Q1 2022 Galaxy Digital Holdings Ltd Earnings Call
Okay.
Yeah.
Good morning, and welcome to Galaxy typical first quarter 2022 earnings call today's call is being recorded at.
At this time I would like to turn the conference over to Galaxy Investor Relations team. Please go ahead.
Good morning, and welcome to Galaxy Digital's first quarter earnings call before we begin. Please note that our remarks. Today may include forward looking statements actual results may differ materially from those indicated or implied by our forward looking statements as a result of various factors, including those identified in our filings with the Canadian sick.
<unk> regulatory authorities on SEDAR and available on our website.
Fillings, we may make other securities regulator.
Forward looking statements speak only as of today and will not be updated in.
In addition, none of the information on this call constitute a recommendation solicitation or offer by galaxy digital or its affiliates to buy yourself any securities, including Galaxy Digital Securities.
With that I'll now turn it over to Mike Novogratz, founder and CEO of Galaxy's edge at all Hey, Good morning, everyone. It is a literally gorgeous morning here in New York City.
Which is exactly the opposite of what the markets feel like.
You know we've been talking this whole year about macro headwinds and institutional adoption tailwind to that.
The crypto blockchain space and that story continues.
I'm going to start a little bit talking about the macro headwinds right now since the last call. We had with you guys right crypto is down roughly 30%.
Not great performance for the asset class that's in line with the NASDAQ being down about 20%.
And overall risk assets being pummeled.
It's a pretty straightforward story it was clear early on it was difficult.
Hoover right. The fed is taking liquidity out of the system.
There was a lot of liquidity in the system asset prices that appreciated because of it and we're having this adjustment and adjustments are painful.
People want to know when the federal stopped raising rates.
It's what inflation will come down and.
Your guess is as good as mine I I said jokingly recently when we can look our employees in the eye and say you are lucky to have a job.
Do you want cheese flavored pop corner salted popcorn on the three days a week you want to comment.
A little plug in here, but right now labor has had the upper hand and wage pressures have been up in every single <unk>.
Facet of industry from low skill jobs to high skilled jobs.
That will shift relatively quick as the economy moves into recession, what does that all mean for crypto. It means crypto probably trades correlated to the NASDAQ until we hit a new equilibrium.
And that equilibrium.
Could stop at 12000 bounce My my instinct is there's some more damage to be done and that will trade in a very choppy volatile and difficult market for at least the next few quarters.
Before.
People getting some sense that we're at an equilibrium at that point I'm actually quite optimistic listen everything Ive seen in crypto gets me optimistic I went to institutional conferences.
Three or four different conferences meeting with all kinds of accounts.
What are the some of our.
The biggest names in traditional finance Blackrock Blackstone Citadel.
Paulo, all making big efforts into this space, having not been here like that that's a wonderful tailwind for the space. It makes us really focus the galaxy to collaborate with them where possible and know we're going to compete with them at times.
And so when I step back.
I haven't wavered at all of our medium term plan.
We are.
We raised capital last year with the idea that we were going to use it to build out infrastructure and build out our teams. We're continuing to do that we're managing the balance sheet best we can.
Our first quarter results, MLR, Damian and Chris speak to that.
You know were quite good results, our operating businesses were positive our mining and banking team had their best quarters ever.
The balance sheet team did an excellent job.
Performing the drawdown in the overall market.
Some money, but minimal relative.
So the volatility we saw.
And so with that I'm going to leave it to Chris and David and to give you. The details of the of the quarter I'll be around for Q&A, but the message that we need to take for me is we expect the tough markets. They are tough markets are but we are unwavering in our belief that youre going to see institutional adoption both.
Crypto as an asset class and as use cases in the media space in the corporate space.
Alright.
Okay. Thank you Mike.
Before I jump into performance highlights for our asset management and investment banking segments.
Going to school Mike's comments about the unbelievable excitement and engagement level, we are seeing on the ground with our institutional clients and counterparties. Despite these very tough macro headwinds.
Since we last spoke to you we have been on the road participating in a number of conferences to meet with our stakeholders clients partners and regulators.
Several of these such as Bitcoin Miami F T X Bahamas, and the <unk> out on the West coast of digital assets focused conferences.
First of all the way from these conferences was the really significant participation from traditional financial firms spanning from traditional asset managers non digital corporations as well as investment banking and technology firms from outside the digital asset sector.
All of these firms are trying to figure out how to connect with their customers both existing and future who are spending an increasing amount of their time in the met of us owning in ftes gaming and experimenting more with digital representation of themselves.
Turning internally to our business segments, and beginning with our asset management business, we are aggressively expanding our product lineup across the asset management platform from passive to liquid active to multi manager debenture offerings to meet the diverse and evolving continuing nature of our customers.
Starting with the passive side as I mentioned on our last call within the first quarter, we launched the galaxy multi crypto ETF and.
And just last week building on our partnership with C. R.
We announced the launch of two Etfs focused on investment opportunities in blockchain technology, and the meta versus that will track underlying indexes created bio area.
Moving to our active products, which serve as an important role in investor portfolios, particularly as the market experiences bouts of volatility we continue successfully fundraise within both our galaxy indirect adventure franchise.
And our Galaxy Vision Hill business.
Within the quarter the Galaxy indirect adventure franchise grew AUM to $735 million.
And last month, we had our first close for the Galaxy Vision Hill venture fund of funds to over $17 million, bringing our fund to fund platform.
To above $200 million across four strategies.
As more and more clients demand solutions to generate differentiated alpha over the long term we.
