David joined ECI Partners, one of the UK’s oldest buyout funds, in 2001 and is now co-managing partner. He started out in software and has completed several landmark deals, including the UK’s first buyout of a native digital business and the UK’s first buyout of a native SaaS business.
We talk about software investment, the UK’s competitive edge, originating deals in the mid-market, expanding internationally, and the prospect for private equity returns.
This is a Fund Shack ‘private chat’ about the large opportunity set in the European private equity market, from buyouts through to venture capital, with a focus on growth strategies in all these markets.
Alternatively, you can listen to the filmed version here.
Transcript:
Ross Butler:
You’re listening to fund Shack. I’m Ross Butler. And today I’m speaking with Dan Aylott managing director and head of European private investments at Cambridge Associates, where he’s responsible for EMEA private equity and venture capital research. Dan works with clients to help them build, manage, and monitor their private market allocations. So he has fantastic insight into the industry and some unique perspectives on the market, which he was good enough to share with me. Enjoy!
Ross Butler:
Welcome to Fund Shack. You’ve been at Cambridge associates for a fair while now, but I believe you’ve just undertaken it a new role. Can you tell us a little bit about that?
Dan Aylott:
Yeah. Hi Ross. And I’m very happy to very actively speaking to you today. I’ve been at Cambridge just over nine years. I’ve been in the industry now for a whopping 20 years. I started with a private equity team in year 2000. I joined Cambridge nine years ago to work with clients on their private markets portfolios. So for the first sort of eight and a half years at Cambridge, that’s been my primary focus. And then last year, my role changed slightly. So I now I’m head of European private investments, which entails me having a mix of responsibilities.
Dan Aylott:
My primary responsibility going forward is to cover the European private equity and venture capital research function here, which means that, were tasked with finding best ideas and high conviction managers. But for our clients, I’ve brought some client relationships with me. I continue to work with some of our key clients at the firm. And yeah, excited by the change. Even when I was working predominantly with clients, I was often, doing manager due diligence and looking and scouring for ideas for, for those clients’ portfolios. So this is just a, really an extension to, to that role. But I’m excited. We’ve got a, a large opportunity set, I think, in, in European private equity and venture where we’re adding resources to the team so that we can we can cover all of those opportunities. And I’m very excited by what lies ahead.
Ross Butler:
What’s particularly exciting. You, what parts of the market do you really like the look over at the moment?
Dan Aylott:
I’m passionate about all parts of the market really, but I think for us at the moment, there’s a real desire and hunger to look for growth strategies, and that can be anything from very early stage venture through to growth, equity and buyouts that have a growth slant to them. We’ve long been talking about the benefits of growth and how growth is the predominant factor in achieving outsize returns in private markets portfolios. That’s where a lot of very interesting ideas are coming from right now. Certainly, in the venture space the ecosystem there has really been growing and expanding in Europe in particular, there’s always been a very sort of well-established U S venture market as everyone obviously knows.
Dan Aylott:
I think Europe has often been thought about as being in the shadows of the US and even potentially China and Asia to some extent, but I think recently we’ve seen some strong performance coming out of Europe and some the manager universe, if you like, sort of expanding in all directions with many interesting strategies for us to, to look at and to answer, consider for our clients.
Ross Butler:
Tell us a little bit about that if you would that. Can you quantify the, the growth of European venture in the last half a decade or so?
Dan Aylott:
In the last year alone, there was $20 billion raised by European VCs, but there was 40 billion invested in Europe. So that gives you a sense that the market is very attractive and is attracting investment from all over the world. In fact, and that’s really feeding into a very buoyant and a flourishing ecosystem. So it’s definitely an area of growth and, and definitely an area where we’re seeing lots of very interesting opportunities There’s always been well-established firms in, in the venture space in Europe for a long time. We’re seeing a lot of managers spinning out. Operators, people who’ve run or worked in senior positions in technology companies and have done very well made a lot of money, want to continue to invest in the space. Joining forces with investors to create new firms that I think are particularly interesting.
Ross Butler:
Then what underlies this growth? Was it just a question of time in the market, because for a long time, European venture capital it underperformed and it was, and it was subscale and perhaps to a degree, it is still subscale, but, but what underlies it’s, it’s, it’s recent growth?
Dan Aylott:
There’s a number of things that you might want to point to. When I started in the industry 20 years ago, roster the European venture landscape was really not on the map. I was joking with a colleague this morning about how, diligence used to be done. Data rooms came in the form of a, of, of envelopes packages in envelopes that were sent to you via the post. So that, that age has me somewhat, but the venture capital market obviously had been impacted by the.com crash. There were very few European venture firms last minute.com perhaps was, was the most famous impacted obviously when, when the crash happened. So really nowhere on the map where performance really wasn’t, wasn’t there either.
Dan Aylott:
And it takes a long time in venture for performance to come through. I think since the financial crisis, there’s several things that have happened. We’ve been in a very low-rate environment for a long time. So people have been seeking growth and seeking alpha from different areas of their portfolio. And I think that, venture and growth has been an area that has if that, that, that growth and that innovation that can’t be sort of captured anywhere else in, in portfolios. I also think it became a little bit uncalled to be a banker or or go into financial services after the last financial crisis. And there was an impetus perhaps, but for young people coming out of universities, strong tech universities to think about doing something different.
Dan Aylott:
So there’s a number of factors I think that has fed into it. And I think as, as we’ve seen performance improve in Europe and we have some statistics that show over recent horizons one year, three year, five year European venture growth has actually performed strongly versus the U S and Asia. And I think as that performance has started to come through its European venture has caught the attention if you like of investors. And from that, and the more capital that flows into the, into the industry, the more opportunities that it creates.
Ross Butler:
That’s all directionally very positive. But the venture managers that I speak still tend to complain about a relative lack of capital in Europe compared to their us counterparts. Would you, would you agree with that?
