ASEAN sees deficits in Series B financing and risk pricing : Kelvin Lee, Fundnel
Kelvin Lee, the chief executive and co-founder of Singapore-based private investment platform Fundnel, is optimistic on the growth of their operations in Australia
As of February 2018, Fundnel has completed 23 transactions and facilitated capital raising amounting to US$100 million. The firm has a presence in six countries — Singapore, Indonesia, Australia, Brunei, India and Malaysia — with its focus markets being the former three nations, which account for the majority of its deal flow.
More recently, the digital investment platform has partnered Singapore-based independent asset management firm Thirdrock Group to offer private equity and venture capital opportunities to clients. Fundnel counts DBS, Dymon Asia Ventures, and Anthill Ventures amongst its investors and partners
Thirdrock said the deal will help the firm, which has $2 billion in assets, invest in mid-stage, high growth companies that are raising Series B financing rounds. According to Lee, the combined deal flow from both the Fundnel and Thirdrock pipeline encompasses opportunities in various sectors, including technology, financial and professional services, lifestyle, retail and the F&B sectors.
In an interview with Venture Views, Lee discusses the Series B financing gap and deficit in risk pricing in Singapore and the broader Southeast Asian region, as well as developments surrounding liquidity in private markets and the Singapore Exchange (SGX).
Edited excerpts
What’s the investor profile you have on your platform?
The investors we’ve engaged with through the platform are mostly institutional accredited investors, which run the gamut from private equity funds all to he way to angel investors We haven’t unfortunately engaged with retail investors; we have’t found a securities product that could be interesting for retail investors yet, but we’re exploring interesting ideas or structures that could engage them in the future.
What’s your take on the current state of the venture ecosystem in Singapore and Southeast Asia, particularly of the venture capital segment?
Its definitely moving in the right direction from when we started out in 2016. There’s good exits coming out of the market now with Razer and SEA Ltd being among the first two that have undertaken liquidity events in the market. We’ve seen good companies grow in nice, large-volume companies like in Japan and have seen the rise of our neighbouring countries as well.
It’s definitely more vibrant but with that being said, there needs to be a discussion about whether there’s a need for a shift in the fundraising infrastructure that supports the growth of these various companies.
Back in 2015/2016, we were looking at companies that struggled to raise their Series A round and now these firms have grown to the stage that they are raising Series B and C financing rounds.And if the financial services providers do not have the mandate or capability to start supporting these guys in the future, we will probably see a slowdown in the performance and growth of these businesses.
So you reckon there’s currently a Series B financing gap in the regional ecosystem?
It goes beyond being a specific Series B gap but there is a gap in our part of the world when it comes to pricing risk. It’s not just being able to look at a company and think about dividend payout — which is what most investors here look at, especially in the public markets — but the reason that entrepreneurial ventures, growth enterprises and the liquid stock investments that could support them have been losing focus among young people is unfortunately due to a lack of ability to price growth or risk.
That needs to be changed and its not just that Series B gap but really about investors taking a leap of faith and backing homegrown companies can grow beyond Singapore, even if there aren’t any dividends.
You’ve recently entered into a partnership with the asset management firm Thirdrock. How do you see this impacting or complementing your current operations?
You see a lot of traditional asset managers concerned about keeping up with and adopting technology to help serve the family offices they cater to. With Thirdrock, we see someone looking towards the future of growing out the firm beyond their current setup with the intense use of technology; they’re using our technology to do more with the resources that they have and expand their investment options.
The reason we partnered with them is that they’re really forward thinking. Basically, this is a partnership with an asset management firm which has clients seeking a certain type of company or exposure to an asset class. Instead of originating the deals by themselves, this partnership sees the asset manager fed curated deals where they co-invest with institutional investors.
A lot of family offices and family investment vehicles may have the money but do not wish to conduct due diligence themselves. But they don’t mind co-investing alongside professional fund managers.
What’s the road ahead for Fundnel in terms of its growth and partnership strategy? And how do you plan to exit in the future?
