Pre-IPO Investing – the difficulties and opportunities in the current market environment

The last speaker of today's alternative ESG perspective is Mr. David Wellington, portfolio manager of Bombaro's Special Investments Growth Fund.

The fund focuses on quality and unique opportunities with attractive industry dynamics and global addressable markets.

backed with strong balance sheets and sustainable funding models.

Since inception in June 2018, it has delivered 13.4% plan and net of fees.

David has 25 years of experience in the industry focusing on corporate finance, investment banking, technology, media and telecommunication.

David's topic today is pre-IPO investing, the difficulties and opportunities in the current market environment.

Welcome, David.

Thank you very much, Angelina.

It's a pleasure to be here and a pleasure to talk to you today.

And to give you a little bit more of a snapshot around who Bombora is, what we do, and as you rightly point out, what does the current financial markets and the conditions of those markets mean for where we are and what we're doing.

But before I sort of kick off into, I suppose, the market conditions, just a little bit of background on the fund and who we are and what we do.

I think the key to the fund is in the name.

We are a growth fund.

So what we are doing is investing in a high growth businesses and providing them with not just capital, but expertise as well to help them on their growth journey and to help them become significant, large listed companies on the Australian Stock Exchange.

But just to give you a little bit of an overview of who we are and what we do, we invest in minority positions in high growth, scalable businesses that have got opportunities to scale, not just here, but all around the world.

We're about $140 million fund at the moment.

The average equity check size that we invest is somewhere between two and $15 million.

We invest in these, I'd call them scale up companies.

So that's companies that are,

generally at a minimum approaching $5 million worth of revenue.

So they're not startups, they're not pre-revenue companies, they are real companies with real customers, real suppliers, real staff, but have got really big growth opportunities ahead of them.

But as I said at the start, need more capital and more expertise to help them realise their ambitions.

Essentially, a lot of what we invest in is around technology or technology related businesses, because we find those businesses to be the most scalable, such that they can scale on a global basis without significant amounts of extra capital.

So they're capital like businesses with opportunity that once they get these businesses to scale, then they can actually drop a lot of money to the bottom line.

If you look at the bottom left of this slide, you'll see the sort of target portfolio allocation.

Essentially that green section there is what we call actively managed pre-IPO.

And in our space actively managed means we're actually sitting on the boards and driving outcomes within these businesses.

And that's despite us generally having a minority position in these businesses.

We operate these businesses from day one as if they're a public company from a governance perspective.

We won't do the traditional venture capital or private equity structure of putting a shareholders agreement over the top.

We run these businesses if they're public companies from day one, even though they are unlisted when we first get involved in them.

We then, once we've got them ready to list on the ASX, and that's getting them ready everything from reporting, governance, budgeting, strategy, board reporting, hiring the right C-suite, getting the right board members,

we'll get that company ready for an IPO.

We will list it on the Australian Stock Exchange and then we will stay with that business through the early two, three, four, five years of it being a listed company and use the capital markets on the ASX to fund future growth and to scale these businesses into meaningful businesses.

So as you can see the green part of the chart there as it migrates into the blue, that becomes actively managed listed equities

whereby we are still on the boards, we're still helping those companies to grow.

And then ultimately, once they've reached scale, we will tend to drop off the board and hand our share holding over to another fund that likes investing in what we'd call passive larger listed businesses.

And we can go and do the same thing again and help those early stage companies to grow and get ready.

In the portfolio company examples there, you've got some examples of some of the businesses we have in the portfolio today.

On the right hand side, you've got some active unlisted investments, such as a video production company called 90 Seconds or a FinTech accounts receivable management business called Easy Collect.

And there's a whole bunch there that we could talk to for a long period of time.

But ultimately, our objective is to migrate them into the left side, which is the active listed.

There are some of what we would call our graduates, the likes of Beamtree, Janison, Gratify and Madpaws, which are now listed on the Australian Stock Exchange.

And we continue to manage those businesses and grow them.

In the middle down the bottom, what you can see is quite a large and experienced team that we've put into the elbow grease into the active side of the business.

What you'll see if you look through the CVs of this is the five, I should say the seven full-timers.

We've also got three non-executive advisors in the group, which have all have 25 years of experience.

But across that group, I won't go into them individually, but across that group of 10 people, there's significant experience in private equity, in managing large businesses.

We've got a couple of CEOs of very large top ASX,

50 companies that have been there and done that.

We've got corporate finance, investment, banking, broking, diligence, accounting.

So the group has got a wide and diverse array of skill sets that we can bring to these companies.

Now, what do we look for when we invest in these businesses?

I think I've mentioned some of them.

These are very high revenue growth rates.

