strategy stands out in the industry as a hybrid model between companies that try to change on their own, but face resistance internally, and others that subcontract work to startups. Its Power Financial Corp. unit has invested $100-million in robo-adviser Wealthsimple Financial Inc., a direct competitor to some of Power's wealth-management companies that targets millennials. Power owns a majority stake in the startup, according to its website.
"I don't think many institutions would have had the foresight to let that company continue to operate on its own despite the capital investment that we've made," Adam Felesky, Portag3's president, said in a phone interview, referring to Wealthsimple.
Faced with their customers' shift toward online banking and investing, Canada's big lenders are all trying to get a digital edge by setting up their own software labs, collaborating with fintech companies, or investing in them. Toronto financial startups raised about $160-million in 2016, double the rate of 2014, according to a report by the Toronto Financial Services Alliance and Accenture PLC. Still, most of that money came from venture capital firms, not the banks themselves.
Power's recent fintech investments are helping make the stock more unique and compelling, though improving the earnings outlook of its insurer Great-West Lifeco Inc. and its struggling Putnam Investments unit in the United States would have a more immediate impact, said Jim Shanahan, an analyst at Edward Jones. Including reinvested dividends, Power Corp. shares have fallen 3.2 per cent over the past two years, compared with a 21-per-cent gain for a sub-index of Canadian financial shares in the S&P/TSX Index.
Even if the older businesses of the group choose not to work with the startups Mr. Felesky invests in, they become more aware of what's out there and compelled to offer similar services, making the $250-million investment go a long way, Mr. Desmarais said.
"$250-million, you're going to say 'with a group this big, what does that mean?'" he said. "But it's huge because it's impacting the culture of our companies like never before."