We launched the platform in January 2016, so its slightly over two years old now. We haven’t planned a liquidity event but if we were to explore this, we would want to offer securities in our firm through our platform. So it is really putting our money where our mouth is. We haven’t given thought to our own exit strategy because we’re trying to grow organically to the best extent we can.
While we do have some pressure from our investors, if there were any sort of liquidity event, we would like to probably have the chance to offer it on our platform first and let our investors base buy in. Our long-term objective is to develop a private bourse to facilitate funding for enterprises.
Looking at private secondaries exchanges, there’s significant discussion about the need for liquidity events and an exit architecture for private enterprises in the region. You’ve discussed having a private secondary market for private enterprises to list their securities. With reference to, how does the emergence of security tokens and initial coin offers (ICO) impact this?
An ICO is essentially another way of offering your product or shares in your company through a utility token or security token to the wider public. Essentially, it could be of version of what we’re used to doing in investment banking and it’s not dissimilar to what we’re doing right now at Fundnel. However, the form, structure method of distribution differs.
We’re on the lookout for anything that could potentially augment what we do or reduce the costs of access to capital. So if you have blockchain network that is tied to an ICO that helps reduce the cost of creating an investment prospectus, that would be something we’d consider.
Do you plan to integrate security/equity tokens as a service offering of Fundnel’s platform?
We’re on the lookout for good companies that want to raise growth capital, be it in the form of a security token or a traditional equity offer. So there’s no reason why we should complicate things, especially if you can do traditional equity offer but then decide to do a security token just because its in the in-thing.
We’re open to all structures — be it a private offer of common equity shares augmented by our technology platform or a security token — and have the ability to handle and structure that.
Coming from an investment banking background, what’s your view on ICOs as a tool of entrepreneurial finance, and the fact that Singapore has somehow managed to become the third largest hub in the world for ICOs?
The real pain people face when they raise entrepreneurial capital is that they may not have the ability to afford an external service provider — like an investment bank- to facilitate the offer, especially if its a small deal. That’s where the entrepreneurship journey starts and ties into why vendors like Fundnel are trying to serve more private companies that don’t want or cannot pay for such services by bringing down the cost of access to capital.
So that’s the same beginnings of an ICO. Second point about ICO is that they may not just fund to offer the security or the equity to the same bunch of investors. And for companies that do not have the access, the same bunch of quote unquote privileged investors, then you want to have the ability to distribute it to their customers. So it’s really back to basics about how people don’t raise money just for the sake of raising money, they raise money to grow wealth to get to a certain point in their company’s history.
What is the fastest way, what is the easiest way to get that growth factoring? Is it using traditional merchant bank? Is it using traditional equity money? Is it using a platform like Fundnel or is it writing it on white paper and raising it yourself using ICOs? So I think [inaudible 00:11:23] the same cause of why are you raising this in the first place.
From a finance perspective, how do you value a company that has closed ICO funding? Is it part of the net tangible assets of the company? Where does it sit on the balance sheet and how does it impact its valuation?
It’s really interesting and that’s something that I haven’t been able to fully answer, which is why we’re keeping a close eye on the ICO space, but I’m not jumping onto the bandwagon fully. Not yet anyway. But coming from a traditional investment banking background, fundamental analysis still remains the best tool when looking at valuations; when you price any offering, be it ICO or a regular offering, it is still based on demand and supply. So right now demand and supply forces affect any crypto-led offering, and it is skewed towards the demand side.
Hence, there are many valuations which are not fundamentally sound, and why its better to regress to the fundamental valuation of a company. So the traditional methods of valuation should still apply. The intrinsic value of a company should be discovered beyond just supply and demand. But that’s coming from traditional perspective.
You facilitated the pre-IPO investment round raised by e-commerce firm Y Ventures Group, which listed on the SGX Catalist lat year. What’s the dynamic of the Fundnel-SGX relationship?
When Y Ventures first came to us, we wanted to be able to help shape the company and get them ready for their external investor conversations. We applied some of the processes that we put our other companies through on the Y Ventures team.