We are continuing to invest in our active platform.
Through innovative new strategies, but also by bringing in top tier talent.
In March we welcomed Chris Ron to the team as our new senior portfolio manager.
Chris brings more than two decades of investing experience to galaxy, having previously invested it but blackrock and colon. She is and will be critical to the buildout of our active business.
Regarding assets under management in the first quarter. Despite a down crypto market. We saw net inflows of $33 million driven by strong demand for our diverse range of investment strategies.
We ended the quarter with $2 $7 billion.
And assets under management down 5% quarter over quarter.
More than a 100% year over year, driven by robust organic growth and the positive impact of crypto market data over the past 12 months.
All in all we are proud to offer customers 17 different fund products to choose from across our passive and active strategies and we will continue to expand and evolve our offerings to ensure we are providing clients with institutional quality exposure to the growth of digital assets blockchain and interactive technology.
Turning now to our investment banking business, we continue to build on the momentum we've demonstrated over the last few quarters and are executing against an active pipeline of mandates representing more than $1 billion in transaction value.
The team is also currently working on several mandates for leading companies in the blockchain and cryptocurrency ecosystems.
Within the quarter.
We advised on the successful close of four transactions most of which we mentioned last quarter. This include.
<unk>, serving on two fund Raisings, so credo and compute north on the equity financing and acting as exclusive financial advisor on Black Diamond's acquisition of Jim and much of this year.
In addition, we also announced the close of one business called <unk>.
Involving one special purpose acquisition company.
We were also finished plaza to Thunder Bridge capital partners for a spec on its business combination agreement with coin check.
And as late breaking news, we advised a leading blockchain protocol on the acquisition of an entertainment company. The transaction was successfully closed but it's not quite yet been publicly announced.
Importantly, our investment banking team returned another profitable quarter growing top line revenue to $8 million and net income to $6 million underscoring. The continued performance of our operating business lines I.
I will now pass the call over to Chris to cover trading mining investment businesses and also an update on the exciting <unk> acquisition of <unk>.
Chris.
Thanks Damian.
Jumping straight into our trading business, which continued to add new clients, while deepening existing relationships across the entire platform of both flow and product offerings.
Consistent with the risk off macro trends, we've seen over the past few months, our trading desk saw counterparty spot trading volumes in dollar terms down approximately 26% in Q1 versus Q4 2021. However.
However, note. This represents an increase of over 50% versus the prior year period Q1 2021.
Derivative volumes also in dollars decreased by 24% sequentially in the first quarter versus Q4, but again this represented in over 140% increase versus the prior year period.
And turning to lending the team added approximately $915 million of gross counterparty loan originations in the first quarter, notably driving a 20% sequential increase versus Q4 2021, and the size of the counterparty loan and yield book to $910 million as of quarter end, resulting in one of our best lending net revenue quarters since inception.
<unk>.
To summarize financial contributions all of these counterparty facing trading activities continued to contribute positively to GTT net revenues offsetting approximately one third of the comprehensive loss within the <unk> segment for the quarter.
As a reminder, our reported Gtt's financial results includes both our core net long active trading on our own behalf as well as all beta neutral counterparty facing and liquidity provider activities and we define our franchise business is realized and unrealized gains from counterparties facing activities for the entire trading business after netting for associated.
<unk> and interest expense.
Moving to principal investment business, we've continued to invest in what we believe to be the most compelling opportunities across the ecosystem. We are csis, driven we're picking our spots and we're being thoughtful about valuation and importantly investment structures.
Excluding our portfolio of companies in our interactive business Galaxy now maintains a 132 investments of 93 portfolio companies.
Within the quarter. Some investment highlights include adding new portfolio companies like Jensen.
Protocol, which we believe is solved verifiable compute for a class of computations related to machine learning.
And encode a developer boot camp that trains went to engineers and web three technologies and that we also believe has the potential to provide a direct talent funnel for galaxy Citgo and our other portfolio companies.
We also added follow on physicians to existing portfolio companies like <unk>, who just raised a series B round. So tour is one of our many blockchain infrastructure investments and as a formal verification and smart contract security company.
We re upped our investment in the company alongside the likes of jumped capital and electric capital.
Now turning to mining the team continues to grow both primary mining and its minor finance offerings and demonstrated record top and bottom line contributions in the quarter, despite declining prices being modestly down.
In total the mining segment generated $10 million in revenue for the quarter, which was comprised of $7 million from our proprietary mining our best quarter to date and over $3 million in machine leasing income nearly three times higher than any previous quarter.
These activities led to an approximate $5 million profit contribution in the quarter.
Okay.
GM also has continued to drive synergies and add value across the firm. For example, we have multiple lending deals to miners in the portfolio and in the pipeline representing potential new originations with well over $200 million.
We added our first dedicated business development resource in April to continue to support and grow. These cross firm efforts and importantly, I want to remind you of our ongoing commitment to increase our use of clean energy or mining business continues to use electricity power mix consisting of more than 80% sustainable power sources, which remains well above industry average of just under <unk>.
60% is estimated by the Bitcoin mining Council.
Finally, I'd like to provide an update on some of the product and strategic efforts, Mike <unk> and his team at <unk> have been focused on.
<unk> team has been broadly focused on three strategic priorities, one aggressively adding additional chain support.
Continuing to focus on the developer layer to ensure they remain the premier source for building web applications and three bridging the custodial gap to defy in web three application components with an eye on bringing these features to the institutional market.
