Capria, a global impact investment firm managing multiple funds, has launched its Singapore office, ahead of unveiling the first set of managers from the region, it will be backing, a top executive with the firm told this portal.
The development comes as Capria is set to hit the first close of its $100 million fund of funds that will invest in emerging markets-focused funds.
“Essentially we will be investing millions of dollars into a couple of new managers from Southeast Asia. We are targeting to allocate (this) from the new $100-125 million fund – about 30 per cent to 40 per cent of this fund will be allocated to managers in South and Southeast Asia,” Dave Richards, Managing Partner, Capria, said in an interaction.
“We have some interesting investors who are behind that and that is a new vehicle. We set up the initial capital in 2016 and this is the second scale of fund and we will have some news on that soon,” he added.
Richards highlighted that Capria’s philosophy was centered around backing first time managers and building long term relationships. with these executives. It currently backs 16 managers, and there are more in the works and these managers become a part of the virtual global firm. “We glue them all together in an interesting way so that they share their knowledge and resources together. So, they get the ability to be very local and they have a global footprint that they can access,” he said.
With Capria, you back first time managers. How does that model work ?
2015, we started building Capria. It is an emerging market and in some cases frontier market investment programme globally.It focus across markets in South and Southeast Asia, Latin America and Africa and our model on ground is to find great local managers in these regions to deploy the early stage capital– venture capital, early private equity or even some products around mezzanine finance so we back these managers around building long term relationships.We back 16 managers and there are more in the works and these managers become a part of the virtual global firm. We glue them all together in an interesting way so that they share their knowledge and resources together so that they get the ability to be very local and they have a global footprint that they can access.
We are now actively talking to managers. We are going to announce some partnerships soon. Half the mangers are first time teams and half are on their second or third funds.Historically the approach or VC and PE are very isolated, we find that most GPs don’t even know each other and they only know each other because they have invested together. We are looking at specialised managers for example in fintech. Some people describe us as VC for managers.
When people come together to set up investment firms, often they use their own money or their family and friends or they would come from a professional or other bigger firm and they stepped out to start their own thing. What it turns out many of them have a lot of experience in the direct investment standpoint and they do not have a lot of experience in the fund management business. There are a lot of things like building a team, a business and fundraising capability and building systems.
One of the things we help them bring to the table is that we hep them bring capabilities that would have taken them a long time if they try and figure out on their own. It is a benefit to them because they can then focus more and more of their energy to actual investing.
You are also doing a $100 million fund of funds and you were going to have the first close in September. What is the status ?
Stay tuned, we have an announcement coming up for that soon. We have some interesting investors who are behind that and that is a new vehicle. We set up the initial capital in 2016 and this is the second scale of fund and we will have some news on that soon.
What is the rationale behind investing in first time managers as compared to established managers. What is in it for you ?
First of all, data shows that first time managers do better than second, third, fourth and fifth time managers. Now that said, any particular manager does better than other managers. There is a lot of experiments in the region and there are these firms who are trying to find a way to figure out their glue moving forward. Not just spray and pray or not just doing all these club deals but differentiate themselves in the market. And the market is competitive so they are figuring out how they can keep up with the opportunities int he market.
I think you are going to see the market maturing and we are starting to have some good conversations with the managers who want to differentiate and we are seeing some new teams which are starting up. We think that is where there are lot of opportunities and there is a generation of new managers coming in. That is the space where we are focusing.
In this region, for a first time manager how much do you potentially deploy. What would be your ticket size ?
It is quite a range so these funds are different size, stage and others so range would vary. Essentially we are doing millions of dollars of funds. We are targeting to allocate from the new $100-125 million fund, about 30 per cent to 40 per cent to the region.
As far as SEA is concerned we see a lot of first time managers in the VC space but not in other spaces like Venture Debt, Private Equity – India on the other hand is seeing a lot of new managers – why is that ?
I think the market in SEA is less mature than India. The PE market in India is more developed so one of the reasons we are also coming in now is there is a big gap in the region.
India also has attracted more global investors whereas SEA has more Asia specific investors that are the LPs and historically they are more focused on China and India and then would be SEA. While there is a focus on China which is still a hot story, India continues to be strong but I see the new frontier is SEA. You are starting to see more Asian investors coming from China, Korea and Japan would come to SEA. What you are going to see is more funds. We are seeing a less of US and European investors, particularly in the earlier stage. They are not as familiar with the region as they would be with India. What we are going to see, a classic with investors, the fear of missing out and looking signals from other investors.
There are seed funds moving up. Does that create vacuum at seed level ?
There are good reasons and bad reasons why people are growing their fund sizes and going up. The good reason is people are seeing a lot of opportunity. A lot of companies now need a series A and Series B capital and there are somewhat less capital available there and they are adjusting their investment model to be great at that. That is the positive.
The negative side is unfortunately that a lot of us are chasing fees. As an example in India what we do in India, we started a $23 million seed fund, we have now jumped to $54 million, doubling the size and we have to focus on being the first check. We think that is the right strategy and there is little competition there. We can add a lot of value at the stage. We are increasing our cheque size a little bit but we are also increasing our reserve capital ti be able to invest more in some of the companies we are backing. But, we have chosen not to.
At Capria when you back first time managers what do you see in them — is it the firm they come from, the commitment they can get or how flexible they in terms of the GP commitment and fee structure ?
