Coverage by Bhat Dittakavi of Variance.AI on “Scaling with Global Investors” by Monashee Investment Management at “TiE Hyderabad Leadership Series” on 22nd Jan 2018.
Moderator: Suresh Raju
Panelists: Robin Osmond, Gerald E Coughlan of Monashee Investment Management
Robin: I have taken around 30-40 companies public worldwide. I was an entrepreneur for a gambling technology company in UK. I have invested in over hundred IPOs personally. I can raise equity capital around the world. I want to answer the following questions.
1) Why do companies go public?
2) What investors and bankers look for in an attractive investment opportunities in equity capital?
3) What to expect in migration from private to public company?
Why do companies go public?
1) Access to capital: Sizeable capital at attractive valuation which is far better than private investors.
2) It provides liquidity to existing shareholders, let it be the founders, earlier investors or others.
3) Having public listing on a recognized exchange brings ancillary benefits such as prestige, branding and human capital.
What investors and bankers look for in an attractive investment opportunities in equity capital?
I start with four different things.
1) What is this company’s addressable market? Is it in sufficient scale to make it attractive enough? Is this market having sufficient liquidity in the after-market?
We look at this company that offered 20-25% and has $150M sterling revenues. The market is large at $400B. We took a call.
2) What is it’s target market share? Where will it be? Are they going to be a leader?
They must get into top two players as 80% of the market goes to them.
3) Is there a credible aspiration?
We recently had an internal debate on investment in “hello fresh” of USA with lot of negative cash flows. they are really strong though. They could be top 2 but can they sustain there as Amazon acquired Whole foods? How about their warehousing and can someone else destroy their position? Is it easy to have entry?
4) How good is the management team?
You may have math-sound business plan. But it means nothing unless if you have all other things looked at, credibility of the management is key. Investment bankers train the management that can sell the investors anything inside two hours. We do due diligence to understand whether their key stakeholders such as customers and partners and even employees trust them?
Great business plan and credible aspiration don’t mean anything without good management.
What else do you need from public market perspective?
1) Corporate governance: As a new investor, am I going to be protected? Do they have good non-executive directors? Do they havr board structure to protect them? If it is a family business, does it have arm’s length relation with its suppliers and partners?
2) Systems and controls: Public market hates shock in the system. You buy an IPO, say we invested in October last year on a mobile gaming company. We bought the stock at $1150 in early October. For the quarter after the IPO, they missed the expected mark by 40%. They dropped to 850 and crawled back to 950. Market lost its confidence and it takes long to get back to original numbers. Make sure management doesn’t over sell itself and hence disappoint the market.
3) Capital structure: Companie’s ability to get funded in future and pay dividends in future. In private company, huge debt on books might be ok but public company can be looked at it differently.
Sanjay) Do you have specific industry focus?
Gerald) We don’t have specific industry focus. I have sufficient domain knowledge in IT. Monashee investment management doesn’t go deep on specific vertical.
Frank) Our focus is on Education, Technology and Healthcare in Asia. Venkat) We go horizontal. Our focus is to find the dark horses as opposed to well known ones. We focus on IP such as software that is scalable. We look at strategic acquisitions where global companies can come and acquire. We don’t differentiate the sectors.
Sanjay) How do you spot diamonds in the dust?
Gerald) Capital raising is always challenge. Investor types 1) Wealthy families (HNI)
2) Pension funds with long term maturity. They have bell curve and risk profiles.
3) Funds (invest managers will have a mixture of different funds)
They are very opaque at what they do. We are having that position of profiling characteristics that may or may not exist.
They don’t have any time line. They may jump right in or they want to watch us deliver before they jump in.
A lot of times, it is luck as right guy comes to right offering. For every hundred phone calls, I hope to get that one.
Suresh Raju) What do you look when you do pilot fishing?
Robin. In Europe, a typical IPO is either real estate or financials. It is straight forward there. More challenging decisions happen when something unique happens. You have to think out of the box for say a Turkish Healthcare IPO.
Suresh Raju) Entrepreneur has built this $15-20M revenue with 30% gross margin and what should he do? There are SME investing and he wants liquidity. How does he get growth capital or should he just sell? Should he list and go through the pain of disclosures and compliance? He doesn’t want to run. What should he do?
Venkat) If the person is tired, he should sell rather than going public.
Dr.Ramesh) I will get out if there is a buyer.
Suresh Raju) Great idea. Built it to $3-4 million revenues. What should I do? Series A? Back route to the public market? SPAC investment?
Gerald) I look at good management for a SPAC (Special Purpose Acquisition Company) investment.
