Whatever is happening with the current state of the markets, one thing has remained consistent. Those people that can get hold of shares before they go public do a lot better than those who have to buy them on the open market (between 1980 and 2016 opening day stocks rose an average of 17.6% Professor Ritter, Florida University). It is the equivalent of buying wholesale and selling retail and until recently was the preserve of an elite few. Typically it was only the Investment Banks that handled the IPO’s and a very select group of top clients that got allocations.
However, a Private Equity firm out of Singapore is looking to change that dynamic and help connect more investors with those businesses about to go public. They have launched a fund called ‘Accelerated Venture Capital’ (AVC) that they claim has access to more than 20 companies who will go public in the next 12 months. Their model allows them to invest capital into the businesses in the day before, or sometimes even hours before the companies go public. What this means for investors of the AVC fund is that they are getting pre-IPO discounted stock that will become ‘liquid’ i.e. freely tradeable within 24 hours. The fund can then choose to sell down the stock any time over the next 12 months. Investors in the Fund are only locked up for 12 months and can choose to take cash or the PLC shares at the end of that term.
This unique structure offers a real innovation for private and institutional investors that would normally be excluded from such deals. It also offers a significant advantage over a typical Private Equity or Venture Capital fund which locks up investors funds for 5-10 years, if not longer.
So how do they achieve this seemingly impossible approach? The secret lies in a symbiotic relationship with an already listed public entity with a very long shopping list of companies it plans to acquire. MBH Corporation PLC ($M8H)is a diversified investment holding group based in London and listed on the Frankfurt main market in Germany. It acquires debt free, profitable businesses in the $1-5m EBITDA range across multiple verticals and geographies.
Co-Founder and Chairman Callum Laing explains MBH’s approach. “MBH exists to support small businesses that would typically be too small to list on their own. We take them public through something similar to a reverse takeover approach we call Agglomeration. The companies maintain their own brand, culture and management style, but because they are public they now find it much easier to win bigger contracts, attract more senior staff and grow faster. However, that often takes investment capital and so we have teamed up with AVC to invest in the companies before we acquire them.”
Jeremy Harbour, who is founder of Unity Group, the Private Equity firm in Singapore that originated the idea explains further: “When a small business goes public, often it is part of a growth plan, they are looking to take on bigger clients, move into new territories, bring on new experience into management or even start to do their own acquisitions. The AVC Fund injects up to 5x their current EBITDA into the company on the basis that it is about to go public which gives them all the resources they need to thrive”.
David du Boulay is the founder of one company that has already successfully taken advantage of this investment model. “Taking duBoulay Contracts public allows us to tender for bigger contracts than a privately held company could usually go for. However, in order to deliver on those, we do need an injection of capital to resource up accordingly. AVC served our needs perfectly.”
Clearly, this model is very attractive to small businesses, but is it really a viable model for private and institutional investors? If it works then not only does it offer a very short lock-up period, it also means the AVC Fund can exit one position, possibly even on day one, and reinvest that money back into the next deal giving investors a compounding effect and promising fantastic returns. However, in order for that to work there needs to be the liquidity in the stock to allow AVC to exit its positions.
At the time of writing MBH Corporation PLC had been listed less than 6 weeks and had already managed its first acquisition, taking its total revenue to more than €30m. Time will tell whether the Market is as responsive to the model as entrepreneurs clearly are.