First is that it is not one size that fits all. It is not just one thing that we look at when it come to managers. If we were backing a manager we would see if he is starting a new fund or if the new fund is a step up in the new strategy. We really come in alongside them and if we partner with them we see that they are open with us helping refine their strategy. We often find they have some good ideas but they do not have it all figured out .Ultimately we are backing a team of people that bring enough experience, frankly have a hunger and willingness to continue to learn. So, that is what is really important to us. We are looking for entrepreneurial teams. If it is people who are looking for paycheck and do not have a lot of skin in the game and we are not clear they are committed in the long term then that is not what we look for.
We have a proprietary fund management tool that we have built over the last three years and is now on its seventh generation. It is based on looking at around 600 GPs that we have seen and based the assessment on. It helps us look very comprehensively to look at a team and its capabilities. How do they benchmark themselves. 100 per cent on the teams do not have the perfect scores on that because they are still learning.
We say that we are a network of GPs and if they are going to value that. Are they willing to collaborate and share their learning. As an example one of the factors that we have in our network is that we have give to get model. What we mean by that is if you want to get the access to the investor list of other members in the network. You give your investor list to the members. We have boundaries around things but we created a high trust model. People who want to be very private and do not want to collaborate with other members are not a very goof fit.
What is the minimum GP commitment that you expect ?
It depends on the situation and also comes down to what the investors want to say. It comes down to significant skin in the game, cash on the table as well as willingness to take very modest personal compensation. We encourage them also to form long term incentive programmes for the team so they are embracing the firm. It is not as common as you think in the VC and PE world.
The 2-2.5% fee structure and the 20% carry model has not changed much – what are the new structures that you have seen emerge in the industry ?
One of the industry structures that we have seen is do you want to look at raising seed capital for the firm when you are starting a firm.You can keep your fees low but have a bigger team for the first three to four years as you are getting off the ground. One of the things we did when we set up Unitus ventures and also when we set up Capria was that we went out and raised seed capital for the investment firm so that allowed us to build out a larger team with a $23 million fund model to support the fees. We had the fees modest but we raised seed capital and sold essentially the part of the carry or profits from the first fund. So this is an interesting model that allows you to keep your fees modest. We start raising your fees, we also start reducing the return on your fund. That is also a cycle thing because people want to know that if you are raising money how has your previous fund done.
Another one we are seeing is variable carry based on performance so it is tier carry. So, in the US Venture Capital model there would be no hurdles on carry but outside the US there would be a lot of hurdles.You have to get a certain IRR. In the Venture Capital we don’t think hurdles make sense but we do think we have to align it with investors. Last year, I wrote an article. In fact, that is how we structured out India second fund on tier carry. As the profits get higher, we get a higher piece of that. Those models are healthy. What one wants to do is align interest between partners and investors.
The challenge is that there are lot of thinking on the models and how to change them but the thing is LPs are very slow to change. They have their institutional processes. I do not think it is going to change dramatically anytime soon.
You mentioned Draper Networks and 500 Startups where lot of changes are happening. As an LP in Capria and the 16 GPs that you have invested in would you consider doing co-investments with them ?
Absolutely, yes. We have not done any yet but that is a strategy that we will look at. We will also do some co-investing.
Would you then need a separate fund to do that ?
The way we structured it is that we have the capability to do co-investing with even one vehicle.We will do investing from the funds in the GPs out of the same vehicle. And eventually we will raise other funds.
You had recently written a piece on recycling capital. One of the things were on early exits and if there are no early exits it is very difficult to recycle capital. Even when there are early exits, do you encourage your GPs to innovate the model and recycling through venture debt ?
Recycling is a term you need to negotiate with the investors and there are partnership agreement with the investors there are rights you have to recycle money. There are often certain kind of rights. In the first few years of the fund, there is more flexibility and later you have less flexibility. The point is that in the US Venture fund recycling is very common and if you can figure out how to do it you can make your money work harder. Some investors like it, some don’t. So, you negotiate it in ways that you could do that. Basically, the summary of the article was that it spoke the in the interest of the LP and GP to have some recycling rights for the opportunistic investing. So, you have to be careful about the timing and all and you cannot guarantee you would be able to use that right but having that right is a good thing to have.
For example in our second India fund, we set up a possibility where we can look at venture debt if we thought it would be positive. So, we negotiated with our investors. How much we do, we are not sure but gives us an option.
One of the complains by first time managers is that they have to bend backwards accommodating the demands of LPs. In LP-GP dynamics, how do you address that and do you agree the power is skewed towards LPs ?
We do a lot of work with our GPs to help support them and negotiate terms with the LPs. You are right there is a power dynamics. The reason LP is looking at it is that they think there is an interesting opportunity to invest so we help the GPs do much more principled negotiation with these large LPs to push the items that are critical and give them a flexibility that they need. For example some LPs may say that I want you to restrict yourself to the geographies that I say. We have had GPs come to us and say that is not a good idea. We also talk to them on fees. When it comes to management fees, focus on the operating budget and do not focus on the fees. We really help them dabble these processes.
We recently did an interactive session with the GPs where we talked about the harder questions. So, this does not mean, you do not have to give us something because as a first time manager you have to give up something. What we found in most cases is that if you have a reasonable argument with the LP, you have a reasonable chance to get it. Unfortunately most do not realize that.