Thank you very much, Claudia, for joining us here today. By way of introduction, Magnet has been doing a webinar series for a period of time, and we're back from the summer, so we take this opportunity to welcome you to the podcast. For those that are joining, many are aware that Magnet has been on a journey, starting off with a geographical expansion for venture capital from the Middle East, both East and West, covering Africa all the way to Southeast Asia.
And as part of our continued proposition... It's been a natural evolution to move into the world of private capital. We started, as I mentioned, with VC. We're now looking at private equity.
We've also covered venture debt on the platform. And this year specifically, we released our first report on private equity in Saudi Arabia, which has complemented the venture capital space. We have also worked tirelessly with the team on bringing on the data for all the geographies that we're covering, which will hopefully come live in the next couple of months in Q4. And really, it's against that backdrop that I welcome Claudia to our first webinar after the summer.
As an alum of INSEAD myself, I'm very pleased and honoured to have Claudia join us today, who's a key protagonist and one of the leading professors at INSEAD, focused on private capital. As a distinguished author, angel investor, expert in the field with 30 years worth of experience, she's a senior affiliate professor of the Entrepreneurship and Family Enterprise at INSEAD. And your work, interestingly, also covers all of those different sectors, which is something that I want to kind of dive into and dig into a little bit more as we go through the conversation. But firstly, I just really want to thank you because I know that you're very busy right now for taking the time in joining me and the Magnet team and our audience in this journey. It's a real pleasure, Philip.
Thanks for having me. And I'm very happy to talk about a topic that's very close to my heart. So kind of before we dig into the world of private capital, which in itself can probably be several hours, I mean, you've had a very long, diverse career.
You've been in academia for a period of time, but coming out of Germany, university in Augsburg, what is it that kind of got you into the field of private capital? And what was it that interested you in terms of the private capital world? Yeah, good question.
So. I arrived, I'd been based all around the world throughout my career. And before joining INSEAD, I was actually mainly focused on the alternative side, but probably more on the public market side and global market side.
Now, at INSEAD, very quickly, I was asked to take a closer look. I mean, this is by now 18 years ago. And at the time, still, if you look at the growth of the private capital space, and I call it private capital because I'm looking at anything from venture to growth equity to buyouts, and always with a global lens as we do it at INSEAD.
At the time, even, it was still kind of a niche. It was a niche asset class. It was one side of the equation. And as I took it on, I mean, I have to say, I would have never expected the industry to go that far. grow as it has in terms of assets under management, in terms of representation globally, not just in the US and Europe, but in all emerging markets.
I think that combined with the fact that I had arrived in Asia as kind of an experiment and I've expected to stay that long. In hindsight, I arrived here at the perfect time and decided to stay. So I saw an emerging market really emerge.
from the mid to late 90s until today. And that has really kind of driven my area of interest. So it kept me focused on what is going on, what are the next emerging markets, whether it is Latin America and Middle East. And obviously, I'm starting to pay more attention now, especially from next year onwards, to Africa now, which will be the next market emerging.
And I'm convinced that it will write its own rulebook. and carve its own story. But I always think there are good connections to be made between the already emerged emerging markets and the soon to be emerging markets. And we'll definitely come on to that because I think what's unique here is that we're going to look at what is different between the emerging market and kind of the global landscape.
But I guess, again, just kind of double down on it. What was it that drove you into academia as opposed to being an operator? So it's a good question. I get asked a lot about it and it wasn't my idea.
I wish I could claim the fame for it, but it was INSEAD that approached me at the time and said, you know, we're looking for someone with a network in Asia, in that space particularly. So when I came to INSEAD, initially I was brought into the finance department, worked very closely with a few of the colleagues there. And then over time, basically spent more time initially on decision sciences, which is closer to my risk management background.
And then basically the question came, we need someone to take private equity and venture capital under our wing. So would you want to do that? And at the time, it was the right thing. I felt it was the right thing to do.
So I took it on. Again, I wouldn't have thought that it would be growing to the extent that it has. And obviously, as you know, from the students.
point of view. I mean, we have a consistent demand for the topic, waitlisted classes and so on. And obviously, by now, I'm more colleagues teaching in that topic as well, because we have to do it both in Paris and Fontainebleau and in Singapore at the same time.
So and yeah, so it was really it was an opportunity that lent itself. I have to admit, when I first joined INSEAD, I thought it was their proposition was an interesting proposition. I thought I would do that for a while and then go back.
to banking again and that never happened. Well I mean you make that point I was there in 2013 and part of why I'm doing Magnet is that I was born out of many of the entrepreneurship classes that were done at INSEAD and at the time they were all electives they were never part of the court and I remember speaking to the the deputy dean at the time saying that this should become part of court because whether entrepreneurship is external or within corporates it's something that is a mindset that needs to be developed but that's for a beer and a coffee for another day. Look, diving into private capital, we did our first report earlier this year.
And what I found fascinating when I looked at it was the lack of clarity as to the definition of private capital, the different segments that fall under private capital. I think I looked at four different consulting firms reports and looked at the CFA and you found that every single one of them had different definitions as to what the pillars of private capital was compared to public capital. So I guess. You're the perfect person to ask.