Dan Aylott:
I mean, I would. I don’t know how, what the best way of saying it… It is… Underserved relative to other markets. Something like10% of jobs in the US are currently within companies that are VC backed and the equivalent number in Europe is 1% that is still quite concentrated around markets like the UK and Europe. But what happens with LPs generally is that there’s a lag. So the PE investors see performance coming through and then think, well, okay, this looks interested. I’m now going to start committing capital to these types of strategies. And so that’s what I think we’re seeing here is that we were convinced Cambridge that European venture and growth is an interesting space for our clients to commit capital finding great ideas for them to do so. There’s some convincing to be done around European venture capital and growth for certain investors, because historically performance in Europe has been difficult.
Dan Aylott:
The exit environment has been a little more challenging, and that’s being addressed. I think in some ways, here in here in Europe, there are changes to the regulations around listings, for example, that might make it easier for technology companies to go public. But that’s just one example, but there are, there are changing in a positive direction in Europe. And so, I think it’s just a matter of time for people to continue for investors to continue to see that positive momentum coming through. And I think that the capital will continue to flow into it. Abut I think it’s today, or you’re right. I think there’s still, more to go for. I think the overhang of capital in Europe is much less than it is in Europe. sorry, then it is in the U S apologies. Yeah. so, there’s some interesting dynamics in, in Europe that were, that we’re keeping our eyes on.
Ross Butler:
I’ve heard one hypothesis, which is that in fact, if more capital accrues to European venture and growth capital, you might see returns increase relatively counter-intuitively because of that sub scale element to the industry. Is that something that you would agree with, or do you think that the more capital that flows in will, will eventually kind of push returns down?
Dan Aylott:
Yeah, it’s an interesting thought. I mean, the fundraising market at the moment is really, really frothy. And boy, there’s lots of capital being raised everywhere, not just in Europe. I think the general perception is that the more, that more capital that gets raised, the more likely it is that returns will tail off. So it depends, I think you still have to keep disciplined. I think the key is for the managers that raise the capital that are successful at raising the capital stick to their strategies and, and remain disciplined in, in the areas that they’re good at and the areas that they can, they can produce, the attractive returns for their clients. And I think if managers can do that then, then, then returns will still be maintained. I think, as I’ve said, I think the, the universe of opportunities continues to grow for some of the reasons we mentioned earlier, more entrepreneurs, more, data scientists coming out of, of universities, more, more M&A from corporates looking to improve and acquire additive technologies.
Dan Aylott:
So as the universe continues to expand, I think that there is enough opportunity for more, more firms, more managers, more funds to be raised, but there probably will come an inflection point, right. Where, where potentially there becomes too much money and the overhang becomes too great. The managers either become ill, disciplined, or valuations get so high that it can then impact returns. And that’s always the concern and something that we’re focused on a lot,
Ross Butler:
But we’re not, we’re not close to that point though. Would you say….
Dan Aylott:
I don’t think we are in Europe yet. No, absolutely. I think there’s probably quite a way to go. We still like to see our managers remain disciplined, as it relates to fund size and strategy. But there does seem to be, an increasing opportunity set. And back to that stat, I mentioned earlier about 20 billion raised by European VCs, 40 billion invested, that tells you that even managers outside of Europe are looking at Europe as a potentially fertile place to invest. And I think that will continue and we’re seeing more and more, for example, U S firms setting up offices in Europe that haven’t previously had boots on the ground here. And so I do think there’s a way to go on that.
Ross Butler:
So if I’m a European venture manager or growth manager, it’s a good time to hit the road and start fundraising, but I’ve got to be disciplined. I’ve got to stick to my knitting as they used to say to what degree do I have latitude with regards to kind of think about different fund structures or sub sectors. Do you think there’s, there’s investor appetite to see firms explore those kinds of innovations?
Dan Aylott:
Yes I think so Ross. We are seeing, in terms of funds raised, ‘opportunities’ funds or, or ‘overage’ funds so that they can continue to back the winners in their portfolio. And this has been a phenomenon that we’ve seen for a few years now and that can work really well. Managers want to continue to invest with their best companies and if they can select the winners in their portfolio, then the benefits to their investors are all great. And obviously, investors must be comfortable for the longer hold periods that that entails. But we’ve seen, we’ve seen a lot of that happening in terms of fundraising and that’s one way for managers to expand their offering if you, like.
Dan Aylott:
I think the other side is that increasingly we’ve been seeing specialization across the, across the market and this applies to the buyout space. It applies to growth, and also it applies to venture where we’re seeing managers really sort of focus on what they understand what they know best. And it might be areas of things like FinTech. It might be AI, it might be SAS or consumer. And, and we’re seeing an increasing level of specialization with, with some firms. This can, this can be interesting. It allows LPs and investors to really kind of construct their own portfolios in the way that they want to, if they have a, a belief, for example, that FinTech is where the greatest opportunities are going to be. They can add some FinTech opportunities, maybe some crypto, that’s another area where managers are really specializing. And so we’re seeing an increasing amount of that. Again, we still like to see managers remain disciplined, raise the right amount of capital to prosecute that strategy. And that’s always the key consideration for us, but we’re definitely seeing more of that in the venture space and frankly, elsewhere in private markets. There’ this theory that as, as a market evolves there becomes more specialization and more deeper domain expertise within the managers.
Ross Butler:
And is that a firm or fund or both phenomenon? So, I’m thinking if I’m a generalist venture capital manager, is it the right strategy to start raising very siloed funds,
Dan Aylott:
Different strategies, work for different managers, right? There are definitely, there are definitely examples where people have been successful at doing just that as you described. So, they raise different vehicles within, under the same firm umbrella and have dedicated teams prosecuting on those strategies. They raise a, a one fund, one pool of capital, and they have teams within their firm that specialize in certain areas, but ultimately investors get a diversified portfolio across those, across those themes. And then the other thing is the other way of doing it is to be a single strategy firm with a very clear specialization in what you’re doing, whether that’s crypto, whether it’s digital health or, whatever the sub strategy is. And so there’s different ways to play at Ross. And there will be different ways it will work for different firms. I don’t think there’s a one size fits all answer to that really.
