Portfolio Management – Learning from experienced investors
The Angel Association of New Zealand (AANZ) is co-hosting with New Zealand Growth Capital Partners (NZGCP) a series of workshops on early-stage investment. The second instalment was on Portfolio Management, held in Wellington on 13 May 2021. Participants heard about both the theory and reality of portfolio management from three different experiences:
- Marcel van den Assum provided the angel investor perspective, having invested in over 50 companies over 15 years.
- Jason Graham from Movac provided an early-stage venture capital fund perspective, detailing 35 investments made across 5 funds and 22 years.
- Marcus Henderson and Hursh Shah provided the institutional venture capital perspective, with NZGCP’s Aspire NZ Seed Fund having invested in over 160 companies over 15 years.
The presenters gave some common messages: the theory says diversification is critical for mitigating the downside risk of your investment(s) crashing to zero, especially in the high-risk early-stage investment space. The data shows that a small number of investments in each portfolio will account for the vast majority of the returns, so you need to invest in enough opportunities to increase your chances of finding a winner.
But what is the right way to diversify in practice, in the New Zealand context? It’s not just about taking every possible opportunity and making a lot of investments. All the speakers agreed that active investment approaches – getting involved in the portfolio companies rather than passively waiting for returns – are critical to improving the likelihood of success. Marcel spoke about five Cs that help him select the right investment opportunities:
- Connections: can your networks offer access to markets or relevant expertise?
- Capability: do you have the right skills to help the company in their current context?
- Capacity: do you have the time, capital, and headspace to help the company?
- Culture: is the company willing to let you help, and can you work with them?
- Capital (strategy): are you sufficiently incentivised to do the work and help the company?
The key constraint for the angel investor is in capacity, and Marcel noted that as he becomes more experienced, he’s looking more to partner with others with complementary skills and time so that he has confidence that his investments are getting the right support. This is where the venture capital funds might have a bit of an edge – a team of people can dedicate more resources to supporting their portfolio companies, and are more likely to have the right networks and skill base to draw from. For example, Movac has a number of Operating Partners who are able to provide sector-specific expertise for the portfolio companies, and potentially get their hands into the companies themselves to provide operational support.
Movac also offered some key metrics that can be monitored to evaluate whether your portfolio is sufficiently diversified:
- Number: an important metric but it doesn’t tell the whole story by itself
- Sector: investing across a range of sectors mitigates macro-trend risks
- Concentration: knowing and playing to your strengths can reduce risk
- Recovery: showing that you are at least breaking even is helpful
- Hit Rate: picking winners more often than others means you have good selection processes
Alongside diversification, a couple of other aspects also contribute towards building a strong portfolio, including:
- having an investment mandate or thesis to provide safety rails around your decision making
- negotiating reasonable terms and valuations that look to the long-term
- building dealflow so that you have access to more opportunities and can select from the best possible options.
Additionally, Marcel and Movac both said the vast majority of their returns came from follow-on investments into companies that were doing well, so it’s important to ensure you have the capital and capacity to support good performers past the current investment round.
Finally, Marcus and Hursh from NZGCP talked about what they’ve learned from managing a massive portfolio of companies, and their new strategies moving forward. For the Aspire fund, they have categorised the portfolio companies into three buckets depending on how much interaction or support they might need, and have assigned team members to provide between 30-120 minutes of active support per week to each company. Looking at where the strongest returns have been in their portfolio, they have identified four focus areas for investment into the future: software, agri-tech, health-tech, and deep-tech. And they have seen a direct correlation between time spent on due diligence and returns, so they are prepared to spend more time evaluating investment opportunities and ensure they are the right companies to deploy capital towards.
The three presentations all drew from the same theory of diversification, but it was apparent that different types of investors have different tools and choices that allow them to apply diversification in different ways. For the angel investor, their own expertise and time to help guide companies makes the biggest difference to their portfolio’s success. For venture capital funds, active support is important, but having more funds available allows them to invest more widely and spend more time on investment selection. But for all investors, the need to constantly learn and refine their choices is critical – all of the presenters have changed the way they make investments in comparison to 15 years ago, and all are still on a journey to learning more.
Andrew is a Venture Associate with Matū Fund, an early-stage investment fund providing intelligent capital for scientific ideas. Keep an eye out on the NZGCP website (https://www.nzgcp.co.nz/news-and-media/) for future workshops in the Early-Stage Investment Series.