George Soros-backed fintech dv01 just raised more money and made a key acquisition. Here's how it's looking to shed light on the murky securities at the heart of the last financial crisis.

  • dv01, a company that provides data analytics and pricing tools for the lending markets, announced Tuesday its acquisition of Pragmic Technologies, a provider of data for agency mortgage-backed securities.
  • The purchase will allow dv01 to expand into the nearly $9 trillion market for agency mortgage bonds.
  • "Data didn't really become a priority until post-crisis for this market," dv01 founder and CEO Perry Rahbar told Insider.
  • dv01 also announced the closing of a $6 million B3 financing round, with a new investment from one of the largest agency mortgage REITs in the country, AGNC Investment Corp.
  • Visit Business Insider's homepage for more stories.

More than ten years since the 2008 financial crisis, the vast market for mortgage- and asset-backed securities still operates with little data transparency, even as the rest of Wall Street has embraced a quantitative, data-oriented tech ethos.

On Tuesday, dv01, a startup that provides data analytics and pricing tools for lending markets, announced its acquisition of Pragmic Technologies, bringing it closer to its goal of offering clarity to how structured-finance derivatives are valued.

Pragmic is an early-stage data company focused on developing the infrastructure necessary to analyze agency bonds, one large subset of the mortgage-backed security, or MBS, market.

While the terms of the deal were not disclosed, Pragmic's cofounders Charlie Oshman and Memo Sanchez will be joining dv01 as principals for strategy and engineering, respectively.

Pragmic's technology is "really attractive for what we could do with it in the agency market, but there's benefits that I think will hit all of our businesses. It's a foundation for new tech that we're building in this space, with the lien at the center of everything and having thousands of other data points connected to it," dv01 founder and CEO Perry Rahbar told Insider.

Read more: Here's the pitch deck that fintech dv01 used to nab $15 million from the likes of George Soros and Pivot Investment Partners. The startup's founder called it the easiest round he's ever raised.

The acquisition will allow dv01 to provide daily, loan-level data for the agency mortgage market by matching specific loans within a securitization to individual liens on homes, analyzing prepayment and performance data in the process. 

dv01 simultaneously announced the closing of a $6 million Series B3 round that was led by existing backer Pivot Investment Partners and with new participation from one of the largest agency mortgage REITs in the country, AGNC Investment Corp. AGNC has nearly $98 billion in assets, and Rahbar said they would be taking a seat on dv01's observer board.

Previous investors in dv01 include George Soros' Quantum Strategic Partners, Jefferies Financial Group, OCA Ventures, and Illuminate Financial.

"We had this opportunity with AGNC. You can't get a better brand name in terms of agency mortgages, and they have an impressive venture business, which makes them an ideal partner in building and shaping the products," Rahbar said of AGNC's involvement in the deal.

"Data didn't really become a priority until post-crisis for this market"

In many markets, the availability of accurate prices at any time is taken for granted. Even corporate bonds, once considered one of the last major vestiges of a world in which trades are conducted over the phone and prices are opaque, seems to be going the way of the algorithm.

And yet in the massive $12 trillion market for mortgage- and asset-backed securities, derivatives are largely still priced in what's considered an old-school way for Wall Street in 2021: via huge Excel spreadsheets that are updated sometimes as infrequently as once a month.

Read more: Mortgage trading had its hottest year since the Great Recession, helping Wall Street investment banks blow past revenue estimates

The lack of transparency in these markets is what drove Rahbar, a former MBS trader at Bear Stearns and JPMorgan Chase, to found dv01 in 2014. The data infrastructure for structured finance hasn't been as transparent as it needs to be since the collapse of securitized loan markets precipitated the global financial crisis in 2008, he added.

"dv01 was born out of my frustration being a trader in this market and how outdated all of the technology was, how scarce information was. Data didn't really become a priority until post-crisis for this market," Rahbar said.

From commercial real estate to mortgage-backed securities

Pragmic was founded in January of 2020 by Oshman and Sanchez, whose experience in developing the Softbank-backed commercial real estate data service Reonomy led them to look at developing a similar tool for agency MBS.

"It just really struck me at the dearth of information that people had at hand given the size of the marketplace," Oshman said. "I was almost shocked. $65 trillion of agency MBS are traded annually, and I felt that the bar could be significantly higher."

There are about $8.8 trillion in outstanding agency mortgage-backed securities, according to the Securities Industry and Financial Markets Association. Unlike the much smaller market for private-label ones sold by banks, these derivatives are issued by Ginnie Mae, Fannie Mae and Freddie Mac: three government-sponsored entities that buy mortgages from banks, thrift institutions, and other financial firms across the country.

The effort to getting a better handle on the information meant "large-scale data wrangling and normalization" as well as analytics, Oshman said.

"We built a system that is focused on liens and able to cover the entire country concurrently, and ties a very specific lien in an anonymized manner to each and every securitized loan," he added. 

Bringing ESG to mortgage bonds

Rahbar and Oshman said the acquisition will also help dv01 develop the capabilities for a new environmental, social, and corporate governance tool that will be able to rate structured finance products on key sustainable investing metrics.

ESG ratings on derivatives are far less common than those in the equity market. While the pandemic has brought renewed attention to the rapidly-growing $40 trillion market for ESG products, the focus has been on stocks. 

See more: Meet Apollo's new impact-investing team: 3 execs lay out a hiring push and how they plan to tie exec pay to moving the needle on ESG

According to Oshman, dv01's new ESG infrastructure will be able to tie nearly 100 environmental, social, and governance standards data to each loan.

"Investors can use dv01 to create custom ESG scores and apply them to each securitized loan, bond, and entire portfolios. Issuers, on the other hand, can use dv01 to rate their bonds or analyze their entire loan portfolios to determine how to package what they already own as ESG bonds, which trade at a premium," Oshman said.

Source: Read Full Article