Ross Butler:
Does Europe have any particular sub sector advantage advantages in either of those kind of very broad spaces? I mean, you mentioned a couple already FinTech and
Dan Aylott:
Yeah, it’s interesting. I, and I think these, these sub strategies are still emerging, really Ross. I think we’re watching closely areas like FinTech, and I think the fragmented European sort of financial services markets are helpful to that. And the, the different currencies in, in Europe can be helpful to spawn interesting opportunities across FinTech. So that’s one area. I think Europe is a leader in yeah, environment, environmental issues. And so climate tech could be an area that Europe excels at. And, and there are some, some managers that we’ve seen that are focused on, on those types of strategies, agritech, climate tech energy, that kind of thing. But yes, I think there are certain areas that that Europe has a unique kind of positioning for areas such as, SAS and enterprise of enterprise software, SAS digital health, I think are probably a little more global in their, in their sort of their reach if you like, or applicability. So I think we’re seeing as much innovation there in Europe as perhaps we have in the U S although probably, a few years behind in terms of the development of the market, as we’ve talked about already. So
Ross Butler:
In the UK versus the rest of Europe, because obviously the UK is still in Europe given the events of the last year, rather than put Brexit on the back burner. But, but how are things looking from a vendor perspective there,
Dan Aylott:
That’s a good question because Brexit, like you say, we’ve been talking about Brexit now for, for, for more than four years, right? It’s well, when you’re coming up for five years and I think when then the referendum result happened I talk about this as well in the context of bias, but I think just the uncertainty around Brexit was the key thing. Now that we have some certainty, I think people can adapt and they can, adjust their, their, their business models to deal with, the additional admin that’s related to Brexit. I think the key thing we were concerned about were, was talent and movement of talent. So I think we still got a way to go really Ross before we can answer that. And no one has a crystal ball. I, what I would say is that particularly in the venture space in Europe, there have been, hubs that have, have, have grown up in Europe, places like Berlin cities in central and Eastern Europe in the Nordics, there are the French ecosystem is flourishing for venture.
Dan Aylott:
And so I think, I think venture capital really i, a pan European phenomenon, although, as I mentioned, earlier in terms of venture backed employment predominantly, it still resides within the UK as a, as a percentage of the overall market. But I think perhaps what we’ll see is a more even distribution of that across Europe.
Ross Butler:
Can we talk a little bit about the exit market you’ve already touched on the fact that there’ve been some easing with regards to IPO restrictions, what’s your general view on gone on, on the exit world?
Dan Aylott:
I mean, I, I don’t know if the regular, I haven’t seen the regulations around listing. I think we’re still being debated, but I think it’s been recognized that in Europe there needs to be an easier path to listing companies, venture backed companies. And so that is, that is I think, still under review. I don’t, I haven’t seen the results of that of that review yet. But as I said earlier, I think large corporates have become more acquisitive. So there’s probably more opportunity for M and a, and there’s also the U S market. So European companies can still can still go to the U S for, for their access. I think it’s still something that’s improving. And for example, there’s been some very successful life sciences exits the, they don’t necessarily hit the Heights of some of the U S listings that we’ve seen, but that they are happening and, and producing some very attractive returns for investors. And I think that that will continue to be an improving picture as time goes on and will help again adding to the to the attractiveness of the European market.
Ross Butler:
I guess one of the things that the venture industry has struggled with is, is a lack of natural institutional investors that are venture capital minded. But I assume that that’s something also that will develop and, and grow over time as investors gain experience in the asset class.
Dan Aylott:
I think so Ross, yeah. And it comes down to risk really, and the perception of risk. Right. And we work with clients of all shapes and sizes, right? With all different types of programs. We’ve, we’ve Cambridge, Cambridge associates. We have been advocates for venture for many decades and our clients have done extremely well from their venture allocations. And so, I think, I think overall, we have an easier time of convincing clients of the benefit of venture, but look, it’s a, it’s a re it’s a riskier asset class when you look at the loss ratios, for example, in funds they’re still very high. So that doesn’t mean that, as I’ve said, performance has continued to improve in Europe and has been, for mthe right managers in the U S have been extremely strong.
Dan Aylott:
And the point there is that the winners, far outweigh the losses, right? You, you need to pick funds who can find those breakout deals that are going to produce the returns that investors are looking for. But I think there’s still this perception that venture overall is a riskier part of the market. And so, I do think that as a, as I mentioned earlier, as the returns continue to solidify and be strong more and more investors will take note more and more investors will take a closer look at venture and find us a place for it, an allocation for it in their portfolios. Particularly as the traditional. And, if you look back at the buyout opportunity in Europe, the early two thousands, there was a lot of low hanging fruit, white space returns were very strong. People could generate great returns. Second decade returns have moderated. It’s been harder to differentiate yourself. The market has become more efficient. And I think as those parts of LPs portfolios start to see that there’ll be looking for other ways to generate outsized returns
Ross Butler:
That you also cover private, private equity buy outs, but from a growth perspective. So what, what are you seeing there are there? I mean, it’s easy to call yourself a growth-oriented buyout specialists, but how do you determine that that’s actually the case?
Dan Aylott:
Growth is a strong determinant of returns. And so, when we’re looking at managers, we’re looking at, what type of businesses they’re buying what are the growth rates in those business in terms of, of revenue and, and how are they helping to maintain and even grow that revenue over there, over their whole periods? That’s not to say that we, we don’t look at any managers with a different strategy. But I think increasingly over time, we’ve seen that just, buying, buying companies, applying a bit of leverage, making a few operational changes to increase margins. Doesn’t really, doesn’t really cut it in terms of achieving the sorts of returns that investors would, should, should expect from this asset class. And you really need to have an element of growth. Now that growth can be, it can be a quiet, it can be organic, there’s different ways of, of looking for growth in buyouts. But that’s what we’re focused on. We’re always looking to see where that growth is coming from. And I think, as I said, it’s an important determinant of returns.