This includes using technology to get as much of the required investor documentation prospectuses in place and then using technology again to connect them and get them in front of the right investors. We facilitated their pre-IPO round in 2016, prior to their debut on the Catalist in 2017.
This is a prime example of how we can work with SGX, in terms of promoting and acting as a pipeline for promising growth companies to head to the SGX.
The Singapore Exchange (SGX) is facing competitive pressures from the Australian Securities Exchange (ASX) and Hong Kong Exchange (HKEx) for IPOs (initial public offers). 2017 saw a strong rebound in their performance and the last few quarters have seen the introduction of dual-class shares and a collaboration listing agreement with the NASDAQ, as well as the promise of a Singapore-Malaysia Stock Connect. Is it a viable platform where entrepreneurs and business owners can list? Or should they seek venues that may offer better valuations and liquidity?
There was a period of time when Manchester United was considering listing it’s shares on the Singapore Exchange back in 2010. I was part of the team handling that transaction at the time and did the exploratory deal divisions; that was where dual-class structures were first proposed by Magnus Bocker, the former and late CEO of the SGX. However, the investing public — at the time — was not comfortable having dual-class share structures.
Instead, Manchester United went on to list in the US, where the market has dual-class share structures. Now in 2018, we have dual-class share structures and its a good move in the right direction.
On the issue of liquidity, however, given the competition with regional stock exchanges, I’m unsure if I’m the appropriate ‘subject matter expert’ to discuss this.
But with that being said, I do have a couple of observations about global capital markets that may be worth sharing: you get a lot of tech companies that prefer the depth of the US capital markets — the NASDAQ and NYSE for instance — and the the pool of investors there have a greater aptitude to price tech or risk, something which our market doesn’t have.
However, after the deal gets priced by the pool of relevant experts and tech investors that are really familiar with the ecosystem, then a lot of investors in Asia do actually join the IPOs there subsequent to their pricing, or maybe even before that point.
Returning to the matter of liquidity, the US equities market has deeper liquidity, which is why many entrepreneurs and businesspeople go there. This is actually a function of geographical — as well as possibly political — conundrums.
But let’s define liquidity, which is actually defined by a mathematical formula. Daily liquidity is going to be contributed at in part by retail investors but not by institutional investors, who are actually supposed to hold their stocks for a long period of time and add value to the firm, etc.
But retail investors are the ones actually trading it out and provide the pricing points every day. In Singapore’s case, a portion of that retail demand is ageing, so demographically that’s a part of the equation; retail demand is a number and you multiply it by investor interest level.
You need to ask how much of the retail investor population is actually interested in trading stocks on whatever exchange — it could be the Bursa Malaysia or SGX — that the company is listed on.
This retail investor interest has not been increasing and is in fact declining; the number of CDP accounts is actually dropping and as a retail investor population ages, their investment objectives also change. When they’re younger, they have an appetite for the higher risk growth companies listed on the SGX; they weren’t dividend companies at the time they were listed.
This same retail investor population supported these growth companies and forsook the safer, more basic stocks. Now, they’re ageing and this pool is not being topped up by younger millennials who — for lack of interest on the list of opportunities on the SGX — are not finding it sufficiently compelling to open up CDP accounts. That’s when you put two and two together.
The retail investor population and level of interest is dropping, so the overall liquidity will drop. Unfortunately, with the demographics being the way it is , that population curve is in a downward spiral. It’s a combination of a small population size and ageing demographics.
The retail investor base is not being topped up by a younger generation that have a interest in trading stocks on the SGX, so we’re at a small portion of retail trades going in and out and aren’t seeing the large price movements that other stock exchanges may have.
So what are the fundamental components that could drive and boost liquidity in the local capital market?
There’s two parts to this equation, the retail investor operations and investor interest levels. The retail element can’t be changes and is based on the situation we’re in. The US and China are much larger, so this retail investor pool is what we have to work with.