Within that strategic roadmap <unk> has had some significant product launches within the quarter, which keeps the <unk> institutional grade products as the premier choice for both developers and institutions among.
Among other innovations the team launched multistate wallets integrated with <unk> institutional support making did go to the first qualified custodian to allow wallets to linked to <unk>.
And solving for a major need among institutions <unk> also launched 24, seven custodial withdrawals, making <unk> the first and only digital asset qualified custodian, where clients can trade out of cold storage $24 seven with a four hour SLA, allowing them to move with the crypto market, which as we know never closes.
<unk> continued to grow their prime services offering launching a crypto based on loan servicing product and growing the business of $100 million in notional loan servicing in the first quarter.
And last but not least because <unk> announced their first developer conference, which will take place in late September of this year continuing their adult developer centric model.
<unk> continually continue to rapidly hire to meet the growing needs of their clients, increasing our head count over 300 employees at the end of the first quarter with over 50% of head count dedicated to the Engineering Division.
Moreover to support that goes international expansion efforts approximately 20% of all <unk> employees sit outside of the U S, which plays well into galaxies ambitions for international expansion a key element in our strategic acquisition of the <unk> technology and team.
<unk> ended the quarter at over $40 billion of AUC, a decrease versus the previous quarter, but consistent with broader crypto market price declines.
Before I turn the call to Alex to give specifics about our financial performance I want to underline some of mic in damien's comments that even in a quarter with crypto prices down and continued macro headwinds our operational business lines remained profitable in aggregate and our growing we.
We will continue our laser focus on investing in our people our platform and our technology as we build the preeminent technology driven financial services, an investment management firm Alex Yeah. Thank you Chris Good morning, and thank you for joining us today consistent with our guidance, we reported the net loss of $112 million in the first quarter.
Driven by declines in the markets.
Our equity capital was $2 5 billion.
At the end of this quarter, a 50% increase from the first quarter of last year, and a 4% decline from yearend.
<unk> to approximately 7% decline in overall crypto currency market values in this quarter.
Since the end of the first quarter market conditions remained challenging as.
As Mike mentioned crypto prices decreased another 25%.
On a brighter note.
Our operating businesses.
<unk> to grow rapidly in this quarter.
In particular <unk>.
<unk> banking roughly doubled its revenues for all of last year in the first quarter and continues to expect high revenues for the rest of the year.
<unk> revenue for the quarter was seven times higher than the same quarter last year.
We remain well positioned.
And well capitalized to continue to invest towards our long term strategic goals.
At the end of this quarter.
$2 5 billion in equity capital.
We held $850 million in cash.
Plus $440 million in stable coin, which is the key to cash.
And 400 million in net liquid digital assets.
Speaking of digital assets.
Thank you realized and unrealized digital assets together, we had a loss of $145 million for the quarter.
Related with an overall market decline.
The large real keen on.
Digital assets versus a good portion of unrealized decrease had to do with the sale of highly appreciated digital asset early in the quarter.
Principal investments continued to be a great part of our story at the end of this quarter, we held 1 billion in principal investments during.
During the quarter as Chris described we made a number of new investments and we curtailed our positions into appreciate it investments.
To remind everyone.
We typically invest smaller amounts in early stage companies.
And realized larger gains in later stages of maturity.
In this quarter, our net new investments were less than what we realized bringing principal investment balances down modestly on our balance sheet. The net mark to market on principle instruments was immaterial for the quarter.
Our portfolio now includes 93 companies up from 86 companies at the end of last year.
On the cost side compensation was $41 million for the quarter down significantly from $95 million in the prior year quarter.
Primarily due to a lower bonus accrual, which is correlated to the performance of the business.
As part of our growth plan.
We continue to build out our businesses ending the quarter with 340 people compared to 90 at the end of 2020 and 280 at the end of last year.
Equity based compensation was $23 million for the quarter up from $7 million in the prior year quarter.
Driven by large equity grants for 2020.
Due to blackout, having to do is bit co acquisition came online in the second half of 2021 and at much higher grant value.
General and administrative fees were $17 million from $5 million in the prior year quarter, driven largely by technology.
Expenses associated with mining and marketing, including increased participation in industry events.
Professional fees were $10 million for the quarter compared to $5 million in the same period last year.
This was driven by one time legal and audit expenses associated with the U S listing.
<unk> acquisition Bally.
Our balance sheet, we held $848 million in cash at the end of the quarter.
This included $500 million of convertible notes raised at the end of last year. These are five year notes with a 3% coupon.
Changeable into equity at roughly U S 33, three sure.
As I said earlier equity $2 5 billion now digital assets are a large part of our balance sheet.
Digital assets, including digital assets receivable and excluding noncontrolling interest liability or other People's money were $2 2 billion at the end of the quarter further.
Removing digital assets borrowed and collateral received from Counterparties.
Net of digital assets lend and collateral posted net digital assets were $900 million.
Removing stable points, because they do not typically fluctuate in value.
It takes us down to have a $1 billion.
We use this measure to assess our net exposure to tradable digital assets and of course principal investments were $1 billion.
With that I will turn it back to the moderator for questions. Thank you.
We will now begin the question answer session.
Ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
Is it any time your question has been addressed and you would like to withdraw your question. Please press star. Thank you.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from Deepak <unk> Shah with BMO capital markets. Please go ahead.
Hi, Good morning, guys can you hear me okay.
We have been clear.
Great. Thanks, So Mike just going back to your macro commentary.
When I think back to to the end of last year.