Ross Butler:
We’ve also seen buyout firms move into the venture space as well, which I suppose with some buyout firms has a cultural effect, because there was once a very clear division between the VC and buyouts for a long time, and perhaps that’s not so clear anymore.
Dan Aylott:
I’m not sure that’s true. There have been some examples of some buyout firms establishing venture teams. There are some buyout firms that feel that having a venture program or a small venture fund alongside their private equity business is additive because they get to get, they get to see innovation and it’s kind of earliest form and that can inform where they want to look in that buyout strategies. I don’t, I haven’t seen a lot of that actually, Ross there’s some definitely some examples. And I think you’re right. I think the, probably the issue is that it’s a very different skillset, a different mindset. You need dedicated resources for it clearly. And so it’s difficult, it’s difficult to integrate. And a private equity mindset is different from a venture mindset in many ways, private equity is all about preserving capital, not losing any capital.
I mean, venture in venture capital it’s, it’s, it’s almost expected that money will be lost. As I said earlier, loss ratios are still somewhere in the 30 to 40 range. I think it might even be higher. I don’t have the numbers in front of me, but it’s almost expected that a part of your portfolio will fail and, and as entrepreneurs that’s okay. You’ve got to focus on your winners in, in venture. So it’s a very different mindset, and I think it’s hard for a private equity firm to have that sort of similar approach. But no doubt, as you mentioned, there’s been a few firms that are doing it and some doing it successfully,
Ross Butler:
Going back to the sector idea, does that also apply in terms of specialization? Does that also apply to the buyout world in the same way?
Dan Aylott:
Yeah, definitely. And it’s probably a little more advanced, I would say, in, in, in buyouts potentially where we’ve Cambridge associates long been investing in managers that have sector specialisms. So again, predominantly, or I would say the US has been ahead of the head of Europe in that. So, in, in sectors like healthcare and sectors like technology, there’s actually a few opportunities in Europe for those types of, of investments, but we still believe that sector specialization and deep domain expertise, is a positive for, for investors. And we’ve, we’ve got the performance numbers to show that actually the, , if you’re a specialist, you, you outperform your generalist counterparts. And I think in areas, for example, like healthcare in, in Europe, where again a fairly underserved space for specialists, it’s an, it’s a sector that has long been invested in by generalist managers.
But we, as I said, we believe in that sector specialism, and that’s an additional domain expertise such that, managers that have that focus should have an advantage. And so we’re definitely watching that. There’s a, there’s a handful of managers where we’re interested in, in Europe for our clients and looking to invest the capital on their behalf in, in those strategies across the size range, by outsize ranges. Yeah, not so much, actually. So I would say that specialization tends to start in the smallest end of the market. And there’s a number of factors there. So probably related to spin out so often, we’ve seen sector teams or sector heads spin out of generalist firms to set up a dedicated sector fund. Those funds naturally being first-time funds being more focused and more specialized will be smaller.
Now over time, we fully expect some of those, those funds and those managers to grow and expand and, and become larger. But there are very few large specialists in the European market, unlike in the US where we’ve seen the emergence of some very large say technology players and increasingly healthcare specialists, certainly some consumer specialists in the U S that are now multi-billion dollar funds. I think we’ve got some way to go in Europe before we have that level of opportunities at the larger end, but we’re seeing several interesting things at the smaller end of the market where, arguably markets are more efficient. I think they’re more efficient, they’re more reasonably priced from a valuation perspective. And where investors and managers with real domain expertise have an advantage. So I think it’s interesting for the low middle market and the middle market at this point.
Ross Butler:
Dan it’s mid-April, and I understand this is your first day back in the office for the best, best part of a year. How’s it, how’s it going to affect ’em and how has it been affecting kind of day-to-day business where you are?
Dan Aylott:
It feels very strange to be back in the office today. It feels like my first day at work again, but having been on calls like this on zoom for the last year I think we’ve all got quite used to it. So it’s been very interesting to see how managers have dealt with, with this pandemic how they’ve dealt with deal origination sourcing of new transactions, which largely has been done virtually on calls like this and the fundraising process. So, I’ve been involved in a number of DDS over the last year where everything has been done virtually. I have personally find I’m looking forward to being able to get back to meeting managers in their offices. But actually I’m always amazed at how well this industry adapts and, and in particular for this crisis and the specifics around the pandemic, I think the industry has moved incredibly to adapt to this new environment.
It will be interesting to see how things unfold as easing unlocks. I think that the preference for meeting face to face and that sort of real interaction with, with, with managers will still prevail. And I think we’ll have definitely be meeting in person again, hopefully soon. I think the industry is probably more aware of the carbon footprint it has now in terms of travel. So I fully expect, and I know here at Cambridge Associates, we’re definitely thinking that through in terms of what makes, what makes sense and, and going forward in terms of our travel policy. But I think it will, I think it will have to come back in many ways. I had a manager asked me the other day, we’re planning our annual meeting in November.
Ross Butler:
What format would you prefer for AGMs etc? In-Person or virtual?
Dan Aylott:
Actually both. Please! I think investors will want the option. I think going forward they’ll will demand to have different ways of doing things. So it will be very interesting. I it’s been, it’s been really surprising to me how quickly the market rebounded from a fundraising perspective. So, Q1, and I think through the majority of Q2 last year, everyone was focused on their portfolios, trying to understand what COVID meant for their portfolio companies shoring up those portfolios. Making sure that, their companies can survive this period. And then I think beyond Q2 as, as it emerged that certain sectors strategies where we’re going to be fine and resilient through this, I think the fundraising market really came back and, technology, healthcare, all the things that we’ve talked about, very resilient through this.
