The impact of crossover investors (and why Australia needs more of them)

Our next speaker in the Global Perspectives is Scott Wilson from Unala Capital.

His presentation topic is the impact of crossover investors and why Australia needs more of them.

Unala Capital provides late-stage growth and bridge pre-IPO financing to companies in Australia, the US and offshore.

They have a particular interest including technology, AI, financial services and carbon management.

Scott is the managing partner of Unala Capital, where he leads its investment community.

Prior to Unala, Scott was with Macquarie for 13 years, working in a range of equity and debt transactions in Australia and overseas.

His experience includes over five billion equity and debt investments.

Welcome, Scott.

Thank you very much, Angelina.

Great to be here.

Okay, today I'd like to talk about the impact of crossover investing and why I believe it's a great product for the tech ecosystem and for private investing in general.

A little bit about Wanulla Capital to start.

So Wanulla is a fund that invests in best in class private technology companies.

It's been running for about three and a half years.

We have invested in 22 companies in that time, of which we've already exited nine of them.

On those nine exits, we've made an average return of 2.65 times our investors' money.

We have significant deal flow and network onshore and international, and we are very focused on sectors we know well, which are those topics that Angelina mentioned at the start of this presentation, particularly software, data, financial services.

that's what we know, that's what we think we're good at and they're the things that we believe have got long-term tailwinds to support them.

In particular we think the current market opportunity has generated some really interesting transactions which we'll go to in a little bit more detail which will generate attractive risk-adjusted returns over the medium term.

And a little bit about our structure is that it's a unique open-ended evergreen fund so we can continually recycle capital rather than raising it for a fixed period of time.

A bit about the team.

I'm the founder of Winola Capital, 13 years at Macquarie, eight of those in New York.

Beau, who joins me on the investment committee, is an experienced VC investor with a lot of experience in Europe, but also investing in a hybrid private and public roles, which is pretty key for crossover investors.

You may be asking, what is a crossover investor?

I'm glad you asked.

They've become a key player in the tech ecosystem.

It's bridging the gap from private to public.

It's around about 13 to 15% of global transactions in the last couple of years, more so in the US, a little bit less in Europe, and very little in Australia, which is why I believe we need more of them.

The role of the crossover investor is to back existing companies that are growing well and have a track record of doing so.

These are not speculative 10-year plus investments where we hope to make 100 times our money.

These are proven companies with a demonstrated track record of selling to customers, ideally globally, that we can invest and get behind.

Our value add is less so on the actual underlying business product, but more so on helping that company scale up, access their global network, and prepare themselves for an IPO or for a trade sale to maximise outcomes for all parties.

As I mentioned, there's the most investor-friendly terms we've seen in decades on offer at the moment.

The crossover investor tends to sit in that bucket between private market and public because we do both and we bridge those gaps.

We're not venture capital and not private equity.

We're not listed hedge funds or sort of long-only equities.

We tend to make the investment when the companies have reached a certain level of maturity.

For us, that's a minimum revenue threshold and existing product market fit.

we do tend to invest again at the IPO where possible and support that company beyond its life as a public company as well.

One of the key things here on the terms is that a lot of the alpha generated from private markets is not so much on picking a great company, but it's also on structuring appropriate transactions.

Everything is up for negotiation as a private company.

Is it your ownership percentage?

Is it your downside protection, board seats, information rights?

liquidation preferences, you're not just buying a share, you can construct a very good downside protection through appropriate documentation, which is something that we focus a lot on.

One of the interesting statistics that's come out of the global research on crossover investing is that tech companies who have taken investment from crossover investors go public faster, more often, and at a higher valuation than companies who have not had a crossover investor.

So I think this is a data point that shows

the maturity of the companies that we're investing in is much higher than those that are just trying to IPO from a, you know, pure VC or private equity approach.

So we like that.

In terms of the stage, we've discussed a little bit about this too, but again, we do that late stage private through to IPO and post IPO.

