How do we achieve high distributions (DPI of > 1) in less than 4 years
Venture capital investments are often criticized because the capital is tied up for a long time.
Our investors (LPs) are mainly private clients. These clients are highly interested in distributions, less in high IRR numbers or other complex KPIs.
As long as the baker’s rolls have to be paid for with cash, book profits are nice, but not helpful when shopping at the bakery. Therefore, there is an interest in high, timely distributions.
The MK Venture investment sweet spot solves this problem. Our funds of funds invest preferably at or shortly after the final closing of a Venture Capital target fund. This allows us to analyze the target funds and their investments extensively. At the same time, we escape the fierce price competition that prevails for secondaries in the current environment.
Secondly in best case the target funds have deployed 50–80% of the commited capital. This situation provides us an already good developed portfolio and the possiblility of promtly markups or even early exits. Startups usualy got a runway for 12 to 18 months. With our approach we reduce the “waiting runway” to the next financial event (in most cases a new round) up to 80%.
Last but not least with a split between early / seed stage funds and growth funds we are able to catch early distributions. Fully deployed late stage funds tent to realize exits within 2 to 3 years. For the seed funds our approach has also a positiv impact. Due to the nature of seed funds, these funds need much longer to exit. With our concept, we buy these funds the necessary time.
The only hurdle we see in our strategy is that always the so called investment period has to be considered. Exits within this period very often lead to GP decissions to reinvested (recycling) and not to distribute.
We take the successful exits and distributions from our portfolio as an opportunity to explain important questions concerning distributions, returns and reinvestments.
Investment and distribution phase as waterfall graphic:
In the years 2018 to 2020, the committed funds were drawn down and invested (gray marked — investment phase). The average total called capital for the first two fund years was 72.2% of the commited amount.
In the course of 2021, our target funds realized their first sales (orange), which flowed to us as distributions (DPI). Thus, the harvesting phase has already begun after 3 years. Already agreed and emerging transactions will drive the DPI to > 1 by early 2023.
We will thus achieve the goal of limiting the average capital commitment to 4 years. Regardless of this, there are still strong growing startups in the portfolio whose potential will fully unfold in the next two to three years and suggest enormous profits. In our case, we are expecting to distribute 3,5 US$ for every commited US$.
Overview of preliminary exits
If you have subscribed to the fund of funds for 200,000 EUR, you own 200 units. Upon your request we can provide details on “per fund of funds share”, so you can see how high the expected distribution per share from the exit will be.
Example: The exit at the startup usercentrics has led to proceeds of 31.91 EUR per share of the fund of funds related to the investment amount.
IPOs
Newly listed on the stock exchange were: Airobotics, SenseTime and Robinhood. Rigetti went public via SPAC in Q1 2022.
Finally, here are some important questions and answers about distributions.
Question: Do all transactions take place for cash?
All target fund managers aim to sell the startups for cash. However, sometimes buyers offer treasury stock / business shares as a purchase price component (“share” deal). The Purchase Price Component column in the table shows whether the deal is a “Cash” deal, “Share” deal or a mixed version of “Cash” and “Share” deal.
Question: What is the difference between “signing” and “closing”?
Basically, the payment of the purchase price takes place with the “closing” of the transaction. With the “Signing” the purchase agreement is signed by the buyer and the seller. In most cases, not all contractual points have been fulfilled at this point and are therefore considered “conditions precedent”. Closing” means that all conditions precedent of the purchase agreement have been fulfilled. A condition precedent may be, for example, the approval of a regulatory authority.
Question: What happens when a “share” deal takes place?
If purchase price components are paid in the form of shares, we are talking about a “share” deal. The shares received may already be listed on the stock exchange. The sale of the E-bot7 shares was made in parts in shares of the buyer Liveperson Inc (ticker LPSN). The LPSN shares are listed on the NASDAQ. The fund manager has to wait for a so-called lock-up period before the shares can be sold on the stock exchange. Lock-ups are very often agreed upon in IPOs in order to stretch out the possible course pressure. Usually lock-ups are agreed for 3, 6 and 12 months, sometimes combined with a maximum number of shares that can be sold, based on the average trading volume of the stock. Lock-ups are to be considered in the IPO of Robinhood, SenseTime and Rigetti.
Question: What is meant by recycling?
Recycling refers to reinvesting. The proceeds are reinvested in new investments.
Question: When are the returns credited to our fund of funds?
All target fund managers communicate promptly whether recycling of the proceeds is planned or not. If recycling does not take place, then the proceeds are either
- remitted in a timely manner, as the target fund manager does not want to burden its “IRR”.
Cash positions do not earn interest and depress performance, which in turn reduces profit sharing
-or offset against outstanding capital calls.
Question: When does the fund of funds distribute?
In contrast to the target funds, the profit participation in our fund of funds is measured on the basis of the distributions made. This means that we have no direct performance pressure in terms of “IRR”. However, our fund of funds also has to pay negative interest on liquidity holdings. Therefore, we also strive to transfer “round” amounts very promptly.
Question: How can I participate?
MK Venture Fund of Funds II implements the same strategy as Fund of Funds I. Although the portfolio is still under construction, we are already invested in more than 80 startups. The first startup could be sold after 6 months with a profit multiple of 6 times. IPOs and initial public offerings via SPAC are on the agenda for 2022. We expect first returns in 2023.
Subscriptions to our Luxembourg special fund are possible until 30.04.2022. If you are interested, I would be happy to send you more information.
Munich, 2022, Mato M. Krahl, GP
info@mk-vc.com
