Interview: Peter Gustavson and Paul Lennox on their second act with EncoreFX

“Last time we had to go cap in hand to the banks to sell them our vision. This time around, it’s totally different”

Paul Lennox, left, and Peter Gustavson.

Paul Lennox, left, and Peter Gustavson.

Peter Gustavson and Paul Lennox built Custom House into a forex powerhouse and then sold it to Western Union for $370 million. Now the pair is planning to do it all again. They talked with us about building the same business over again, keeping lean, and the state of global monetary policy today.

Peter, you’ve made no secret of the fact that you’re getting back into foreign exchange now because your non-compete agreement with Western Union has expired. You even named your new company EncoreFX. Are you basically building the same kind of company all over again?

It’s pretty much the same. The product has changed slightly. The foreign exchange industry has evolved over the past five years. But the culture we had at Custom House, the commitment we had to bleed customer service—those are the things we want to emulate at EncoreFX.

In the press release, you said you were “putting the band back together,” and you’ve said that 85% of your current employees worked at Custom House in the past. Are you hiring people straight out of Western Union?

When I sold—or when we sold; there were stock options for all employees—I didn’t think I was going to get back into [business]. I thought I was going to get on the PGA Tour or something. But in the end, we have a lot of friends who are still in the industry, some of them working for Western Union, some of them having moved on to other companies. The conversations we had with them were that they pined for the good old days, when customer focus was No. 1, not where you’re hell-bent on driving quarterly earnings. In our culture at Custom House, we would delegate very wide decision-making capabilities and responsibilities around credit and other issues to the front-line staff, who actually interfaced with customers. All that was taken away from people and all decisions were centralized [when Western Union bought it].

So these former employees gave you the idea to get back into the industry? 

Paul and I sat down and [realized] some of the challenges around starting up were no longer challenges. When we had Custom House…we had close to 50 people in our IT department, writing and testing our customer-facing and back-office systems. All that’s now a commodity. There are great IT systems that have been written over the past five years that are light-years ahead of what we had, and we can lease that for a fraction of what we spent. One of the big expenses we had at Custom House was the capital cost of all the servers and special air conditioning and backup generators, and the redundancy site at the other side of the country. All that now sits in the cloud.

So we said, OK, we have decades of experience in this industry. Last time when we started, we had no experience and very little capital. This time we have lots of experience and a very healthy balance sheet. So I put out feelers to some of our friends, saying, “What if Paul and I put something together?” We were just inundated with people saying, “If you build it, we will come.”

Paul, what were you doing before you started talking about this opportunity?

I was with Custom House for more than 10 years. Then one time Peter and I talked over a beer, and he said, “Look, you’re too young to retire. How about running a hedge fund?” I liked the sound of that, so for four and a half years, I think, we had a currency hedge fund. It was a private fund. We explored algorithmic trading. We had a couple of bright, young guys working for us, banks of computers running program testing, that sort of thing. We got to stay in the currency space. I enjoyed that opportunity.

Peter, I gather you also were also running a private equity business. Or was it a venture capital business?

We called it private equity, but we did some early-stage [investing] as well.

I’m guessing, then, that you felt that going back into a business you knew and had operated in for so long was a better opportunity than these other businesses you had invested in.

What I learned from private equity is that to do it properly, you really have to immerse yourself in the businesses you are investing in—get to know their industry, get to know their management team. The foreign exchange industry is something Paul and I invested a big chunk of our lives into. We understand where the risks are. We understand where the opportunities are. It’s just a better investment. We looked at buying a foreign exchange company. We looked at several in the early stages. Some of them had been around for decades. But in the end we thought we could create a platform and our own systems, our own culture, and not try to shape something else.

What’s the advantage for companies in dealing with EncoreFX for currency transactions when they already have banking relationships?

Anybody can sell you a spot transaction. Anybody can phone up a bank or us and say, “I’ve got $300,000 in a U.S. [dollar] transaction. What’s your price?” The difference with EncoreFX is that we spend the time to get to know your business, what the currency risks are in your business, what the currency opportunities are in your business. Then we can make recommendations around spot transactions, around forward transactions, whether you should or should not be employing an option strategy. Selling the actual currency is secondary to providing the forex strategic plan for your company. That’s how we differentiate ourselves.

Monetary policies are diverging around the world, causing big shifts in currencies. Does that make it an auspicious time to launch your business?

It’s a wonderful thing because, you know, the tide’s going out and a lot of people are finding that they’re naked. When you have these huge currency swings and people have not planned appropriately, your business model could be turned upside down and no longer be feasible or profitable. If you were importing from the United States and you had not hedged your next year’s purchases or a portion of them, with the drop in the Canadian dollar, you could be in big trouble. But if you had hedged it, you’d have a year to adjust your sales to survive.

Canada now has its own renminbi trading hub. Does that benefit your business?

The renminbi was a big challenge when we had Custom House. I was in Beijing half a dozen times, meeting with the Bank of Beijing to set up a renminbi [exchange]. In the end you just couldn’t get there from here. So this is a big opportunity, especially for Canada. It’s going to be interesting, if we expand into the United States or if we expand into Europe, whether we’ll be able to use that hub to our advantage.

Victoria is not known as a financial centre. What are the advantages of being headquartered there?

It’s a huge advantage in that when Custom House closed down, it had 350 people at its head office and probably 1,000 more who had worked there over the years, all trained in foreign exchange. We were the largest non-bank foreign exchange provider in North America—in fact, the largest in the world. There were a lot of skill sets that got built up in Victoria. Even to this day there are three or four foreign exchange companies that run their head-office functions out of Victoria as a result of the expertise left behind by the Custom House alumni.

The other part is that being on the west coast, the time zone we’re in, we get up a little early to service the eastern seaboard, but when we have to square off our trades and close out our books at the end of the day, we’re still trading with companies out of San Francisco and Los Angeles in this time zone. Another unique thing is that if, like Custom House, we decide we want to expand into the Asia Pacific [region], we’re only two hours different from Auckland. It’s a different day, but there’s only two hours’ difference. You don’t need a second treasury. You can run your treasury out of Victoria and serve a big chunk of the Asia Pacific.

How are you financing EncoreFX?

I sold Custom House for quite a bit of money, so I’ve invested a significant amount into the equity of EncoreFX. We’re rolling out an employee stock option plan so people who join us are given the opportunity to participate in the equity of the company. I could put in substantially more if required. So we’re not going to look for third-party investors.

You must have a lot more freedom than you had the first time around with Custom House.

Last time we had to go cap in hand to the banks to sell them our vision, to show them the growth we were having. When we decided to expand outside of Canada last time and we were going to go into the United States, England, Australia and New Zealand all at the same time, we didn’t have the balance sheet to support it. I went to Bank of Montreal and said, “Hey, I want to borrow $10 million to do this.” They said it was too risky, but then they introduced me to their private equity subsidiary and also to Sam Belzberg, and they cobbled together the $10 million and lent it to us at 14% interest. But it all turned out well. We paid it all back and made lots of money off that investment.

This time around, it’s totally different. The balance sheet is not the issue at all. We sold Custom House for $370 million. We’ve still got a good chunk of that available to be invested, if required.

If you have any constraints to growth, what are they?

Managing the velocity of the expansion. We don’t want to drop the football—make mistakes or hire the wrong people. When you move quickly, there’s always the chance you forgot to close the door, and something got in that wasn’t supposed to be there.