This article is sponsored by Moonfare.
Sitting between venture capital and buyouts, growth capital has become increasingly popular over the past few years, and covid-19’s acceleration of technology trends from remote work to e-commerce is attracting even more interest to the area. “We’ve seen two years’ worth of digital transformation in two months,” Microsoft CEO Satya Nadella said in the early days of the pandemic. But how easy is it for individuals to invest in this pocket of private markets? And how durable is the growth investing trend? To find out, we spoke to Moonfare’s founder and CEO, Steffen Pauls, and its CIO, Winson Ng.
There is increasing momentum behind the democratisation of private equity. What role will Moonfare play in widening access?
Steffen Pauls: In establishing Moonfare, our aim has been to rewrite some core rules of the private equity industry. It has historically been very difficult for individual investors to gain access to private equity funds. We wanted to offer them a route to fund investing that suits their needs. So far the feedback has been incredible. I expect by the time this appears in print, we will have crossed the €1 billion assets under management milestone. We are growing so quickly by giving investors access to the best private equity funds with low minimum investments. We deliver a super-digital experience as well as a path to liquidity. Private investors never know what will happen in life. Our minimums go as low as €50,000, and if investors need to sell their positions, they can do so through our digital secondary market.
Why have you launched a growth equity strategy?
SP: We have already established a strong position in the buyout segment of the market, where we continue to offer investors a choice of really high-quality funds. Yet we could also see there was appetite for creating portfolios for investors. They want to invest in a basket of funds with one ticket.
We started by doing this for buyouts. Now we believe the time is right for a growth equity portfolio. There is a need for a one-stop shop here for private investors, and so we are developing a portfolio of eight to 10 funds run by high-quality managers. One of the differentiating factors is that it is not a blind pool – investors know that they are getting pure-play growth if they invest in the portfolio; and because it’s Moonfare, they know that each and every fund in the portfolio has passed a very demanding due diligence process on its own merits.
What is attractive about the growth space?
SP: There has long been the adage that software is eating the world and, while that has been true for a while, we have seen a significant acceleration of this trend over the past year. It is hard to think of an industry that has not been disrupted or reinvented by technology. In other cases, startups have created new industries altogether. Growth fund managers are the investors powering those changes and, yes, reaping the rewards. This trend, we believe, is not going anywhere. Technology-powered businesses are more resilient, especially during downturns.
Growth is a fast-growing segment, and some significant players are moving into the space. In addition to well-known VC firms raising later-stage growth vehicles, we are seeing large buyout managers, like EQT and Blackstone, bringing growth strategies to market.
Winson Ng: With VC and buyout fund managers both moving into growth investing, we have an increasingly deep pool from which to select managers.
Tectonic changes in equity markets underpin the increasing emphasis on growth capital. We are seeing companies remain private for longer before going for an IPO. This change lays the groundwork for growth investors. These fund managers have a robust pool of targets that are no longer startups but also haven’t become the kind of mature underutilised assets that buyout fund managers target. Growth companies have recurring revenue and are beginning to scale rapidly. In this context, growth capital funds typically generate the higher returns achievable in earlier-stage investments and the stability and lower loss rates of later-stage investments.
With companies staying private longer, how do you view the interplay between public and private markets?
SP: It is a relatively new phenomenon and it is enabling unprecedented value creation in private markets. Back in the 2000s, the average time to IPO was three years for technology businesses; now it is around eight or more. There are now investors equipped to create value and support companies through this stage of their development in private markets. That means there is less value for the public markets.
Many large IPOs have recently had poor post-IPO performance because the value creation has already been eaten up by investors at the earlier stages – so that is where you want to be as an investor. If companies go public at multi-billion-dollar valuations and you think of the classic buy-the-pop strategy, you have to ask how much upside is left.
How do you select opportunities in the growth space?
WN: We have a rigorous process and we see more than 100 opportunities a year. From these, we select strong teams that have performed well in the past and can demonstrate that they will sustain that performance. The teams must have worked together previously and show they will continue to do so, have repeatable track records and have a competitive edge. Our process includes both top-down and bottom-up analysis of sectors and segments, and our screening is forward-looking.
Our growth portfolio will consist of carefully curated funds that offer investors diversification through timings and deployment of capital. We will combine more stable opportunities with those with the potential to generate stronger returns. Growth portfolios should generate strong alpha and, while normally with higher returns there is higher risk, diversification helps mitigate this.
How will growth capital evolve further?
SP: Growth capital will benefit from the best features of two worlds. From the VC side, firms have raised large pools of capital and they will further develop their value creation skills, while on the buyout side, firms will adapt their playbooks and leverage their strengths for the growth space. Buyout and VC firms started out as generalists, but they are now raising funds around not just themes, but sub-themes and sub-topics, such as artificial intelligence, infrastructure and so on. We are already seeing some specialism in growth, such as healthtech and robotics, and that will continue.
WN: Agreed. I believe we will indeed see many of the global brand name GPs add growth strategies to their platforms if they have not already done so. The growth space will continue to have further runway and capture investor interest with its sustained and stronger returns.