In 2010, when I was working on the Manchester United IPO, there were talks about Asian stock exchanges pulling together, not just in Singapore but across Asia, where there are other countries with much larger populations. So this would have suddenly boosted the retail investor component of the equation exponentially.
The second part comes in keeping up investor interest and this is where Fundnel is trying to help educate the public to keep up the interest in actually investing, but not just in the listed options on the stock exchanges, many of which represent industry 1.0, such as the old school manufacturing companies that built our nation.
It’s about really being able to invest in non-listed companies as well, such as private businesses that you interact with everyday — the coffee chains, yoghourt chains, the salad chains — which are the private companies that we, the younger generation, have a better understanding of and can relate to.It’s really about bringing up the investor interest in everyday companies.
On a private bourse, wouldn’t liquidity be an area of concern when engaging both the retail investors and institutional capital players? How would regulators respond to this?
Let’s return to the original original business model for such a platform-the institutional investors will lead the way, similar to an IPO, and that’s the way it generally works; 80%-90% of an IPO is usually taken up by institutional investors while the retail investor population accounts for perhaps 5% to 12% of the IPO.
We’re trying to adopt that same IPO model and use it for private investments. So most of the deals would be underwritten by the institutional investors. Retail investors would account for a small component but will hopefully provide the liquidity.
With reference to the point about the secondaries market, that’s actually already happening in exactly the way I described. You get your retail investors and institutional VCs taking on a large portion of deals, and then you have the angel investors that are the early investors seeding these firms.
Then you have your angel investors. The early investors that seeded these guys. For whatever reason, they may need liquidity for some other venture or are looking to monetise part of their early investments.That’s a domain where a secondaries deal increase could happen, and we’re hoping to facilitate some of these transactions. So that’s where we’re working to influence regulators and market liquidity.
The SGX-Bursa Malaysia Stock Connect is supposed to come into play by end-2018. However, people are recall the problems with the Central Limit Order Book (CLOB) in 1999, while others cite the Shanghai -Hong Kong Stock Connect as an example of how it will boost liquidity. Any thoughts?
Looking at the Stock Connect itself, stock exchanges often have national interests at play and objectives to fulfil, so having cross-border channels is always beneficial as it breaks down the walls between bourses and regions. It’s a development that definitely beneficial.
But as to how it’s actually executed? Subsequent to that, anything can happen, so I’m not in a position to comment as to whether it will succeed, but the intention is always good.
The SGX is reportedly is in a bid to acquire a controlling stake in the Tel Aviv Stock Exchange (TASE). If successful, how would it impact the financial ecosystem in Singapore?
We’ve seen the SGX pursue a number of acquisitions, such as the Baltic Exchange. So it’s not a survival thing, but rather the fact the SGX is constantly trying to reinvent itself. It’s always a positive move, given the very real impact of the demographic changes in Singapore. If you think about exchanges just operating solely within Singapore, then there are challenges with that view.
With trading volumes dropping and more companies staying private longer, this reinvention and internationalisation is an ongoing trend. So I’d applaud them for trying to deepen their exposure to other countries.
Since Fundnel has expanded its operations to Australia, what sort of developments are you seeing?
We’re getting really interesting deals from Australian companies, which would have been difficult for us to access without having a footprint there. There are companies inspecting milk tanks using drones and agricultural services among them, as well as an array of alternative energy companies that would otherwise be inaccessible had we not expanded to Australia.
From a local Australian perspective, we’re actually seeing a lot of hyper-local businesses, where we see brands get a lot of great recommendations from their local community. But these local brands may not have access to growth capital beyond their sector or be may, for a number of reasons, unwilling to go through that process.
And for those that wish to stay hyper-local and serve the community? A platform like Fundnel could, down the the line, facilitate someone invest in their neighbourhood grocer or supermarket. That being said, we are still building business operations there and were recently awarded a license in Australia from ASIC, so we want to leverage that to aid the business community there access capital.
See:
Digital economy enterprises can’t approach ASEAN as a single market: Charif El-Ansari, Dropsuite