So your view was that the fed could be more aggressive in tightening then we're saying and they certainly did that now you view that we could be heading into a global recession do you think the crypto market is priced that in or do we only just started that.
Yesterday with the gap down in Bitcoin, how do you think the market's pricing within today.
Yes, I think I mean in some weird way of global recession will be good for crypto.
What we're pricing and now is the.
I don't know if its the last chapter of the second the last chapter of the Derisking of the World right people had lots of risk built up youre going to see hedge funds that have to restructure gets shut down and so when you have the kind of current <unk> seen you just have people get out of risk and while in the long run people can say well did.
<unk> is an alternative asset and it's a different places store your money for people that have leverage and risk. It's all correlated and so that's what we're seeing.
I'm not.
Panicked by any stretch.
And I would tell you if I was there that would be selling a lot of stuff.
I say that only because of the immense amount of meetings I've had with people seeing people lineup and get in they see bitcoin as a macro.
Instrument that is going to continue to be part of the macro toolkit for a long period of time and Thats on an adoption cycle and then everything else.
Is it really is a technology play right web three building out a.
Who knows what combination of block change will end up being the winner between the theory.
Polygon in Salon, and all of the L ones and twos.
But that that's not going away and people have.
Huge interest in that space, I think youre going to see media companies become bigger and bigger players in this youre going to see all brands become bigger and bigger players and so.
Crypto as a tech play in building this new infrastructure is gaining momentum not losing it.
How you value of this stuff in a period of time when.
Valuations are everything would be to look at stocks like palin tier or zoom or you name the growth stock and look at the price gets trickier and so I think thats why because theres not a valuation model that people are comfortable with encrypt out right because it's mostly momentum based on and is that momentum.
And it just momentum its momentum based on on metrics on developer usage on.
Investor participation on projects being built on top of these block chains.
But it's still there is not a tried and true hey, here's the P/e adjusting my earnings and adjusting my my pay and here's my new price and so price discovery is harder in our space.
Which is why we trade at much higher hall.
So.
We're going to continue to think theres going to be volatility I do think 30000 holes in decline as some might call since the beginning of the year. If I made one mistake is that when we got closer to the top of the range I thought well, maybe if there is a break in the range will be to the top side and that was just because it felt like the adoption.
<unk> was really picking up.
Youre going to see in the next few months I think some big Big players announced a block chain as Theyre building on its youre going to see this crossover between traditional media and websites.
And so.
Listen it's going to be.
Challenging to navigate.
Right.
My sense is 2000 holes.
And the theory.
Early August 2030, 500 range those are big ranges right those are 75% ranges.
Hello.
But I think that's the world we're in right now.
Great. Thank you for that and all your comments are always very clear and helpful on the macro.
When I think about technology risk within the industry.
It still seems like there's a lot of maturity go I want to ask you about stable coin and one of the.
The events over the weekend now most recently was was a U S T and the dip below a dollar I always scratch my head how can a stable coin you'd pick one as a reserve when bitcoin bitcoin is still in a risk asset base. What do you think of as this segment of the industry in terms of stable point, how do you think it evolves and how could this.
Leader lagged the industry in terms of technology adoption.
Yes, I think you can break stable claims into three buckets right you have.
U S D C right.
The stable coin that is actually backed by treasuries held at a fed.
Fed regulated bank and so that really is a digital dollar.
You'll get a really high yield on it.
But it is a very.
<unk> way for people to move dollars around the system, then you add Heather right, which was the first big stable coin, which is backed by a basket of assets.
That sometimes we have some sense, what's in them and sometimes we don't.
There is a lot of people that used Heather.
When it provides no yield is providing something for that Mike My sense that there is a lot of tax avoidance from.
And offshore money from China, that's held in there, but thats just the sentence.
I don't know that factually, but it doesn't make a logical sense that you'd have a lot of money in something that earns no yield that has lots of risk or could have risk and then you have algorithmic stable claims like <unk>.
Di.
And U S T.
Listen Ust has risk, but you were paid.
You are paid 18%.
Yields in it.
And so.
One who went in knew there was some risk.
You don't get 18% for nothing right, so people to buy Ust and deposited in the anchor protocol.
And why it grew so fast is because people are hungry for yield.
We will see this as a really big test of.
That whole model of algorithmic.
Algorithmic stable claims right <unk> got both.
Peril lunar and.
And bitcoin.
In their reserve.
There are big players that have lots of vested interest in this right three arrows capital jump lots of some of the biggest players in crypto or invested in this in this project and so we're watching really carefully.
<unk> is a spectacularly smart.
<unk>.
And has done an amazing job building up an ecosystem and so.
But yes, that's created volatility overnight I think youll continue to see that for.
Until this period evolve.
<unk>.
Until we get through it.
Yep.
That.
Stable client in that system survives this and I think it will.
I will say a lot right. This is a real test. This is a full on out category five earthquake globally. If you look at so have any of the NASDAQ This as a correlated risk nervousness and so it'll be a real big task, but it's certainly creating volatility on all crypto.
Okay No I appreciate that.
Add to that to the mix of another test in the market.
What's the Galaxy view on the theory emerge and how are you guys.
<unk> your business or your book to benefit from.
We are very <unk>.
<unk> always been very positive on that theory is it as an ecosystem right I love.
<unk> leadership.
Is that kind of spiritual ahead of it.
We think the merge happens if I knew the exact data I'd tell you that but.
All of our Intel from people close.
We should have a third quarter.
Event, where the merge happens.
We will through <unk> was already set up to be big Validators.
