Richard Watts, manager of Merian Chrysalis, Suresh Withana, manager of Adamas Finance Asia and Richard Matthews, co-founder and chief operating officer (COO) of Augmentum Fintech discuss the attractions and risks of investing in unquoted companies.

Why private companies?

Watts: “Over the last decade an increasing number of companies have chosen to stay private for longer in order to de-risk an IPO. Unencumbered by stock market volatility, businesses often achieve significant growth and return on investment during the later stages of unquoted life.”

Withana: “We find that many high-quality Asian SMEs struggle with access to traditional sources of financing, especially those in nascent industries; many of these SMEs are typically private companies. The resultant financing gap means that there is a plethora of investment opportunities for Adamas Finance Asia. In particular, we target companies that are likely to have an attractive exit route through a public listing or by acquisition at a premium, giving them a greater growth potential over a publicly listed alternative.”

“Public market pressures are leading companies to stay private for longer, and the trend is towards the bulk of a company’s value being generated prior to public exit.”

Matthews: “We invest in disruptive private fintech companies across Europe, where the fintech opportunity is still in its nascency. We view the fintech sector as at ‘the end of the beginning’, and with its maturity comes unprecedented growth. Public market pressures are leading companies to stay private for longer, and the trend is towards the bulk of a company’s value being generated prior to public exit.

“We provide exposure to high performing assets before their value is realised. We are the UK’s only publicly listed fintech fund, and we are proud to have opened up an emerging and hard to access asset class for institutional and retail investors. Our structure provides inherent liquidity and means we can provide patient capital to our portfolio companies, unrestricted by conventional venture capital timelines.”

Where are you finding opportunities?

Watts: “With the European unicorn scene thriving, led by capital-light, tech-enabled disruptors, we’ve already made sizeable investments in a number of attractively valued, high-growth companies, including TransferWise and Klarna. Importantly, and of equal significance as knowing where to invest, we are clear on which companies to avoid. We don’t invest in businesses in the infancy of their journey or sectors such as biotech, where success is so varied.”

Withana: “One of the great economic themes across Asia today is the increasing spending power of the middle class. We consider investments in healthcare and pharmaceuticals, education and technology as attractive ways to gain exposure to this ongoing trend. We source opportunities through our network, leading to proprietary deal flow which investors would not ordinarily be able to find themselves.”

Matthews: “We focus on the disintermediation and disruption of traditional services across the financial spectrum. We invest in ambitious, talented fintech teams across Europe at Series A funding and beyond, with investment sizes of £2 million plus and our four key areas are banking services, asset and wealth management, technology infrastructure and insuretech.”

How does market uncertainty affect your portfolio?

Watts: “With market uncertainty unlikely to be alleviated soon, we believe the opportunity for unquoted investments will continue to grow, leading to a greater number of attractively valued businesses, particularly against a listed market background.”

Withana: “Our portfolio companies are not publicly listed and our investment timeline is relatively long term so our investments are not subject to volatile price movements which publicly listed investments suffer from. We have also witnessed that market uncertainty, such as the ongoing China/United States trade war, can create investment opportunities elsewhere in the region.”

Matthews: “Many of the fintech businesses that Augmentum are investing in have global ambitions, and already operate cross-border with operations throughout Europe. Of those that are UK-based, many rely on the four pillars that have allowed the UK to become the global fintech centre. These four pillars, Capital, Regulation, Central Bank support and government engagement will ensure the UK remains one of the leading fintech centres in the world.”