NAOS Asset Management has launched the NAOS Private Opportunities Fund, which will seek to provide investors with exposure to smaller unlisted private companies. NAOS portfolio manager Brendan York explains how they identified a gap in the market.
Why did you decide to launch the fund?
There's a lot of overlap between what we do now and what we can do with investing in a private fund.
This fund is really using that NAOS philosophy and experience to broaden exposure to investors. We've got that deep experience of micro-cap investing and to make the link to private investing [there] is actually a lot of very similar characteristics between the businesses that we invest in, in the small-cap and micro-cap end, and private.
And, in fact, a lot of the businesses that we invest in people consider almost private, given the inherent lower levels of liquidity, capital being deployed for growth and expansion, and the founders and management holding a significant interest in the business. NAOS is able to add a two-way value relationship, if that is us helping them source directors or advisors or how can they grow, and [assisting with] communications.
Will you be looking at pre-IPO companies?
There'll definitely be some that will be on the path for listing. But I think a key element of this fund is we are looking for businesses that aren't necessarily in a hurry to list.
And really, the businesses that we're looking to invest in are ones that could do with some growth capital or expansion capital and are happy to have a minority shareholder.
If you're beyond the seed, or the venture capital, funding element and you're not a tech start-up or something like that, but on the other end of the scale, you're also not big enough for a private equity type player to come in and take a controlling stake, there's a really big gap in the middle, where funding is quite difficult. And a lot of the owners of these businesses either have to put a mortgage over their house... or take a very, very high-priced debt facility in some way shape or form.
We think can be a really nice place to play in the middle here, where they probably don't even realize that there is this option of funding in this type of environment where we could partner with them, take a minority stake, help them with some growth and expansion capital, and grow with them on a journey.
How did you research market opportunities?
We actually feel there's a big gap in the market for this. There isn't an easy way to get exposure to this type of asset class. There's a lot of LICs out there. And they're focused on the listed small-cap, micro-cap world, or the bigger asset classes. You can invest, obviously, in private equity, but it's actually very difficult to get a good exposure to private businesses.
We did a lot of research across the market and there aren't too many [of these types of funds]. There's obviously a bunch of pre-IPO funds that have popped up over the last few years. But we'd like to think where we're kind of slightly different [is] we're not completely focused on having everything IPO in the next 12 months, or at all, in the life of the fund.
What's the fee structure for the fund?
The fee structure is the management fee of 1.65 per cent per annum, and then we are doing a performance fee of 20 per cent. But we are basically splitting that into two. So, 10 per cent on an annual basis, and the other 10 per cent is actually going to be deferred subject to achievement of the cumulative returns over the term of the five years. So that gives our investors protection that a one-off good year isn't going to trigger a big performance fee and we've got to deliver over that five-year period.
The hurdle we've set at 5.5 per cent percent compound annually and that's calculated post all fees and expenses.
Who is the fund for?
It's for sophisticated investors only.
You're looking to raise $35 million. How is the fund raising going?
We've had some really good support so far. We think the market is very open to this and everyone we've talked to they really think it's a great idea. It's different to everybody else, and it's getting them access to an area that's really hard to get to.
We pulled some statistics out from the ATO and there are actually 50,000 small, private businesses, with between $2 million and $10 million revenue, which is a huge number. Now, obviously, you'll have to put a quality lens over that and that will probably strike out a few. But if you compare that against the listed small cap market, excluding mining and resources, there's only 375 small-cap, micro-cap companies, with between $5 and $100 million in revenue. And if you drop that down into $5 to $10 million, you've got 67 businesses, that's it, you know, as compared to 50,000, on the private side, not listed. We'll work through the fundraising for the next few weeks. But certainly, it's very positive feedback so far.