Venture Capital: Not Just About Early Stage Partnerships
This project has been solely focussed up until this point about unlisted vehicles and when it’s come down to real estate, infrastructure, bond funds and peer to peer lending we’ve managed to cover a wide array of options with varying degrees of risk, return and different structures to suit different investment patterns.
When it comes to Venture Capital, for a retail investor the picture isn’t complete without looking slightly further afield to the listed vehicles available. This week we’ll profile a particular listed vehicle: Bailador. Commonly referred to as a Listed Investment Company (LIC), Bailador should be thought of more as a listed investment fund. Unlike some other LICs, it doesn’t exist to invest in other listed companies: it has a focus on investing in private firms in the late-stage or growth stages of venture capital and in that sense has a broadly similar mandate to the Ellerston or Blue Sky Venture Capital partnerships. Bailador has an IT focus, but the way it’s structured is quite different to the Early Stage Venture Capital Limited Partnerships (ESVCLPs) we’ve discussed previously. I was lucky enough to speak to David Kirk the Managing Partner at Bailador about the company.
Since the IPO in November 2014 and until 30 June 2016, after all fees the fund Net Asset Value (NAV) has had an annual increase of 18.3%. In the 12 months to 21 October 2016, the share price had risen by 18.1%. Bailador, like many listed investment companies has historically traded below its NAV, however compared to its historic levels it is trading quite strongly and it may eventually trade at a premium to its NAV. For further information see the Paterson report here.
Bailador is an avowedly IT-focussed vehicle. It specialises in several sub-sectors including Software as a Service (SaaS), data businesses and marketplace businesses. David believes these are business models that are superior in the sense that they are able to retain cash to reinvest in the business and have features such as repeating revenues and/or subscription-based businesses.
The Bailador team is one that has a breadth of experience. Led by David Kirk and Paul Wilson, the team has both private equity experience and real-world business acumen. David is the former Chief Executive of Fairfax Media and led the companies’ investment into acquisitions such as Trade Me and Stayz. He has been nursing the potential of online businesses for quite some time. Paul is a private equity expert who has been Director of CHAMP Private Equity in Sydney and New York and MetLife in London. The Bailador team (you can find out about them here) has a range of skills including international private equity, start-up involvement, analytics and online business process improvement. The team has deep and broad experience in IT businesses which makes a strong case for value-adding in their investee businesses.
Bailador, like other Venture Capital investments we have profiled previously, takes a seat on the board of all companies it invests in and insist on a number of downside protections including investing in preference shares and taking a senior position in the capital structure of the investee company. Bailador provides mentoring for their investee companies and while they may be a diverse group, there are consistent opportunities to make gains in areas like sales process improvement, on-boarding of new customers and focussing and reporting on the metrics most aligned to value creation.
The Bailador portfolio is weighted to two companies, with around 50% of the portfolio invested in SiteMinder and Viocorp, which are two of the oldest investments in the portfolio. Newer , smaller investments in Standard Media, iPRO, Straker, Stackla, Rezdy and Click Loans (Bailador’s first foray into Fintech) fill out the rest of the portfolio. In June 2016, over 20% of the portfolio was allocated to cash. In July, the company invested in DocsCorp, which provides document management services and is now expanding to cloud computing and in November in Instaclustr, which provides managed solutions for the rapidly growing NoSQL database market.
Defining returns and value in venture and expansion-stage (Bailador’s stage) investing can be a difficult proposition given the lack of data and long investment horizons. When I spoke to David Kirk, I asked him what he thought were the critical components our readers needed to ask about when making an investment decision within this asset class. He suggested:
- The team is very important – invest in a quality team
- Prior performance and track record are important
- Expansion capital has many advantages over venture capital
- Consistent growth in net asset value is an important indicator of long run performance
David also mentioned a feature of the Bailador fund I hadn’t considered: Bailador, based on their assessment, has a fairly low correlation with the ASX generally compared to some other investments. That’s interesting because it suggests that the fund may be a useful source of diversification.
Unlike the early stage partnerships we’ve discussed previously, Bailador is a listed entity. The minimum entry point is also much lower as it acts like any other entity traded on the ASX: if you only have $5000 to try out in Venture/Expansion Capital, then that’s no problem for Bailador. A wholesale or sophisticated investor’s certificate is not required. Given the risks of Venture Capital we’ve outlined in our previous profiles, the listed vehicle is a good opportunity to try out the asset class without risking a large amount of capital.
Like the unlisted partnerships, dividends in the listed Bailador fund will be irregular and difficult to forecast. The fund went to initial public offering in 2014, but the company had been running for some years prior and investments are likely to be realised in the medium term, resulting in fully franked dividends for investors.
The taxable income of a listed vehicle like Bailador is somewhat different to the special circumstances of the ESVCLPs, which we have discussed before. While the ESVCLPs have a 10% taxable offset and tax-free returns; a listed vehicle like Bailador is eligible for fully franked dividends to the tune of 30%.
There are a few advantages a listed vehicle has over the ESVCLPs that are worth considering. Firstly, liquidity in a listed vehicle is considerably greater than in a partnership. If you need to access your money or the investment doesn’t suit your purposes: you can have access to your money, provided you’re prepared to sell your shares at a price the market will bear. In a listed vehicle, you can vote with your feet in both directions: don’t like the way the wind is blowing? Sell your investment. Happy with management? Putting more in is an option.
Be aware of buying and selling at a premium or discount to NAV: the premium or discount is market-driven. As a result, there is a level of exchange-driven volatility that may not be present in a partnership investment model. Be aware, however, that both investment models are subject to multiple sources of volatility, the extent and type of which are different.
The second difference between a listed venture like Bailador and an ESVCLP is investment horizon. While all Venture Capital should be considered a long-term proposition, a listed fund that is not subject to a hard end-date is able to be flexible in terms of exits and realisations. This means not being compelled to exit a very fast growing investment due to a closing fund, as well as the possibility of investors entering a maturing portfolio of assets in the listed fund when realisations are closer and NAV growing.
The last of the differences here is that, since the listed fund is not an ESVCLP, it does not need to comply with requirements regarding Australian investments to qualify for the tax advantages offered to ESVCLP. So far, Bailador has made investments only in companies that were first headquartered in Australia or New Zealand, but the listed vehicle has the flexibility to seek out and invest in opportunities that present themselves in an international market.