And I think that will continue. I think that’s an acceleration in innovation if you like that, we’ll just, just continue. So it will be interesting. I think this is going to be a fascinating period for everyone in the industry to see how this unfolds. But I’m expecting to continue to do some of this, some of this sort of virtual meetings and discussions and conversations with managers, with colleagues but I’m also expecting to have some more interaction face-to-face as things ease and as, as, as prospects live writer globally,
Ross Butler:
I do hope so, Dan, and thanks so much for sparing your time and your insights.
Dan Aylott:
Pleasure. I really enjoyed it. Thanks Ross. Appreciate it.
Vania Schlogel is managing partner and founder of Atwater Capital, an LA-based international private equity firm. You can watch the video version of this conversation here.
Vania Schlogel is managing partner and founder of Los Angeles-based Atwater Capital, a private equity firm with an exclusive focus on media and entertainment. Vania cut her teeth at Goldman Sachs and KKR. She was on the board of Pets at Home, and she was CIO of Roc Nation, Jay-Z’s entertainment agency. And she currently sits on the boards of private equity back to media and entertainment businesses across the US, Asia and Europe.
ROSS BUTLER:
Vania, welcome to Fund Shack. You are quite an unusual private equity investor in as much as the creative industries don’t scare you. In fact, that’s what you focus on, specialize in. How did you get interested and involved in it?
VANIA SCHLOGEL:
I saw so much value from marrying those two worlds. So the very kind of disciplined and rigorous private equity side of things with the innovation from the creative world. And I just always had the natural interest in it. The creative side of things, obviously as, as, as an individual who consumes content and music myself, and as an investor really experienced that marrying those two worlds could actually help an investment in terms of equity, value creation, generating returns on behalf of our LPs. And then I know this not many folks were doing it, so it seemed like a natural opportunity to get in.
ROSS BUTLER:
So what, what, when was your kind of Eureka moment that actually there’s an investment opportunity in this industry?
VANIA SCHLOGEL:
When I was at KKR one of the investments that I was involved in was the buy and build strategy that built what is BMG today. One of the world’s largest independent music publishers, and it was really my first foray and ability to actually invest in the creative industry. And I think one of the things that was very successful about that investment is we, as investors were able to go in and provide a body of knowledge and expertise as to what we were good at and focus on that. And I think what we did really well is let the creative guys focus on what they’re good at. And so we were backing a great management team and company with capital and M and a and integration expertise. But then we also knew when to not overstep our bounds. I can’t recall who said it, but there’s, there’s this joke in the music industry about the CEO that wants to see himself in the music videos? I think the most successful thing we did is we made sure that we were not the CEO that wanted to be in the music videos or the shareholders or board members, however, you’ll term it. And, and that was my Eureka moment where I said, this is a great investment. It’s a lot of fun. I tangibly understand it. I get along really well with these creative executives. And from there on, it just became as you know, what happens in life, you one thing, and then suddenly more opportunities keep coming in that vein.
ROSS BUTLER:
So you, you had it with a traditional private equity house, but why do you think the traditional private equity market doesn’t see it as necessarily a big sector ?
VANIA SCHLOGEL:
Well, I,do think they see it as a big sector. I think that there is more appropriately put there’s a lot of opportunity from actually investing in the sector, but then taking the next step of being really operationally involved and plugged in with the creative sector. And I think the primary reason, honestly, why it is not a big operational focus for large private equity shops is because they’re very, very good at what they do on an operational level. So implementing an ERP rollout or optimizing a supply chain, these are scaled replicable, operational strategies and processes that they can apply to their portfolio companies, really building a deep partnerships. And the operating level with creatives is time-consuming and not always replicable to other portfolio companies. And so it’s more of, I think, a scaling issue and we’re kind of happy being the smaller fund that goes ahead and steps into that role as a partner to a lot of larger GPS.
VANIA SCHLOGEL:
Yeah. It’s a chemistry thing, presumably that, you know, people that set up creative business are probably quite different to almost any other kind of business, I guess, and you have a good kind of chemistry with them. It sounds like.
VANIA SCHLOGEL:
Yeah. And I think at the core, in any case investing is a human centric business, but when you do delve into the creative aspect and, and partner with creative executives who are very much more around, you know, emotion and being led by intuition, it is very important to jive on a personal level and to really take the time and build those relationships. And I will say that despite the fact that we have wonderful working relationships with a lot of creative executives, myself and a lot of Atwater’s executives are also personal friends with our creative partners. I think that works really well for the industry.
ROSS BUTLER:
It’s quite a rare individual to be both creative and to be able to be more financially focused as well. Do you come across many creative entrepreneurs that can and do do both?
VANIA SCHLOGEL:
It is, I would say it’s more of a rarity. I definitely have noticed that a lot of a subset of folks that do this really well seem to be founders and entrepreneurs. So we back, for example, certain portfolio companies Oscar Hoagland, who’s the co-founder and CEO of epidemic sound. He does really well in terms of liaising with both communities. And so it’s not a common skill-set. We do see it, but I would say I see it most often among CEOs and founders, and maybe it’s because I don’t know us founders, we have a, a little bit of that craziness, the risk taking the innovative, whatever you want to call it, but just enough there that we’re willing to kind of get out of maybe the modality of thinking in a, in a typical private equity or consulting or whatever.
ROSS BUTLER:
So you will come your private equity firm Atwater it makes it a virtue of being operationally involved in these creative businesses. To what extent do the businesses that you invest in kind of welcome operational input and to what extent do they need it typically? Yeah.