So people get state area there.
And I think it will be great for the ecosystem right because remember we're talking about a theory of in 2016 that this move to proof of stake.
It proved a lot more complicated than people originally thought it would but right at the finish line now and so I think.
That'll be a real positive confidence both for the <unk>, but really for the whole crypto community.
Sure.
We will also take the.
As a whole you're used to.
Too much electricity story at least away from half of the crypto community.
More and more people move to proof of the state.
Okay, well look I always appreciate your thoughts Mike.
I'll just leave it that and then over the line. Thanks.
The next question comes from Chris Allen with Compass point. Please go ahead.
Good morning, guys. Thanks for taking my questions.
Yes, I just wanted to talk on.
Digital trading.
The.
I'm sorry.
The client facing trading in London.
Offsetting approximately one third of the comprehensive loss, you're talking about $22 million give or take there is that being measured in the same way as you measured it prior quarters too I know, there's been some adjustments in the prior quarters.
Yes, yes, that's being measured consistently with the way we've been reporting the segment for sure.
Got it Okay and then.
Obviously the.
The unrealized losses in the quarter kind of kind of stark.
The market conditions have gotten more challenging in this quarter to date.
Where does that kind of sit.
Is it.
And you'd be able to offset anything with hedges there.
Without giving you numbers I would say listen the market's down a lot we actively hedge our book.
As best we can.
When the market's down 30%, we hope to be down a lot less than 30%, but we're not going to be up.
Understood.
In mind that and please keep in mind that realized and unrealized were offsets to each other in the first quarter.
Understood. Thank you.
The next question comes from Devin Ryan with JMP Securities. Please go ahead.
Hey, good morning, everyone. Thanks for taking the question just wanted to come back to the conversation just on the current market conditions.
Spectation, we could be in.
Perhaps for a.
Choppy ride from here and tightening.
Economic conditions it doesn't sound like much is changing to the investment plans for the firm, but I'm curious kind of where other opportunities may arise for the company, obviously in a backdrop, where there's dislocation.
Much can happen but.
I'm, assuming you could potentially set up for other opportunities or even M&A.
Could come about just as you're smaller firms.
Firms.
The challenges from capitalization perspective or.
Slower scaling so I'm, just curious kind of what the other knock ons are of a view that we may be you're in for a few quarters.
Choppy market.
Yes listen it is certainly.
It certainly impacts your business.
If prices are lower and volumes go lower.
One of your businesses get hit.
Hit some.
And so.
Constantly underwrite.
My broad assumption that crypto adoption is happening I'm really confident in it right now.
We're not crazy.
As we think see things slow down we will look to adjust where we can.
And we think it's prudent but we're really playing for two years three years out.
And so theres lots of infrastructure to be built.
As we see where the puck is going not where the puck is we've raised money we have a lot of cash we raise money both through our convert but we raise money by selling a lot of crypto assets last year.
And so.
Have a strong balance sheet.
And are not using it to just go in and buy a lot of grip or using it to build our business.
To look Opportunistically I do think there.
Some carnage and there'll be some almost distressed opportunities both in companies and portfolios that.
Our skills, certainly I'm looking over to Chris Ferrara.
The first part of his career in that space.
We will be put to use.
And listen I'm never hoping for the demise of of.
People that are in our space, but I do think when you see <unk>.
This move like Youre, saying youre going to see some some competitors.
Weakened and that might be opportunity.
Yep, Okay terrific want to come back to the conversation on institutional adoption obviously.
Could you guys talk about you are seeing.
A lot of momentum there and you have recently met with a number of folks that are kind of moving into the space or.
Already you recently entered so I'm curious kind of just outside of kind of the notion of institutions coming in and buying and selling digital assets. What are some of the other big areas, where you are seeing interest and expect maybe over the next 12 months that institutions or when I say institutions meeting kind of just corporations in kind.
Broad participants beyond retail and.
<unk> you touched on media web three but kind of curious what kind of applications. You think are maybe most right.
Currently worst.
Sure.
If you think about the kind of the two permanent of crypto or the two contributions one was.
Blockchain are using.
Decentralized databases.
The processing.
Sure.
Syndicated data and power systems built things like decentralize.
The second is unique digital assets right big claim being the first private property on the Internet. We now have NFC is unique digital assets that story is a real one and I think youre going to see media companies all over the place figure out how to sell.
Assets in the Med averse right in the digital World how to connect community in the digital world that could be music youre going to see concerts.
Where they have they have.
Our physical concert in place then.
And then the virtual concert might have.
10 times as many people.
That technology is being built.
We're very bullish on our interactive.
<unk> is growing well.
Really bullish on that space and I kind of think that could be one of the big next use cases.
Because of that I would say I think because I'm seeing all that interests are worsening as a firm all that interest so.
Crypto blockchain digital assets is a pretty wide swath of ideas and technologies.
It wouldn't surprise me if that becomes the fastest horse.
Got it okay great.
Maybe just maybe just one more quick one I'm not sure I'll click it is but if we all just solid recent.
The release of the SEC significantly increasing their enforcement footprint.
Curious kind of any conversations with regulators.
Where those have evolved in recent months and just weather.
There is any.
Potentially.
A positive development on the other side of that but they have more resources. They can better help you the industry around some of the regulatory questions that are still out there.
Yes, I would just start with like crypto is already regulated rate. We have 30 regulators that we deal with that is just galaxy that's between U S and international.
Unfortunately, it's complex, it's a bit like the.
The space is like I, just said there is not one thing Thats crypto.
