This is how you pick those pre-IPO winners
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For Sydney-based fund manager Bombora Investments, the unlisted space has proved a happy hunting ground in recent years.
Bombora’s Special Investments Growth Fund — which combines ASX-listed and private holdings — posted a robust return of 54 per cent in the 12 months to September.
But the fund’s pivot to private opportunities started in around 2013 — part of a shift away from public markets where it was getting harder to outperform the benchmark.
Bombora’s chief investment officer Gregg Taylor has had a front row seat to that changes taking place since the 2008 financial crisis.
And speaking with Stockhead, he said those changes are likely to become more entrenched in the years ahead.
“Our view is the whole concept of active management will be redefined over the next 10-15 years,” Taylor says.
“The definition will shift to mean actively getting involved in the companies in which you invest, and looking to drive value through that involvement.”
Within the unlisted space, he noted that Australia’s venture capital ecosystem has grown increasingly active providing Series A funding opportunities around the $10-$15m mark.
On the other hand, private equity (PE) firms with plenty of dry powder are typically looking at deals in excess of $100m.
“Our view is that between $20m-$100m there’s a real opportunity, and that’s the segment we operate in. At that valuation point it’s businesses with proven operating models, who are looking to find that next stage of growth and need support,” Taylor said.
He added that within the Australian market, the ASX is nicely positioned as a vehicle to fund growth — somewhat in contrast to markets such as the US where companies choose to stay private for longer.
“What’s most interesting is that some of our best opportunities don’t come from companies that are focused on a pre-IPO path,” he said.
“They know they need capital, and we assist them to assess whether a pre-IPO round (into an ASX listing) is a better path than a potential VC or PE deal.”
With that in mind, Taylor said a key part of Bombora’s filtering process is to gain an understanding of which companies are potentially suited to a listed environment.
When Bombora began pursuing opportunities in private markets, one of its early success stories was LiveTiles (ASX:LVT) — the US-based tech platform that listed on the ASX in 2015 via a reverse acquisition, and now has a market cap of more than $200m.
“The filter’s probably changed a bit since we invested in LiveTiles, because when we took that company towards IPO it was still pre-revenue,” Taylor said.
“You probably couldn’t do that now in the current market conditions. Investors have become more sophisticated at distinguishing between different tech offerings and the quality of their business model.”
In addition, LVT’s proposition was unique in that it had a large embedded customer base that was reliant on the product, who were initially using it at no cost and transitioning to a paid model.
And importantly, it met one of Bomborra’s key investment criteria — providing solutions to a real-world problem.
Says Taylor: “There’s a lot of interesting tech companies that look like they have a big market, but are they addressing a real world problem? Or just creating a solution companies aren’t willing to pay for?”
In the case of LiveTiles, that solution was an enhanced user interface embedded in Microsoft products that had the highest installation rates, but some of the lowest utilisation levels.
Taylor said companies also need to show evidence of genuine intellectual property, and a point of difference for their product can’t be replicated.
“It’s also got to be a globally competitive offering. Just wanting to win a handful of enterprises in the Australian market probably isn’t enough.”
Having established a presence in the unlisted space, the Bombora team now see about 20 to 30 opportunities a month come across their desk.
Each of the 10-strong investment team have about 20 years of experience in funds management, and Taylor said the networks they’ve built are an important advantage.
“We get lots of deal flow from traditional investment banks and brokers,” he said. “They refer opportunities to us, both to help raise capital and for the expertise around governance we can provide.”
One of those recent examples is Marketplacer — a SaaS business that provides a platform for companies to set up their own online marketplaces.
Bombora is assisting in raising a $15m pre-IPO round to finance the next phase of growth for the 10-year old company.
Lastly, Taylor said it’s essential to make an assessment of the people involved. Bombora then provides support where it can to foster the growth of the management team.
It’s not uncommon for investment candidates to have built an established business model, but don’t have the experience to handle a public listing.
“It might be capital markets knowledge, or more rigour around the finance function (such as hiring a CFO). Companies in that space are more likely to benefit from an active investor,” he said.
“We’re not there to kick out management; we’re there to assist and help plug the gaps where they might not have the full skill set for life as a listed company.”