VANIA SCHLOGEL:
Well, let me answer the second question first, because I think that’s the easiest every business, every individual, any organization of people can improve in one way or another. That doesn’t mean that our ideas are always right. And in fact, that’s one of the first things that we strive for in our relationships with management teams is feel free to kick us in the teeth and tell us if these ideas are completely asinine. And we genuinely mean that. And but is the, is the opportunity for improvement there? Absolutely. And the best founders and management teams recognize that then going to your first question about how welcome is that we as a fund, so we’ve invested about a hundred million dollars since I founded the fund in 2017. And in all our investments today, we’ve been a minority shareholder de facto.
VANIA SCHLOGEL:
That means that even if I wanted to, from a governance perspective, I cannot come down with edX from above and say, this is what you must do. And in any case, I genuinely think that’s kind of bad, bad governance and a poor way of managing these relationships because a lot of the CEOs and founders that we work with have been in the business for years, sometimes from inception. And so it’s incumbent upon us to actually come up with ideas an operating level to, to present a Rolodex within the industry that is exciting for management because we’re very open about the fact that yes, despite the fact that we may be represented on the board and can vote shares a certain way. My personal experience has been in less management really wants to work with you. Your operational strategy is not going to be that effective. And so it is a foundational thing for us to come in as investors and really form number one, deep personal relationships. And number two, actually show up with the goods because we’ll get called out right away by these very demanding founders and CEOs. If we’re not showing up with something that’s helpful for their business,
ROSS BUTLER:
And what’s the competitive environment like for attractive assets in this sector,
VANIA SCHLOGEL:
I would say our sector is more, is more right for proprietary deal sourcing than potentially other sectors. And it goes back to what we just talked about, which is that kind of creative and founder led group of folks. There’s so much that is based upon relationships and how well networked are you in the sector? How well-liked are you do founders talk about you in a positive fashion. And it’s interesting, both what I’ve witnessed is both on a positive and negative level founders. It will, it will spread like wildfire among founders, if you are seen as either a great partner or not a very good partner to management. So I actually think within the sector being, being well-networked and well-liked lends itself to proprietary deal sourcing, which means it’s outside of a normal process being run for example, by an advisor. And in that kind of case, that’s actually the ideal scenario because it’s not a competitive process. Aside from your main competition being against yourself, are you presenting a compelling case to the founder and CEO and the existing shareholders that you’re worth it, that they should sell some of their shares to you because you’re going to, going to bring value.
ROSS BUTLER:
Yeah, I can imagine that the LA creative great vine is quite sophisticated and active, so the word would get round, but you’re not just you’re based in LA, but you have an Asian presence and you recently did a European deal as well. Talk to us a little bit about your kind of geographic coverage.
VANIA SCHLOGEL:
It’s really funny because prior to parasite winning an Oscar, which is a South Korean movie, we would always get the strangest looks when I would explain that we have offices in Los Angeles and Seoul, South Korea, because most funds are based in New York and London and San Francisco. And then when they go to Asia, they immediately typically go to Hong Kong or Singapore, you know, kind of a financial hub. And the way that we explained it is we’re operational investors. And hence we launched in Asia in a very operationally relevant geography. So South Korea has the fastest internet speeds in the world. It’s a thriving and healthy democracy. It’s intellectual property protection laws are very robust. All that put together means that the monetization methods and kind of the business ethos, also legal protections endemic to South Korea, feel very natural for Western portfolio companies to launch into a, so you have to get over.
VANIA SCHLOGEL:
Obviously some of this is natural, no matter where you expand to globally, but, but you know, you need to be comfortable with the language barriers the cultural differences and being respectful and mindful of that. But once our portfolio companies launched there it feels much more like a fish in water in terms of them looking around and saying, Oh, okay, I can still sell my intellectual property for example, and monetize it the way that I would, whether I were based in Sweden or New York or, Seoul. So that’s one of the reasons that we set up a presence there. And going back to the example, also a parasite winning an Oscar, we identified very early on that for whatever reason, Koreans are very good storytellers. And so there’s always been a large body of a great intellectual property and content trends coming out of South Korea.
VANIA SCHLOGEL:
And so as the fund focused a lot on entertainment, media, and content, it made a lot of sense to us to be present in cities that were driving these trends. And it’s one of those markets where a company can launch. And admittedly, it’s a very small country and a very small core addressable market, but given the ability to export cross border a company can look into expanding into adjacent geographies, Japan, Southeast Asia, China from the, that kind of launchpad in South Korea. I would almost liken it to Sweden in that sense, what Sweden is to Europe, pretty small addressable market, but, you know, Spotify did all right.
ROSS BUTLER:
Absolutely. And so speaking of Europe, you’ve got some activity there too
VANIA SCHLOGEL:
Well. We’ve actually invested quite a bit in Europe. So we’re invested alongside KKR in a company called Neo nine studios, which is Germany’s largest production and distribution company in the country. I chair the board there were invested alongside EQT and epidemic sound, which is based in Stockholm. I also chair the board of that company. We just closed another investment alongside EQT in Malaga Spain, and a fantastic company called free pick.
ROSS BUTLER:
So under normal circumstances, your air miles are pretty significant,
VANIA SCHLOGEL:
Wonderful from the perspective of never having to pay for a personal vacation ever again. Yeah. I was spending a lot of time in Europe, I lived in London for six years. And so from a, from a sector perspective, I actually think it’s a wonderful geography to in, I think it’s multiples cheaper than a lot of us media.
ROSS BUTLER:
You’re relatively small funds to have a kind of what appears to be a completely global footprint and also personally global responsibilities, a portfolio of companies all over the place. And I guess that’s a function of being a sector specialist. Would you say
VANIA SCHLOGEL:
That’s exactly right. And I wouldn’t say we’re truly global because we genuinely as a operational fund, we have to spend time building relationships and liaising with folks. And so we’re very much present in Europe and Asia, we don’t touch geographies yet where we don’t have executives or very strong partnerships. So that would include, for example, South America Africa, those are geographies where we’re not present, but in Europe we feel very comfortable investing in the region you know, regulatorily regulatory perspective culturally even our role relationship Rolodexes, we feel very natural about investing in the region. And also importantly, we have such wonderful partners in terms of larger GPS that we work with as well as a lot of founders company founders that we know who also keep us connected on all the grounds.