Rimpal) I cofounded a SEBI registered hedge fund with a small corpus. We manage $7M capital AUM. We have an opportunity to scale it up with a global investor. What if you have a big offer at a very low price?
Gerald) The first investor in a hedge fund gets a piece of equity. If they force us to eat our own dog fund, we structure such that they did come in but we have to meet some hurdles. A third in error came in but by then we have a performance track and we negotiates a higher management fee. No 4, 5 and 6 investors means leverage in negotiation shifts to our side. We tell them we protect the capital in a difficult market. We got the track record. We tell them we don’t really need you but if you want to in invest, here are the terms. Then we have a capacity constraint on our strategy. We can’t get 100% of allocation and we use that scarcity to people to charge a good fee l.
Offer a fee break say from $7M to say next $20M.
Q) How small is too small to invest for you? Do you look at company’s closer to IPO?
Gerald) We look at companies going IPO. We have a global preview. We screened 380 IPOs worldwide. We look for post-money market cap of $200M and minimum offering of $50M. Our efforts are the same and hence the threshold. We also look for adequate liquidity in the market for trading volume.
Raj) When you scales from 25M to 1B, what did you learn?
Gerald) We happened to walk into a hedge fund risk management company. We were introduced thriguh Credit Suisse. Principal of this company fell in love with our idea. When the markets are raising, IPOs happen as it encourages banks. Conversely, IPOs dry out when markets are not good. There is natural hedge that happens. This particular guy has close relationship with biggest pension fund in the world. He knew their pain points. They told him that they weren’t looking at very large hedge funds. They want emerging ones as fees could be less and returns could be Hugh. Luck but hard work too. They speak different language and we got to learn and we have to position ourselves differently. Suresh Raju was helpful in this translation.
I couldn’t ever predict in 2011 that we would go from $25M to $275M overnight. It happened. Then we went back to them and told them to expose themselves from USA to global market. We advised then to hire folks and let us help them reach out to global markets. We could make an economic arrangement for both of us. Luck and timing.
Q) Your focus in Indian market?
Gerald) We are here to explore. I came first in 1991. Since then this company got explosive growth since then. I think India is one the exciting stories of the world. Large population and sophisticated busines class and aspirational middle class. I think the future is bright for indja we want to be part of it.
Q) Duration of pilot fishing?
Robin) 4-6 weeks. Not as big as due diligence by the private equity investors. We trust that investment bank does the lot of work for us. If they consistently brought to market the management teams that fail, their brand is in trouble. We take some comfort in them.
Suresh Raju) Be precise and focused on what you want to highlight. Sometimes in 45 minutes we tell the bank that the company is not ready to get to the market.
Jerald) $2T equity capital under management through Fidelity and Wellingtons of the world in Boston. Every IPO company comes there for a road show. We want to see that vision and enthusiasm from the management team in 45 minutes. I disarm the founder and ask him to tell the story or journey to get all the way here. Other investors ask them about numbers. Are they telling a tall tale ot there are telling real. This helps us see their conviction. We overlay this on their industry structure, market share and more.
Suresh Raju) What are the things not to do?
) Management team needs to show long history of being with that company. Is CEO charismatic. Is CFO coming from the banking background? Does he understand what investors want. Incentive structure for the management, such as ownership and lock ups and so on, in alignment with ours. Is the presentation concise. If I don’t understand their differentiation or defined edge, not the sound byte statistics, I won’t. Bankers and lawyers prepare them. We need to see what would be seen in between.is
the CEO who runs a the business on his own. Why they needed to raise $500M and where do they out it to work? Whatever the messaging, make sure it is refined and consistent in tune with the market.
Sanjay) Warren Buffet won a competition between managed S&P and unmanaged S&P.
Robin) We as a hedge fund, we tell the investors we generate a certain level of return whether the market goes up or not. We do charge a higher fee than an index fund. If we don’t justify huge fees, we go out of business.
As an investor, I want exposure to beta and also exposure to a portfolio that factors beta as well as alpha strategy by something like Monashee management. An investor who got one part of S&P and the other part of Monashee has generated 38%.
Suresh) Most of the money in the market is for short term. If you want lower volatility and risk-adjusted returns, go for hedge funds.
Bhat) How about block chain?
Gerald) It could be fad or bubble or it has some merit. 50/50. Let it come to mainstream before we invest in Blockchain companies.
Robin) I see that Blockchain technology reduce trading costs significantly.
Q) What is your hedging strategy for shocks?
Robin) We stress test on what if markets drop by more than 30%, how quickly do we reinvest? We pick a week after the downturn to make that decision. We are always shorting the futures in some ratio. Forbexample, we have substantial exposure to Hong Kong but we are shoring Hansen.