TheWall: Funds: Providing access to the world’s best unicorns

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 1, 2019 - July 07, 2019.
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Over five years ago, any private start-up company valued at US$1 billion was viewed like a mythical being. They were so rare that venture capitalists began calling them “unicorns”. Today, these companies are no longer uncommon — more than 300 globally have exceeded the billion-dollar mark. A small number have gone public, and this has enabled more investors to participate in the growth of the new economy.

However, most investors do not have the opportunity to own shares in these companies. Even institutional investors with sufficient assets would have to queue up to purchase stocks of a unicorn, says Ismitz Matthew De Alwis, CEO of Kenanga Investors Bhd.

“There is a gap here. The demand and appetite to invest in these companies has been increasing because they (the investors) have seen the success of these initial public offerings (IPOs) in the US equity markets, but they typically do not have access to invest. It is difficult even for institutional investors,” says De Alwis.

He sees the demand for unicorns increasing, especially among second-generation Malaysians who are using the technologies provided by these companies on a daily basis. They also believe in the potential capabilities of these companies in the future. “While the first generation tends to focus their investments in brick-and-mortar companies, the second generation is excited about these new technology companies.

“The latter group is likely to be in their 30s, scrolling through Facebook on their way to work in a car that they hailed through Grab, while listening to music on Spotify. They understand the various technologies. They want these companies in their portfolios to complement their holdings in traditional brick-and-mortar companies. They just don’t have access to it,” says De Alwis.

To bridge the gap and meet the investor demand, Kenanga Investors launched Kenanga Global Unicorn 1, a fund that feeds into the Ericsenz-K2 Global Unicorn Fund. The target fund invests primarily in the securities of globally recognised technology companies, otherwise known as unicorns. The first of its kind in Malaysia, the fund offers investors access to revenue-producing unicorn companies with near-term visibility for an IPO within six to 24 months, says De Alwis. The fund may also opt to take a balanced approach between making pre-IPO investments and growth or late-stage investments.

“It is the first time that this form of private equity (PE) investment is available to local investors,” he adds.

De Alwis says Kenanga Global Unicorn 1 fund will invest up to 100% of the fund’s net asset value in the target fund, with the remaining amount in liquid assets. The fund is targeted at sophisticated investors who have a medium- to long-term investment horizon, with a minimum investment amount of RM100,000 (ringgit class) or US$25,000 (US dollar class). The fund is available for only 45 days, from June 11 to July 25 this year. According to the information memorandum, the fund will mature on April 18, 2021 or April 18, 2022.

 

Looking for breakout companies

The target fund is managed by Ericsenz Capital Pte Ltd, a venture capital (VC) and PE firm regulated by the Monetary Authority of Singapore. The company invests in high-growth middle-market companies operating primarily within the technology, healthcare, consumer and energy sectors globally.

Ericsenz works with K2 Global, a VC firm with access to a wide selection of late-stage private technology companies as its strategic adviser. K2 Global is invested in a few unicorns currently: ride-hailing app Uber, property marketplace Airbnb and question-and-answer website Quora.

According to Datuk Ashley Choo, CEO and executive director of Ericsenz Capital, there is a huge opportunity in investing in top-performing business-to-consumer companies in different segments.

“Private technology companies typically do not have high velocity of profits, but they do have high velocity of growth. While we consider other factors, ultimately, we want to find out whether they are the market leader in the segment. For instance, for music [streaming sites], there’s Spotify, Soundcloud and Tidal. After extensive research and due diligence, we find that Spotify is the breakout company [among the three]. So, it could be one of the companies that the portfolio may invest in.

“Another example is in food technology. There are a few players in this segment, including producer of plant-based meat substitutes Beyond Meat. But this company has already gone public. So, we look at other breakout companies in this segment and find that Impossible Foods fits the bill. Essentially, we are looking for the best disruptive company which is become a billion-dollar valued company and has a strong paying consumer base,” says Choo.

 

Disrupting the way we live

Aside from the accessibility, many are reluctant to invest in unicorns, as they are often viewed as high-risk. A key issue is the lack of profits. For example, ride-hailing company Lyft, which went public recently, has not turned a profit for years. Last year, it posted losses of US$911 million.

Choo thinks this sentiment is gradually changing as the unicorns continue to disrupt the everyday life of the masses. Previously, many were reluctant to use the products and services provided by these companies, as they lacked understanding of how they worked. Now, more are aware of the benefits and are willing to pay to use these products and services.

Choo says, “I used to go to stores and purchase physical CDs if I wanted to listen to music. I liked holding on to these CDs, but Spotify has completely disrupted this space. Today, I can’t even remember the last time I visited stores that sell them. Similarly, I used to think that I would own a fancy car once I made my own money, but ride-hailing has completely changed that. I have been carless for seven years and counting.

“Can you believe that companies like Impossible Foods are even changing the way we eat? They were able to make plant-based products taste and behave exactly like meat — it sounds like a science-fiction movie. Think of the implications of that — the cattle industry, which has a vast environmental footprint, is being disrupted. Will poultry be next?”

While there will always be sceptics, Ozi Amanat, founder of K2 Global, is confident that more investors will eventually be convinced and attracted to these companies. As the strategic adviser to Ericsenz, K2’s role is to bring its expertise to the industry to discover “gems” and assist in performing due diligence on potential companies.

He shares that one of his idols — prominent investor Warren Buffett — had previously avoided the tech sector, shying away from buying stocks in hot internet companies even during the dotcom boom. Last year, he invested in India-based One97 Communications Ltd, which owns fintech platform Paytm.

Amanat says, “I grew up reading books about value investing and have always admired Warren Buffett as one of the world’s best investors. It is disheartening to hear him giving negative comments about investments in tech companies, although I do understand that he looks for deep value.

“When I heard the news that he invested in Paytm, I was thrilled. It was a seminal moment in my life because I had also invested in the company. The shareholder base is very small — there are only eight investors in that company, including us. That’s when I know a fundamental change is happening. Investors are getting more convinced that there is value in this space.”

 

Providing more alternative products

Kenanga Investors Bhd is positioning itself as the investment solution provider of choice for its clients. While it has been traditionally known as an equity manager, it is working on strategic alliances to provide new products that invest in different asset classes to Malaysian investors, says CEO Ismitz Matthew De Alwis.

“Partnerships and alliances are important because we cannot claim to know everything. For example, we work with parties like Ericsenz because private equity (PE) is not our area of expertise. Similarly, we decided to acquire Libra Invest Bhd, an arm with fixed-income expertise, because we want to build a stronger fixed-income team,” says De Alwis.

“We extend our partnerships across the globe — if we want to introduce exchange-traded fund (ETF) products, we work with our partners in Taiwan. If we want something to do with futures and hedge funds, we work with our partners in the US. It is great because we get to continue to learn from and leverage each other’s expertise as we go along. Why should we reinvent the wheel?”

Kenanga Investors received approval to acquire Libra Invest, the fund management arm of ECM Libra Financial Group Bhd, from Bank Negara Malaysia in May. De Alwis says the merger will be completed before year-end. Once that happens, the fund house will look at introducing new funds in the future.

He is also looking forward to expanding the fund house’s alternative investment offerings. “In this ever-changing environment, we have to be innovative. This is important because the local equity market is currently very challenging — people are seeking higher yields in other asset classes.

“This is why we are one of the few fund managers in Malaysia with an alternative investment division. We have a small team working with our partners around the world. In the near future, we will be launching Malaysia’s first leveraged and inverse ETF. We are looking forward to the reception (of the fund).”