ROSS BUTLER:
Well, I was going to come on to that because it’s very interesting, the fact that you you partner with some of the biggest buyer houses in the world on some of their deals. So they like you and they bring you in, they’ve got enough money of their own. What do they want from you?
VANIA SCHLOGEL:
That’s a great question. We feel a very strong duty towards our GP partners and today we’ve done, you know, we’ve, we’ve invested alongside KKR, EQT in TPG since the fund launched in 2017. And you’re absolutely right. We recognize very much that they have enough capital. They have a large committed funds and they certainly don’t need out water to come in to fill a hole. And hence there is a very strong expectation of performance on our side that in the Venn diagram of things not to get too nerdy, but they’re going to focus on, you know, these, these sets of operations. And we’re going to be over here focusing on our operational strategy and the two don’t really overlap. And that’s great that complimentarity of what we focus on and our expertise, I think is the reason why we get repeat business and repeat partnerships with these GPS.
VANIA SCHLOGEL:
And the other aspect is just we have a very, the way that we set up the operations of our fund are centered around our operational expertise. So I gave you one example, which is we’re present in South Korea because we understand it to be a trendsetter city in terms of content and technology trends, our LPs in South Korea. In fact, for example, Kakao is not only a partner of ours, but also an LP of ours. And if you imagine a digital media and technology group for a given country that owns the WhatsApp, Spotify, PayPal, Uber, and a few other assets of a country that is cacao, and they are one of our greatest partners in LPs. And so when we partner with the larger GP, we can actually go in as one of the only if not the only fund in the world that can say that and say, Hey, when, when this company, this portfolio company is looking to launch in Asia, we’re gonna consult and give a great body of expertise around having done this before. And Oh, by the way, we’ve got a fantastic digital media company there as an LP who now has a vested interest in making a success story.
ROSS BUTLER:
Yeah, that makes sense. So what, what specifically, what sub sectors, what types of creative companies are hot right now, interest you from an investment perspective?
VANIA SCHLOGEL:
We are very much focused on content and we focused on it from, from the inception and we built out a very strong investment thesis to the point where I almost feel sheepish saying content, because it’s such a broad umbrella term, the way that we segmented it is we got very deep into it. And so we’re looking for example, at content that is buoyed by the trend of online creator communities. We’re looking at content that has an over and exposure to growing over the top, or what’s called OTT streaming platforms like Netflix or Amazon. So while we spend a lot of time in content, we actually very delve down into those sub sectors that we feel have kind of acyclical component, but also from, from kind of a meta-thematic side being buoyed by digital trends and digitization, which COVID, by the way only helped to hasten quite frankly.
ROSS BUTLER:
Yeah. It’s interesting. Like when the, in the first internet, boom, like 20 years ago, everyone was constantly saying content is King, but looking back, I sometimes wonder whether actually for that first wave, but networks were King because the ones that did really well were the companies that capitalized on people’s people’s networks and kind of get the sense as you say, particularly with lockdown. And now that everyone’s got decent broadband and streaming services. And so on that the content might finally be having actually it’s it’s time in the sun. You’re gonna, when you think about that, like orthosis,
VANIA SCHLOGEL:
I’ve had this debate so many times about content versus distribution. And I think one of the most interesting case studies is what happened with Netflix. And I re you know, prior to launching house of cards in January of 2013 it was a pure play distribution platform, and I’ll never forget the production costs that were quite heavy for house of cards that Netflix had undertaken. If you actually have the interest and go back to a lot of the equity analysts and what they were saying about Netflix, it was brutal. I mean, it was just, this is daft, this is how many subscribers they would have to get to recoup this, and it just ripped them to shreds and what happens, they launched house of cards and in quick succession orange is a new black, the Marvel kind of TV series spinoffs, et cetera, and their stock price within the next year two and a half 10 next.
VANIA SCHLOGEL:
And, and so I think it’s I tell you that anecdote because where I land is that it seems more and more these days. It has to be the marriage both. Now, that being said I don’t know. I don’t mean that to say that there is not an opportunity for induction and content creators. I absolutely think that opportunity is there, but in, in order to really sell and continue selling in a systematic way and not be hit driven, these content creators need to focus on franchise defining or tentpole content to really have viable business models and also to try and own some of their intellectual. Are you going forward rather than just being a licensed, sor and working for fees in terms of the monetizing, their content? The other thing that I think is positive or content creators and intellectual property owners, is that pro in, in a, in a prior world, these content producers were selling into the traditional set of media buyers.
VANIA SCHLOGEL:
Then they were selling into the traditional set plus Netflix, and now the world has opened where now they’re selling into to Apple as well and other new entrance. And so it’s a great time to be a good content producer and intellectual property owner because the buyer set is proliferating. There’s just more and more buyers now of good and franchise defining content. I think one of the other things, and this is why we invested, for example, in Leonine is one. Yeah, the great things that happened from Netflix. And I actually mean this at associate level is because, so Netflix was able to aggregate eyeballs at a global level. There became this re-education process in the entertainment world that we are willing to watch local language, film, and TV, whether it’s the example of parasite, which is completely in Korean or dark, which is in German.
VANIA SCHLOGEL:
And so this put the emphasis and investment again in local language content. And I think that’s really important and social level. I don’t think we want to see a world where 98% of content is created and generated out of Hollywood and has an American perspective to it. I think we really want to honor diversity of content and also local traditions and cultures. And I think that’s one of the great not to go on a tangent, but it’s one of the wonderful things that actually has come from technological distribution is a refocus, any commercial case that now puts investment back again on local language content.