And the regulation wasn't written free crypto and so theres still this.
Learning process horse trading amongst the different regulatory agencies in the U S.
The optimistic side as people are becoming much.
A more educated and the political tone in D. C has changed to be much more crypto friendly right.
Can't be anti crypto and think it is good politics anymore and so the Democrats, who had been kind of.
The anti crypto side.
Have definitely shifted their tone.
Adam are engaged with the community.
And so I'm, hoping.
Youre going to see I don't think Youll see any legislation at least until the election right. There is no. There is no appetite for any legislation in anything right now and.
And so we're not going to see any crypto legislation.
I'm, hoping that.
Post the election, we get some some move in Congress.
Also hoping that regulators as they come up the curve or they take their shoes as well from the politicians that in the long run they report to.
And so.
I mean, thats, our hope we haven't seen anything specific.
Our biggest frustration continues to be.
Yes.
How slow the process happens right in some ways it becomes anti innovation.
That will leave us wondering are having to guess what regulation is.
So.
Still frustrated, but a little more optimistic.
Yes.
Okay. That's great color. Thanks, Mike I will leave it there, but I appreciate you taking all the questions.
The next question comes from Owen Lau with Oppenheimer. Please go ahead.
Good morning, and thank you Paul I'm, taking my questions.
Could you. Please talk about the driver of the demand loan portfolio I mean, it look pretty strong quarter per quarter and ill also yogurt year.
It will be great. If you can also we might have how do you manage the risk in this portfolio. Thank you.
Our portfolio.
And that's the question I'm, sorry could you repeat that just the drivers of our long portfolio loan I'm sorry, the driver of the demand of your loan portfolio. So it looks I think pretty strong quarter for Europe .
On your loan portfolio and also how do you manage the risk in this portfolio.
Yes sure.
So generally speaking the way the market is organized today.
A lot of the.
People people borrow.
Dollars.
To get longer with Levered assets people borrow crypto assets to get short their position and market makers will borrow dollars endpoint for inventory to be odd venue and operate those are generally the buckets for lending and borrowing the market's organized primarily bilaterally today, which.
Which is a not great market structure, meaning.
Counterparties face each other galaxy faces as Counterparties <unk> and then those counterparties take those assets transact elsewhere generally.
That makes for the growth that we have seen in the other market participants have seen I actually commend everybody in industry for being able to build that business can grow despite.
Sort of like having a pretty fragmented market for us we have always been primarily focused on.
On structuring our financing to be net in an over secured position and so that takes a couple of forms in some cases.
We have margin loans to institutional Counterparties, where we have less dollars in coin against dollars and coin.
And we have taken in more collateral than we have went out and we have <unk>.
Liquidation at certain levels that ensures that we get our principal back. We also do other structured financing where we.
We'll wrap that those kinds of loans with put call colors. For example, like a pretty plain vanilla structure, where we know based the downside risk to a put counterparty, which in some cases is essentially cleared the exchange and other cases are facing other institutional counterparties, where we also taken initial margin and variation margin in <unk>.
Ourself on that side, so on the risk side I think we have continued to show on our side at least to have seen zero losses, and zero expected losses and that financing book since we really really started have started growing the franchise.
On the demand side.
We have seen a pretty dramatic increase from the bitcoin mining community and that takes a lot of different forms.
That takes that's miners looking to increase their <unk>.
<unk> and so they'll borrow dollars against coin to buy additional bitcoin mining rigs that will be miners borrowing dollars secured by machines and sort of lease financing and other secured financing structures to <unk>. They also have bigger and bigger bitcoin treasuries for example, which from a treasury management.
Perspective.
Whether its overwriting call positions, whether it's borrowing dollars against the treasury, whether its systematically borrowing and selling via the overwrite that has become a large driver of larger driver of our business and so that's.
That's that's our example of why having a mining business in house with our lending business in house is a really good virtuous cycle for us.
It really makes galaxy a special place so that's pretty much what we're looking at today.
Got it that's very helpful. And then on the principal investment side could you. Please talk about the health of your portfolio companies can be managed to control expands and raise funds given the macro.
<unk> backdrop.
I just mentioned and then what characteristics you are looking for maybe from the platform perspective that can come out stronger on the other side of the world.
Yes so.
Our investing philosophy generally for the firm has been to be thesis driven in our approach and so we spend a lot of time as a team thinking about where are the places in crypto, we want to invest rather than where just the opportunities where we can put capital to work.
We generally invest earlier stage rather than a later stage. So our check sizes on average, which is which resulted in us having 93 portfolio companies tend to be <unk>.
Smaller and more diverse rather than big and chunky and concentrated.
And company. So 2021 is a big capital raising year for the industry.
So we had a number of existing portfolio portfolio companies raise incremental round some of which we followed on some of which we chose not to do some of which we chose to take liquidity in.
But those companies in general on average do have pretty decent size.
Size balance sheet now.
Whether they can appropriately manage their balance sheet is something we spent a lot of time talking to them about.
I think our company is pretty exemplary of how we think that should be managed.
It's a push and pull those companies are fighting to build.
The next trillion dollar companies fighting to build new financial infrastructure and so there is a good balance between spending your resources to build versus holding back and potentially having a competitor having beat you to build the next thing and so and then you ultimately lose and so that's the conversation we have with our portfolio companies pretty often.
Capital, there's a lot of capital still on the sideline and there are new pools of capital in the billions of dollars range over multiple multiple funds that have been raised in terms of dry powder dedicated directly to this space not just crypto native but also crossover funds who have now direct mandates with B's next to them in terms of dollars.
