Are ICOs the High Yield Bond of the 21st Century?

Last month, Vitalik Buterin held a keynote presentation in Singapore, resulting in nostalgia taking over for me. For those who are not familiar with the cryptocurrency industry, Buterin is the 23 year old inventor of the blockchain-based Ethereum smart contract platform, and this event was part of his announced relocation to Singapore as a gateway to promoting it in Asia.

Ethereum is the platform that most of this year’s more than $1.7 billion Initial Coin Offerings (ICO) were built on. As a kind of combination of Crowd Funding, VC funding, and securitisations, the popularity of ICOs has rapidly expanded this year.

The keynote presentation reminded me of my days as a young banker on Wall Street in the early 1990’s, working on financings in the then emerging High Yield bond market that unleashed the entrepreneurial spirit, disrupted industries, and created fabulous wealth for the innovators it helped finance. Given the wide swath in time periods, a little history is in order.

A brief history of high yield bonds
This method of new issue financing is largely attributed to Mike Milken, an investment banker at the time, but whose better known these days as founder of the renowned Milken Institute think tank.

Tracing their earliest roots back to mostly the 1980s, new issue High Yield bonds filled a vital niche between Investment Grade debt (i.e. what the rating agencies deemed as “safe” and which severely limited capital market access to all but the largest and most established borrowers), and restrictive bank loans or substantially dilutive equity financings.

The latter financings were often the only viable alternatives for companies in emerging industries and entrepreneurs needing large amounts of capital, yet the accompanying terms -- highly restrictive covenants or substantial equity dilution -- were unpalpable for many of the most ambitious among them.

Enter the High Yield bond, and the speed of access to large fundings on the flexible terms they required. The author William D. Cohan cited some of the entrepreneurs and companies backed by High Yield bonds in an Institutional Investor article from May: “Milken went on to finance Rupert Murdoch as he transformed News Corp. into an international powerhouse and Craig McCaw as he built a nationwide cellular communications company with 2 million subscribers before selling it in 1994 to AT&T for $11.5 billion.

Milken helped billionaire entrepreneur John Malone grow his cable television empire and helped Bill McGowan create MCI, which competed with AT&T in the long-distance phone market. He helped create Viacom, Time Warner Cable, Telemundo, and Metromedia … and got Ted Turner the $1.4 billion he needed to buy MGM and start his cable TV empire.”

Indeed, if not for these earlier High Yield deals, we might all still be calling on landlines instead of our coveted mobile phones, while watching highly limited choice network TV programming. I think also noteworthy is the effect these firms had on upsetting the concentrated power structure in telecommunications that otherwise could have threatened development of the decentralized internet.

A brief outlook on ICO’s
On that August evening in Singapore, in attendance to my left were the founders of TenX, a Singapore-based Company that had just completed an $80 million ICO to make BitCoin and other Cryptocurrencies spendable wherever Visa is accepted.

In front of me were the Indorse co-founders David Moskowitz and Gaurang Torvekar, who were in the process of doing an ICO to fund their blockchain-powered professional network which will allow end users to own their data and get paid for their information. Just a couple examples of ICO-backed initiatives with the potential for major disruption, just like the High Yield-backed ones had earlier.

The appreciation and energy flowing that evening from Buterin to these emerging stars, was much the same I experienced between Milken’s High Yield bond backed entrepreneurs decades ago on Wall Street. And just as those Wall Street backed entrepreneurs went on to become some of the best known, wealthiest, biggest industry disrupters of the past few decades, I am confident that the ICO space will spring several comparable future icons.

In this age of exponential technology growth and rapid end user adoption, the ICO provides them with the ability to complete large fund raises in relatively short periods of time, and on flexible terms, giving these driven visionaries the runway and resources they need.

Although the current size of the ICO market is less than 1% of the $226 billion High Yield bonds raised in 2016, at its earliest recorded stages High Yield bond new issuance was also measured in single digit $ billions. More tellingly, the volume of ICOs jumped 2000% in the 2nd quarter of 2017 from the previous quarter, more than three times that of comparable venture capital funding.

In addition, with ICOs being built on the same distributed ledger technology that banks and exchanges are implementing for their own trading systems, it will be easier to integrate when the two worlds combine. Taking into consideration these factors, and a bespoke customization that High Yield bonds lack, we should keep a keen eye on the ICO market in the future - I foresee it being just as robust, and perhaps even bigger than the High Yield bond market.