ROSS BUTLER:
I understand that a lot better now, because when you started speaking, I was going to say that all sounds great, but there’s, there’s only one Netflix, but I mean, Hey, that’s not quite true, but also it sounds like Netflix allows a whole ecosystem to happen as well in the same way, as, I guess, Amazon allows a whole ecosystem of suppliers to feed into it and get greater distribution. Yeah.
VANIA SCHLOGEL:
Yeah, absolutely. And I think to be fair, there need to any time one seeks a sustainability and health of an industry, there need to be countervailing forces. So while I’m also very positive on some of the positive things that Netflix has engendered why, why did we invest in Leo nine Leo nine took five companies and consolidated them into the number one player because scale at a local market level is a net necessary countervailing presence to a global technology player like Netflix. So I think for the health of the industry, also the, for the health of consumer choices going forward and for greater investment behind local content we as investors are placing our bets and trying to have scaled local players rather than just a fragmented market.
ROSS BUTLER:
Oh, these kind of film production companies, they, they are, they’re kind of like finance houses in themselves. Aren’t they, to some extent cause they’re then financing projects,
VANIA SCHLOGEL:
They are. Yeah. And that’s, that’s also why scale matters because content behaves very similarly to venture capital as an asset class, meaning you have a few real outliers in terms of performance and a lot of losses along the way. That is the nature of content that also scares a lot of investors. And so the way that we approach the sector is with eyes wide open and saying, we understand that’s how the asset class performs, but we also understand portfolio theory enough to know that diversification diversifies a way that unique hit risk. And so if a, an asset is scaled enough, it’s producing it. Number one, it’s producing enough new shows or films. And number two, it’s typically paired with an existing library that generates stable cash flows. And so I think there’s a perception versus reality gap. A lot of times when it comes to investors that investing in the content space, they just look at that unique project risk of it’s going to be great, or it’s going to be an absolute unmitigated disaster. We don’t view it that way. We view it as, as long as we can get into scaled ventures. A lot of that unique risk can be mitigated.
ROSS BUTLER:
Hmm. The fact that you’re partnering with big buyout firms also suggests that the risk profile isn’t that venturing. Yeah.
VANIA SCHLOGEL:
Yeah. That’s absolutely right. And, and Leonine, for example, spent the better part of two decades, for example buying up content and has eight, the best library in Germany. So as, as one example of why that’s so important when COVID hit and for a period in, in Germany productions completely shut down of new content, we were sitting on the country’s largest library. And so while we’re all hunkered down, bored out of our minds, looking for titles, and we’re going back to Tomb Raider and Home Alone and all those things that we watched in the past 20 years that library was generating fantastic cash flows for the company. And I think that’s a really good example of how an asset class that can be perceived as, so hit-driven actually ended up being one of the most sheltered and a cyclical assets as evidenced by what happened after COVID hit.
ROSS BUTLER:
Yeah. That’s amazing. Isn’t it? Do you want me, what’s your view of the future of private equity meeting, creative industries? Would it always be bore the specialist to some degree, or do you think there’s a larger opportunity opening up
VANIA SCHLOGEL:
Trend of a lot of pro previous operators within the media and entertainment space? Raising capital, for example, they’re, they’re doing a lot of fundless sponsor activity. I, I, you know, there are certain situations I can’t comment on now, but very well-known media executives who have identified proprietary deals as we talked about earlier and then going, and either partnering with private equity or with family offices, the rise of, of family offices, for example, has opened up a brand new and innovative kind of funding pocket. And, and they’re going about it that way. So it’s, again, it’s one of those industries that, and I mean, media and entertainment within private equity that is not only within it itself, but also the, the industries that are tangential to it. So media itself is constantly evolving, but also the way that private equity invest into media, it’s constantly open to evolution and sometimes outright tumbled. And so I do see that going forward, there’s going to be much more of a trend and continue trend of very well-known operators who have left their operating posts and want to try their hand at investing. And they’ll find funding, whether it’s through respect partnership. Spacs also, that’s part of the reason why there’s been such a rise in space.
ROSS BUTLER:
So is it because of the sector?
VANIA SCHLOGEL:
Exactly. Because who knows the media and entertainment sector better than, than folks who have a deep operating expertise within it. And so now they have creative ways of finding capital and because it lends itself to proprietary deal sourcing, I just think this industry is very unique relative to investing in other industries,
ROSS BUTLER:
Given that you’ve always been in investments and something’s doing creative, you’ve had quite a buried career cause you KKR, you’ve got your own shop. And in between you were a CIO ROC nation with, can you tell us a little bit about what Roc Nation is?
VANIA SCHLOGEL:
So rock nation is founded and helmed by Jay Z, who many people know. And, and one of the really interesting things about Jay, if you look at the history of his career. So yes, he is a very well known rapper and artist, but he’s also had a business savvy. So very early on, for example he structured the deal so that he the retention of his master rights reverted back to him, this is before artists were doing it at a broader scale. And I would say before Taylor Swift, for example, really got on that public messaging about it. And so he, he actually is, is a great example of someone who took his relationships and industry expertise and leverage that into an operational role by setting up rock nation. And so rock nation represents, I believe they started really in music now, they branched out to representing artists in outside of just music and then also athletes professional athletes and moving into those adjacent verticals and really what that comes down to is leveraging a Rolodex of relationships. And then having that credibility that, Hey, I care about your career, your art, I will be a good, good partner for you in a way that Jane the rock nation team can do.
ROSS BUTLER:
And, and culturally going from KKR to Roc Nation, and then to your own shop. I mean, they, they must be big leaps or was Roc Nation, very KKR-like?
VANIA SCHLOGEL:
Worlds apart. They are very, very different. And, and funnily enough, I would actually having experienced on the one, the Goldman Sachs and the KKRs and my career, and then on the other kind of the Roc Nation’s of the world I endeavored to set up the culture of Atwater to be a hybrid culture. So if you ever come to our offices, you know, you’ll see some funky art up, you know, music typically playing in the background. So it’s a little bit of a hybrid.