Waiting to deployed into the space So I.
I think that funding will continue to occur it may be more structured you might see things like liquidation preferences, you might see things like like preferred coupons.
But I think the companies will still get funded the structures might shift a little bit it might become more investor friendly, which ultimately would be a good thing for us.
Got it thank you very much.
The next question comes from Mark Palmer with BTG. Please go ahead.
Yes. Good morning, Thanks for taking my question.
As you're looking across the crypto markets.
What have you seen in terms of leverage in the system.
Particularly as we have seen.
An extended decline here, how does that leverage moderated.
What are you seeing.
Whats been spectacularly interesting is and maybe not so optimistic is that there's not a ton of leverage in the system.
And you can see that by a bunch of different metrics.
One of the clearest as volatility Hasnt jumped right.
Equally involved is far lower than it was in any of the the down spikes last year right its right around 60%, 60% in the in the OTC markets.
And so I think this has been retail gotten beaten up and taking our leverage down and they're liquidating.
Period.
I don't think Theres, a tremendous amount of leverage in the system.
In the past what creating these wild.
Downs and ups spiked has been has been leverage.
The Asian exchanges would provide you 100 times leverage which always seemed a bit insane debate.
But.
That's way down.
In the system and so.
Pretty convinced that we will see.
Trip Dell outperformed once overall market conditions and trade Fi in there.
As that can the S&P find some kind of bottom I don't think that bottom is going to be a giant V. Like we've seen.
In 2020, with Covid or an O eight or in any of the big sell offs. Because you don't have the plunge protection team coming back.
But as long as we get.
As long as we get some sense of new equilibrium and then I think youll see the real dollars that are on the sidelines waiting to come into crypto start really coming in.
No one puts money in chaos right like if you're any institutional funded right now.
Your new allocation of crypto, it's not high on your your weekly to do list is Oh, my goodness I've been stuck and risk parity for the last 15 years.
Looks like it's worth more.
Sure.
Overcommit to venture portfolio, Ed and I have all these obligations still domain portfolio of smaller or and so when everyone is in triage, new risks slows down in the system as soon as <unk>.
That sense of panic.
Abates.
I don't know when that will be it will be sometime.
I don't think its going to be in the next two months.
Right.
Right. The Fed's got to go through a few more rate hikes.
You got to see inflation at one point.
Start heading the other direction.
I do think youre going to see signs of recession faster than people think.
I think you can see the adoption cycle pick back up.
And so.
Again preparing for the worst and hoping for the best when I say preparing for the worst it could be in 18 months.
Crappy environment I'm, hoping that's not the case.
But.
Look this is a generational shift in what's happened right we had a hole.
Since literally a one but really since so eight years of <unk>.
Z money free money and that is being reversed and so to think.
Anyone can pinpoint where the new equilibrium is.
There's a little bit.
Aggressive.
And I think the best we can do is understand we're in a different environment.
Operate accordingly.
And like I said continue to re underwrite our own assumptions that.
The digital asset space will have a GDP that grows.
Thank you very much.
The next question comes from Jamie Friedman with Susquehanna. Please go ahead.
Hi, good morning, Thank you.
I'll just ask Mike two questions at once I was wondering if you could share with us which of the.
Segments, you think you have.
Best visibility at would it be.
Sei asset management of investment banking.
So how do you think about the.
The visibility on a segment basis.
And then as the follow up could you talk about the strategic significance of prime broker because it seems like to some degree of pollinates.
Other parts of the business. Thank you.
I'm going to let Chris because Chris has spent a lot of time on prime answer that first and I'll hit the other ones out there.
Yes.
Prime brokerage and crypto is yes. It is.
Very challenging word because everybody uses it and no one has implemented it yet.
We think it's incredibly important for the market structure to come together.
And.
Quote prime broker like fashion, the idea is to remove counterparty risk from venues and to increase capital utilization capital efficiency that's really.
What people are talking about when theyre talking about prime brokerage.
We're an active user of all venues and have pieced together.
Our own leverage with other providers to try to make our capital Fisher.
Fisher as possible, so we suffer ourselves from not having a prime broker relationship in crypto.
We at the same token because of that we have been.
Ourselves internally continuing to build out our roadmap and technology to support our activities and ultimately turnaround and help support the markets activities.
Yes.
We will we will.
We launched an MVP product.
In this space, we probably won't call it prime brokers, because because calling at prime brokerage is akin to trying to boil the ocean all at once we will start piecing together.
Client trading and.
And margin based financing and leveraged services in one platform in a way that helps clients access the markets.
Without themselves having to have multiple multiple connections and counterparties and also be able to access the markets with capital efficiency with leverage and netting of positions.
And that is very clearly on our roadmap, we think it's very important to the market.
As a result of how important it is for Mark just has to have it it's on our roadmap to launch as well.
Yes.
Yes.
The banking business has a really really robust pipeline.
Those deals have to get done right deals are harder to get done in environments, where markets are falling, but assuming we find some stability.
I am really optimistic there.
<unk> asset management.
Damien is spending more and more of his time with steep curve on this and this is a business that we need to win in and I think we have we're set up to.
How do you when you connect with the institutions that are coming and positive institutions are making are coming into this space and we will continue to come in and you create product that.
They want.
Damian talked about with Chris Pine.
A mutual fund and less on the mutual fund, let's say a long only asset fund net proxies when a mutual fund would be if you had the right regulatory regime.
