London-headquartered venture capital firm Draper Esprit announced in early June it had raised £100 million ($129 million; €115 million) from a share subscription, increasing its firepower across its three funds: secondaries, venture capital trusts and EIS, which is aimed at small, higher risk companies that qualify for the UK government’s Enterprise Investment Scheme.
Simon Cook, the firm’s chief executive, spoke to Secondaries Investor about his approach to the secondaries market and the problems with the traditional private equity model.
What is your typical approach to the secondaries market?
We are mainly a primary investor, so we look at growth companies. But because we meet so many companies in Europe, we have a lot of information and sometimes take stakes in them when they come up for sale on the secondaries market. Single-company secondaries we do all the time, from the balance sheet and the capital that we’ve raised.
Occasionally, probably about once a year, we find a situation where a venture capital firm has decided to put a portfolio of assets up for sale and we have the ability to work out which are the great companies in that portfolio.
When we find a portfolio for sale we cornerstone the transaction but we tend, depending on the size of it, to share it with traditional secondaries LPs. We bought 3i’s venture portfolio five or six years ago, and we bought Cazenove’s VC fund, Prelude [Investment Trust]. If we don’t get to invest when they’re raising money we have a way to put together a transaction that gives us access to great companies. And when you do this as a package you tend to get an even better deal.
Do you have a specific secondaries allocation that you aim for in a year?
Because we’re a multi-fund manager – in essence we’re managing funds of around £800 million – we’re investing [in total] around £160 million a year. We plan to do one big secondaries deal a year, with about £50 million being our target deployment into the secondaries market. But you never know, if something big like 3i comes along we could swallow that and we keep our eye out for little deals as well. If we can invest £30 million-£50 million in secondaries, we do about £30 million-£50 million in EIS and VCT, and that leaves us about £50 million-£100 million to deploy off the balance sheet.
We just see great companies. This whole secondaries and primary differentiation is a bit weird. In public markets, you buy and sell shares all day long. So we are a bit more like a public investor inside the private market.
We’ve been very fortunate to operate with firms like HarbourVest [Partners] and Coller [Capital] in the past. We’ve learned the tricks and now we are applying it to our core market.
Some funds are hoovering up tail-end VC stakes at the moment. What opportunities do you see in this area?
I love the fact that, particularly in Europe, many of these funds are just badly structured, so there’s a fantastic opportunity to buy into these things. Probably the best ever was the secondaries deal done on Apax’s fund with King [developer of Candy Crush] in it. It was year 11 of King – just before they created Candy Crush. There was a secondaries transaction on the fund where King was valued at zero in year 10, and by [the end of] year 11 it was worth $5 billion. We see it as a wonderful opportunity because we have the unique information advantage. We are meeting these companies every day and it gives us an inside edge on what to pay for the best ones.
It was Tim Draper’s grandfather [venture capitalist William Henry Draper III] who took an oil and gas 10-year partnership off the shelf in 1957 and invented this 10-year model for tech. It just doesn’t make sense to have five years to invest and five years to exit. Tech businesses get better and bigger, which is ultimately why we went public – for the flexibility, to get away from that.
Simon Cook has more than two decades of experience in European venture capital and has been involved in a number of Europe’s most successful startups including Lovefilm and nCipher. Prior to co-founding Draper Esprit he was a partner at Elderstreet Investments and a director at 3i.