European venture’s biggest problem at the moment is capital. Or more precisely, a lack of it. Some practitioners claim that return prospects for today’s funds have never been better: more experienced entrepreneurs, more internationally-focused businesses, less competition for assets. But the fact remains: returns from European venture have been so poor for the last decade that many institutional LPs have given up on it altogether. So while governments can help to prop up the smaller end of the market, there’s a lot less capital floating around at the larger end – which clearly makes it much more difficult to build really big venture-backed businesses in the region.
So what’s the best way to attract some of these large institutional investors back into the asset class – at least until such time as returns start to speak for themselves (assuming that day ever comes)? Two interesting ideas emerged this summer in the UK, courtesy of Amadeus Capital Partners and Octopus Investments.
Amadeus said in July that it had held a $75 million first close on a new fund, Amadeus IV Digital Prosperity Fund, which will make late stage venture and growth capital investments in technology businesses seeking to profit from growing demand in emerging markets. Since so many consumers in these markets use their phones as their primary way to get online, the focus will be on ‘mobile-first’ technologies that ‘leapfrog’ desktop applications, according to Andrea Traversone, the Amadeus partner heading up the new fund.
The most unusual aspect, however, is that the fund’s cornerstone investor – in fact, the only investor, at the time of the first close – was MTN, a big African telecoms company. In the coming months, Amadeus hopes to match MTN’s contribution with a similar sum from institutional investors, taking the final fund size to around $150 million.
Anne Glover, managing partner of Amadeus, told Private Equity International that MTN had initially approached the UK-based firm (among others) about doing an Africa-focused fund – but were persuaded by Amadeus to increase the scope. “We said: ‘That’s great – but to attract the leading companies globally and scout technology globally, it needs to be bigger than that. The demand is global; it’s not in the centres of innovation. But we can be the bridge between [those two].”
This arrangement is a good illustration of some of the big trends in European VC at the moment. As other institutional LPs pull back from the market, corporates are becoming an increasingly prominent source of capital: many are sitting on big piles of cash, and are getting more involved with venture in a bid to make this money work harder. But their wish-list tends to different from the traditional VC investor: they’re less interested in blind pools, preferring tighter, more focused mandates that could have strategic as well as financial upside.
Happily, this should also have the effect of de-risking investment for institutions. Amadeus’s argument to other potential LPs will be that having MTN as a partner gives it a competitive advantage – in terms of both access to these markets and understanding of the potential opportunities. What’s more, since Amadeus can start investing the new fund right away, these new LPs will also be able to have a look at some of the businesses being bought (or looked at) before committing. So it mitigates blind pool risk.