I think thats perfectly tailored product for the.
The big endowment institutions that are coming in.
We're going to launch that soon and we will see.
But for us.
This is a huge focus and it's really important that.
We win in this space.
We're in the market with our.
Our third interactive fund right now fundraising round is going fine and so hopefully.
By next call, where we're announced they were the.
But that cap raises.
The the index funds are going to going to be a little bit more momentum driven.
When you.
Do you see crypto going up, though we start bringing in assets.
So it's really building that bespoke product.
We've got an advantage with the fund of funds business.
And that it's a unique product, but b, we probably have the only.
Database.
The <unk>.
Over 1000.
So hedge fund.
Venture funds and so we got a pretty good.
Insight into whats working whats not.
And so I know I'm not answering the question as crisp as you want to you want to hear it.
I would tell you that.
Message banking feels really robust, but it's going to have that market conditions that are at least.
You had a stable enough where deals get done.
Asset management is something that you guys should keep your eye on because we're working our tails off on it.
Thank you for the color.
The next question comes from Rich Repetto with Piper Sandler. Please go ahead.
Good morning, Michael and team.
I guess, Michael the question is on your U S listing and apologies if you've explained this in past calls, but I'm just trying to see how much is delay between the FCC and <unk> and.
In galaxy sort of spin.
Specific from an accounting standpoint, and how much is it.
SEC crypto in general.
Without being able to comment directly on it I would say there are four companies in the space that all seem to have been.
<unk> been suffering similar delays and sell.
My instinct would be it.
And everything we feel is nothing specific to us.
Just taking.
Their time to be very thorough that they understand.
What they're doing and so.
Hugh.
The other company that's bullish in circle E Toro.
All having longer processes that is normal and the SEC.
So.
Frustrating, but.
Optimistically get through it.
Got it.
And then.
I just wanted to like Linq, two concepts of issues has been talked about on this call.
Throughout the call, but that regulation, and then crypto being looked at as a risk assets and I guess the question is no.
First is there anything that you would point out.
There's no doubt the market goes down risk asps were down but.
Would get crypto to be less looked at as a.
Far ranging risk gas asset.
I think you mentioned NFC, but are there any credible proof points or use cases that makes it more real and then.
And then on the other hand with regulation.
No.
You talked about the sentiment changing but anything beyond sentiment changing where regulation might help also with the.
With the credibility of this space.
Yes listen the single biggest thing that can happen for crypto.
We will be the approval of a bitcoin etfs and while that's really like that.
Simple statement.
I think.
It will signify to the whole institutional community that the U S government believes in crypto.
Right.
My instinct.
Kind of makes no sense why they haven't approved the bitcoin Etfs, yet right you've got a futures ETF you've got <unk>.
Yes.
And I think that'll be a real message.
To the market that.
This is the.
<unk> got a government approval, having been very nervous about it for a long time.
Will happen.
I think the political pressures, especially with what must most likely happens in the next life.
No.
And later in November .
Probably.
To help accelerate that.
And so.
On your first question.
You have to.
Always keep in mind that this is a very young ecosystem right.
The central the idea of a decentralized database.
Where people build real enterprises pop ups is growing in parallel to how fast our move into the meta versus growing our moves to being in an online world is but really didnt get started in earnest with with real acceleration until four or five years ago.
And so it's a really young technology people have to get used to using it we talk about voting on the blockchain and my line is always maybe we should start with American Idol notes on the blockchain and so customers can understand how the system works, it's funny, because it's a trust machine, but you've got to get people to understand how it works. So they trust.
And so I always just encourage patients.
Thank you are seeing real applications I mean, <unk> was a startling explosion of innovation for.
For the first time artist.
Wow I can actually create digital stuff that it will get stolen and will get counterfeit.
Sure.
Not only that I can create a whole new business models I E. The idea that every time I art gets resold or by digital.
Innovation gets resold I get a royalty like that's built into the system and so you've got.
Can a major innovation breakthrough is happening.
And all of a sudden now the big companies are looking at it.
Listen.
<unk> made an extra $125 million last year Major League baseball has engaged English Premier League sold the rights for 500 million pounds, that's not small numbers and so I do think you shouldnt discount what's happening in the intellectual property space or the NFC space, it's easy to get kind of fast.
Dated with board apes, and people spending millions of dollars for.
Really cool monkeys.
But underneath it's a technology platform that almost every smart C suite.
He has got to say how does this disrupt our world how can we actually use our.
That we have and create digital objects that we can sell.
And so this is where I think.
Keep your eye on because of that.
That.
I think only goes one direction, but I really think the GDP of the meta versus I want to be cute.
We're going to grow a lot faster.
The atomic World.
Long, but its albert items.
Yeah.
This reminds me of sort of the internet boom and bust.
We had a correct hopefully its not as long as the internet.
But you know.
All of a sudden think I've proven that.
Better than just email.
E Commerce is.
So it's we use applications.
Applications.
Anyway, thanks for the follow up.
Nick.
Yep.
This concludes our question and answer session I would like to turn the conference back over to Mike Novogratz for any closing remarks.
Hey, guys, it's still a beautiful day in New York, It's still illegal today in the markets.
Thanks for your time, we are working our tails off here with a mantra of build build build this year, it's been our mantra since the beginning of the year.
Look forward to speaking to you again.
Listen we are as anxious as you to close our transaction with <unk> go in and get that part of our history started and so we will.
Grind grind through the process.
And.
We'll be back thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
[music].
Sure.
[music].