WHILE the concept of venture capital is well established as having provided early funding for startups that grew to become global giants, venture debt is less known. It is, however, growing in importance and has some advantages over the traditional venture capital.
“Venture debt is a complementary source of financing for startups that usually raise funds through venture capital.
“We want to fill in a gap in the local startup ecosystem. The key difference and advantage of venture debt is that it helps founders of startups minimise diluting their equity while raising funds to grow their companies,” says Datuk Wan Kamaruzaman Wan Ahmad, a veteran from the local asset management industry with more than 40 years experience.
Wan Kamaruzaman is the chairman of a newly founded and the country’s first venture debt fund called Iris Fund. It is managed by venture capital firms Iris Capital Partners Sdn Bhd and South Korea-based Hanwha Asset Management Co.
Iris Fund is one of eight venture capital fund managers selected under the Dana Penjana Nasional programme through Penjana Kapital Sdn Bhd, which is owned by the Finance Ministry.
The size of Iris Fund will be RM160mil, with the capital contributed by Penjana Kapital and a host of institutional and high net-worth investors. The fund aims to provide venture debt to invest in startups in Malaysia and other parts of Asean.
Wan Kamaruzaman says Iris Fund intends to help startups expand their business, providing them with working capital and helping them fund their acquisitions.
“The concept of venture debt has been gaining traction in this region. In developed countries such as the United States, almost 20% of funding being provided to startups is in the form of venture debt.
“Companies usually use venture debt in between their fundraising rounds,” he adds.
Wan Kamaruzaman is a former chief executive officer of Retirement Fund Inc (KWAP), the country’s second-largest pension fund with assets under management of about RM150bil.
During his five-year stint, Wan Kamaruzaman was instrumental in developing the fund’s alternative investments such as private equity (PE) and venture capital.
He oversaw KWAP’s PE investments into food and confectionery manufacturer Munchy Food Industries Sdn Bhd in 2014, UK-based Vortex Solar in 2017 and ride-hailing giant Uber in 2016.
Wan Kamaruzaman notes that over the last few years, more money has been entering this alternative asset class (of venture capital and debt and private equity) targeted at the Asean market. “It is becoming crowded. Hence, rather than compete with other funds, we want to work with them and make joint investments where possible,” he says.
Early-stage companies usually find it difficult to get loans from financial institutions due to the absence of a track record or having a large asset base. This is where venture debt comes into play.
However, it has a different structure and pricing for its loans as venture debt takes on higher risks compared to financing provided by traditional banks.
Wan Kamaruzaman says the interest rates for its loans will be in the region of 8% to 15% per annum. This is lower than the gross returns that venture capital firms target, which is to the tune of 25% to 35% annually.
Wan Kamaruzaman says venture debt providers typically look into companies’ cashflow and their ability to repay loans, and not so much at their valuations, which has to be used by venture capital investors as they are buying equity.
“As such, we can participate at the late stage of development of startups regardless of their valuations,” he quips.
According to a report by PwC, the venture debt model originated in Silicon Valley in the 1970s and has since become an established form of alternative capital for venture capital-backed companies globally.
The report points out that many well-known technology companies have taken on some venture debt in their growth journeys including the likes of Google, Facebook, Uber, Airbnb and Dropbox3.
PwC reckons that the venture debt market in South-East Asia could grow to US$490mil (RM2.05bil) to US$980mil (RM4.10bil) and that over the last 18 months, the region has seen an uptick in venture debt activity, driven by the Covid-19 pandemic.
“There are 80 to 100 South-East Asian companies that have already benefited from venture debt,” PwC says.
Iris Capital associate director Syarina Zakaria reckons that while there has been interest in venture debt in Malaysia, many of these companies are still at a “very young stage”.
“Venture debt is usually for companies that want to grow their business such as funding acquisitions while minimising shareholders’ equity dilution.
“While venture debt is new in Malaysia, big boys such as Japan-based SoftBank and Singapore-based Temasek have already expanded into this segment over the last two years,” she adds.
Last year, Iris Fund made its maiden investment into Singapore-based food technology company Growthwell Group Pte Ltd, which specialises in plant-based meat-free food products.
Iris Fund provided venture debt as part of the S$22mil (RM68.5mil) Series A funding round by the company alongside Temasek Holdings Ltd Creadev, GGV Capital, and DSG Consumer Partners. The fundraising has been earmarked to expand Growthwell’s manufacturing facility in Johor Baru.
“While we like technology companies, we are also interested in sectors such as healthcare; environmental, social and governance-related; and food and beverages,” Syarina says.
She says while the fund will be mainly focusing on Malaysian companies, there is also allocation to invest in regional companies, specifically the ones that have operational exposure in Malaysia. “Our mandate is 50% Malaysia and 50% Asean including Vietnam, Singapore and Indonesia,” she says.
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