A new wave of pioneers is developing a way of funding venture capital firms by listing public funds on the London Stock Exchanges Alternative Investment Market instead of raising money privately.
Proponents say advantages to listing include providing permanent capital and lengthening the investment period to about eight years from the usual three to six.
Venture capital firms listed publicly might not have to sell off their best portfolio companies or let fail companies that take longer to turn a profit, as often happens with private funds.
Buyout firms like Kohlberg Kravis Roberts & Co., the Carlyle Group and Apollo Management already are listing public vehicles on foreign exchanges as well as raising private funds, said Steven Neil Kaplan, Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago, Graduate School of Business.
So far, institutional investors are not directly investing in publicly traded venture capital funds. But many buyers of the AIM-listed shares are investment management firms, so most pension funds, endowment and foundations that invest with them have exposure to those shares through their externally managed active equity investments.
I have heard about them, but the question remains the liquidity and the discount to NAV (net asset value) at which these firms trade, said Mario Giannini, chief executive officer of private equity consultant and alternative investment manager Hamilton Lane, Bala Cynwyd, Pa.
The traditional venture capital funding model is a bit like playing Beat the Clock, because the fund cycle often does not parallel the fundraising needs and lifecycle of young companies, said Frank D. Ballantine, partner and co-head of emerging growth venture capital for the Chicago law firm of Reed Smith LLP.
Venture capital funds typically have a life span of about 10 years. During that time, executives need to invest all of the limited partners commitments in the portfolio companies and then sell or take the companies public. Venture capital firms use the track records of existing funds to raise their next funds before the end of the last funds lifecycles, Mr. Ballantine said in an interview. So, a venture capital firms investment in each of its portfolio companies is shorter than the life of the fund so that returns from these investments can be generated for fund investors on time.
A public venture capital fund gives executives the time to hold on to their best-performing portfolio companies longer while they are still growing to their full potential and nurture the slower-growing but promising companies rather than let them die. This new model has the potential of making these funds perpetual fundraising machines, Mr. Ballantine said.
Mr. Ballantine said one example of a successful public venture capital fund is Amphion Innovations PLC, based in New York and London. Amphion has listed a fund containing a portfolio of 10 partially funded portfolio companies. To keep investors happy, executives at Amphion plan to return to the market at regular intervals with a new portfolio company and, at the same time, sell or take an existing portfolio company public. And along with either selling or taking portfolio companies public, Amphion executives can also return cash to investors through such strategies as dividends.
Officials from Amphion could not be reached for comment.
So far, Amphions returns are stellar. Between its initial AIM listing in 2005 and Sept. 19, Amphion reported annual compound growth of NAV per share of 41% in British pounds and 47% in U.S. dollars, according to a report by Charles Stanley Securities, a London-based advisory, brokerage and equity research firm..
Other early stage public funds listed on AIM include ANGLE Technology Group, Biofusion PLC, IP Group PLC, Sigma Capital Group PLC, Baltic Oil Terminals PLC, XL TechGroup Inc., IPSO Ventures PLC and Imperial Innovations Group PLC.
Not all of the venture capital funds on AIM are structured like Amphion Innovations. Some are blind pools similar to private venture capital funds in which investors know only the type of deals and not the identities of the companies. IP Group, Imperial Innovations, Biofusion, ANGLE and IPSO are in partnerships with universities that develop the innovations that eventually will become part of the portfolio companies.
Biofusion, for one, has an exclusive commercialization agreement with the University of Sheffield and Cardiff University in the United Kingdom, in which university discoveries in various fields including medical, drugs, alternative energy and engineering are used to create portfolio companies.
University partnership agreements often require the company to participate only in the first major financing round, before seeking a relatively quick exit via trade sale, licensing or IPO, Charles Stanley Securities Amphion stock analysis states.
Suited for early stage
AIMs size and relatively small daily transaction volume, compared with Nasdaq, makes the strategy best suited for early stage venture capital firms, which raise smaller amounts of capital, Mr. Ballantine said. AIMs lack of liquidity compared with other exchanges that have higher trading volumes means it is unlikely that venture capital firms will go public the way the Blackstone Group, New York, did in order to pay the founders the value they built up in the firm. Rather, it is a fundraising strategy.
There are as yet no publicly listed venture capital vehicles in the U.S., and most of the public venture capital vehicles listed on AIM are based in the U.K., although Amphion, ANGLE and XL TechGroup have U.S. headquarters. The closest U.S. version is the special purpose acquisition corporation, or SPAC, such as those filed by private equity firms GSC Group and Hicks Holdings LLC. SPACS are publicly traded vehicles that are used to buy one business or asset. A SPAC can use the money raised only to buy a majority interest in another company.
Most institutions we deal with wont invest in SPACs as an option for a private equity investment, Hamilton Lanes Mr. Giannini said.