I think on average over the last four years, we've been growing our unlisted companies four years in a row

revenue growth rates of 56% per annum.

So these are rapidly growing businesses.

They're all scalable in that they've built a technology platform that can now scale not just here in Australia, but around the world.

These are businesses with very high gross margins, often over 80% gross margins.

These are businesses that we think have got sustainable competitive advantages and barriers to entry or an economic moat.

As Angelina mentioned at the start,

We only invest in businesses without debt on the balance sheet.

We give them plenty of cash for runway for future growth to handle situations, which I'll talk about at the moment where the market has definitely dried up for new funding, but our businesses are well capitalised and still have cash on the balance sheet.

These are attractive industry dynamics and we're looking at businesses with large, really large addressable markets.

We obviously do a lot of work around the management team and the culture and the authenticity of management to say, are these people do they do what they say they're going to do?

And do we trust them?

And then ultimately, we've got to get involved in these businesses at a compelling valuation at a discount to the comps so that we know there's some some upside for our investors in the future.

You asked about current market conditions.

And what does that mean for a fund like that us

Well, clearly, the last 18 months has seen a significant turn away from the attractiveness or the market's appetite for this style of investing in terms of technology and growth, which is obviously part of a general market cycle where markets come and markets go.

What does it mean for us right now?

It means we're probably overweight in the active unlisted space at the moment because

We've got a number of businesses that we think are IPO ready in terms of size, scale, maturity and all of that governance that I talked about earlier.

But unfortunately, given where the markets are at, we're not able to list them on the Australian Stock Exchange until the market turns and we can start seeing some more appetite for IPOs in the market.

So we're finding that sort of dynamic a little bit challenging at the moment.

What I would say is the counter side to when you see investment markets do exactly what they're doing now, is there's a massive supply demand imbalance at the moment in terms of the amount of capital, which is very limited and the amount of opportunities which are in, which are, which there are numerous.

So what I'd say right now is we're in one of those unique markets where there's really, really interesting opportunities

to deploy capital right now into businesses that are at materially discounted valuations to where they might have been 12 or 18 months ago.

And if you're the capital provider that has the capital and has the expertise that we do, you're in a very good position to be able to negotiate really strong, you know, deal metrics on transactions at the moment.

As we've seen the sort of capital markets dry out, that does mean that there are a lot of those opportunities out there.

We're looking at a number of them right now.

In terms of where the fund's at, we're doing a lot of work at the moment doing things like this, Angelina, where we're marketing the fund because we see those opportunities out there.

We see there's a very real opportunity for growth and to set this fund up for really, really solid returns in the next three to five years.

So we're spending a lot of time educating our investors and the investor universe that now's the time to be deploying capital into this space when it's in this sort of low depressed state because if we can set up these sort of investments right now, I can see that we can set the fund up for really strong returns over the next three to five years.

So I suppose in summary, Angelina, that's kind of a little bit about the fund, a little bit about what we do, and a little bit about how we're seeing the market right now.

Thank you, David.

I want to give you two qualities, a unique market and this imbalanced supply and demand.

And just looking at your presentation slide on the left-hand side, that green part of it, that's the pre-IPO side of things.

So I'm just curious, how does Monvaro's valuation policy work with these unlisted assets?

It's a very, very interesting question, very topical.

You know, we are a little bit different from traditional private equity and venture capital, although essentially the way they would value their unlisted is to do a director's valuation every quarter and mark the investments up or down to whatever the valuation that they determine at the time is.

We've taken a more conservative approach in our valuation policy.

We essentially will do a valuation every quarter of our

private investments.

If they've gone down in value, we will mark them down.

However, if they've gone up in value, we will not mark them up.

The only way we would mark them up is if there's an external round of capital that's gone into those businesses at a different valuation to where it is today.

So I suppose where does that leave our unit price at the moment?

It's a big question at the moment.

As I mentioned earlier, we've got our own listed companies that over the four year period from FY21 to where we see them

finishing up in FY24 are growing on average 56% per annum, but we're not in a position where we're able to mark those valuations up until there's an external round of capital into those businesses.

So I suppose what does all that mean?

Look, we feel there's some significant latent value in our unit price because we haven't been able to mark a lot of these unlisted businesses up in value despite their growing at such a rapid rate

which is a bit somewhat of a frustration to our existing investors, but potentially an opportunity for new investors coming in.

And it's just the way that we've approached the world to be very conservative and not just arbitrarily mark them up in the good times and then have arbitrary evaluations.

So it's a very topical discussion in our space, but yeah, we've taken a very conservative approach on that.

Yeah, well thanks David, it does sound conservative as you only mark down, not marking it up.

And thank you for answering the question.

Now, great to see you David and thank you for the presentation and the Q&A today.