Our ideal journey is to invest once when private, once when public, and ideally hold on as long as possible.

we have our unique structure allows us to retain the post-listing shares in our vehicle for an indeterminate period of time.

If we believe they're going to continue to generate attractive risk-adjusted returns, we would like to hold on to them.

If we'd like to sell that capital to distribute to our investors or to recycle into new opportunities, we can do that too.

Why now is an interesting time.

So

companies are staying private longer and they're getting larger.

So there's an increased shift of focus to that late stage private market.

But that's not being matched by an increase in supply of capital.

And we're seeing that right now, the demand for capital is three times higher than supply, which means that for every $3 of companies wanting to raise money, there's only $1 of fund capital available to support that.

What that means is that it's led to some of the most investor-friendly deal-making environment that we've seen in decades, where, again, terms have switched incredibly in the favour of investors.

This won't last forever, of course, so we are trying to make hay while the sun shines to do that.

We also believe that investing after a bubble has burst will lead to superior

And we've seen this play out after every other crash, after the tech bubble in 2000, 2001.

Those that invested immediately thereafter when valuations had normalised did very well.

Those that invested post the GFC, immediately post the GFC did very well, and we believe that this will also be a similar time.

We're already starting to see some green shoots in the IPO market becoming normalised as well.

The Goldman Sachs barometer here shows that things are returning to a normalised level from pretty dire in the last 18 months, which is trending to look like it will continue to be positive.

Well, another strategy to take advantage of that is basically to do what we said on the tin.

We're going to bridge those private to public markets.

We back companies with strong growth tailwinds that are proven that have global expansion and long-term thematic tailwinds.

And the value add is that we bring the IPO and M&A preparation experience to them and that we can be supportive partners for them.

It's also unique because we and other crossover investors are a new source of capital.

It's complementary to the early stage venture capital and complementary to the latter stage private equity enlisted markets.

At Winulla, we have a deep network that generates hundreds of transaction opportunities a year, and you can see the numbers there.

We are hyping victory.

We only make four to six to investments each calendar year.

The summary there is that crossover investing is, I think, a really unique opportunity.

It generates attractive risk-adjusted returns.

You're getting into companies that are proven performers, and you can protect yourself on the downside with, you know, if you know what you're doing, which we believe we do, you can protect yourself through superior documentation and negotiation.

We look forward to seeing you in the markets in the near term.

Thank you.

Thank you, Scott.

Now, you talk about the concept crossover investors and explain the bridge between private to public.

From an investor's perspective, how do they obtain liquidity if companies decide to stay private for longer?

It's a very key focus of ours and often one of the first questions that we ask.

For the best companies, there is always path to liquidity.

There are secondary sale opportunities, share buybacks, funding of dividends, or just other minor ways to exit without having gone public, without the company having to sell.

Even without that,

there are certain investment types that we know that have a cap on the time period so either we can have a redemption right on a convertible note where the company has to pass back or refinance us or we can have an exit mechanism where after a certain period of time the company is obligated to hire an advisor or an investment bank and explore a sales process partial or full for us to exit.

There are definitely ways to obtain liquidity without relying on an IPO.

That makes sense.

And my next question is, what is the ideal company journey for a crossover investor to be involved with?

The ideal journey for us begins with the company already having achieved that level of maturity.

They've got a product or product suite.

They have customers.

The customers are paying them.

Growth is increasing.

Net revenue retention is increasing.

That's the point that we want to get in.

At that point, the company has typically focused on just building and improving its own product and distribution and hasn't necessarily thought about where is it going to go.

That's where we like to come in to say, great, you're doing really well at this.

We'd like to help you expand internationally.

We'd like to help position you for an ultimate sale to a strategic buyer.

That's where our journey takes them from that product market fit,

through to a liquidity event.

Thank you very much, Scott.

Great to see you.

Take care.

Thank you very much, Angelina.