I mean, what is your definition of private capital and how is it differentiated to kind of public capital for people that may join? Yeah, a really good question. And the frustration about the lack of being organized and the lack of definition, which really doesn't help when you're dealing with investors and managing other people's money, led to me publishing the first book in 2016. I mean, there was really, there was nothing there. Someone has to basically like write down what it actually means.
So first, maybe starting a high level, I mean, private capital means those are private companies that receive funding from an external investor. And again, those private companies may be startups, at which point we're talking venture capital. They may be fast growing companies, not quite willing to sell out yet, often family owned and controlled, at which point you're talking growth equity or growth capital.
that is coming in. So minority investments in fast-growing companies. And then obviously buyouts. Buyouts meaning controlled stakes that the private capital fund is acquiring. There we are talking, if it includes leverage, we're talking leverage buyouts.
But in emerging markets, more often than not, at the beginning, buyouts usually refers to straight equity deals. So The way you separate it is by looking at the target company. Is the target company listed? Was there at one point an IPO? Is there a tradable price that can be seen on whatever exchange?
In which case, it's public equity. If it is a private entity that has a investor, an external investor, that is, I put another layer on top of that, I require an institutional investor, meaning that it's not an angel. it's not a family office.
It's not what is being called real money in terms of LPs. It is a fund that has itself raised money from investors and is deploying that money with the investor's best interest in mind. So the investors and the funds referred to as LPs, as limited partners, are the ones that are providing the funding. but the hard work in terms of finding good companies, managing the companies to a successful growth.
and ultimately exiting from the companies. That is done by the private capital fund, the partners in the fund. Again, at that point, the target, whether it's a startup, a growth company, or whether it's a buyout, is then less relevant.
So that's how I draw the lines very clearly. And I think it's also important to draw the lines like this with the investors in mind. Because as an investor, obviously, whether I am buying a S&P 500 ETF or whether I'm investing in a public market, whether I'm buying NVIDIA shares or Intel shares or whatever it may be, I have a reasonable amount of liquidity.
I can liquidate the possession very quickly. For private markets with my investor, my LP hat on, what that means, it means they are committed to a fund anywhere from five to 10 years time. at times longer.
So that requires a certain amount of understanding of the illiquidity that this asset class comes with. And obviously, as a chief investment officer at such an investor, you've got to be aware that maybe not all your assets should be invested in private capital because of the illiquidity. On the other hand, there comes in the question, can you afford not to be invested in private capital. I have argued for the longest time, sometimes with large LPs, that that's not the case.
If you're not investing in private capital, you're consciously stepping away from an opportunity set that is not available in public markets. And just on that, because I've seen different types of charts, why is it, and excuse my naiveness, that infrastructure, real estate will fall within the concept of private capital as well? Because you talked about those asset clusters, but they tend to be companies.
But you also do have the pillars of kind of infrastructure development projects and potentially real estate projects as well. Yeah, no, it's a good question. And again, I like to start where the funding starts, which is with the LPs. So when I look at the LPs, I mean, different endowment, pension plans, family offices can be structured quite differently. So some of them, yes, will lump it.
all together in one asset class and just simply divide their AUM, their assets under management, into private, public, and fixed income. Let's call it like that. Others, nevertheless, have very distinct teams that deal with infrastructure only, real estate only, and then have venture growth buyout in one asset class. I mean, you know, the fact that there is no right or wrong, as long as you as an L.P. P as an investor, allocate the right amount of riskiness or a risk measure to the bucket that you're managing.
So I would argue a real estate portfolio, infrastructure portfolio, and private capital portfolio is too distinct to be managed jointly. But I can tell you three or four pension plans, very large ones and very successful ones too, that would argue that this is not the case. So I think it starts there.
But back to your earlier comment, it doesn't help. It doesn't make the asset class more transparent, right? But I think for the purpose of private capital, for me, it simply means venture capital, growth equity, and buyout.
And then if you want to have a conversation on real estate and infrastructure, which may have a similar fund structure, but is really a very, very different asset behind it, we can do so, right? So I like to keep things simple. and very cleanly defined. And again, I kind of want to start diving into this concept of the emerging market versus kind of the more mature. You've talked about the LPs and the funders.
What's the interest and what should be the interest of government in private capital and the development of the asset class of private capital for the development of different economies, if there is any? I mean, what do you see from your experience in Southeast Asia, now the growing interest in the Middle East, and you've touched on Africa? What is the view from a government perspective and what do you believe the view should be for governments to consider the private capital asset class? Yeah. So and allow me to do make a couple of parallels here, for example, to Singapore, for no other reason, because I'm sitting in our studio here in Singapore.
And having seen Singapore really kind of make tweaks and changes around it over the time. So what's the role of government? The role of government?
in private markets is to ensure that deals can be done. in a secure and transparent way. So what does it require? It requires legal infrastructure. So when I buy an asset from you and we're signing a contract, both of us can trust that the courts in the respective country will understand that I own the asset, you have sold it to me.
Both of us are comfortable, you and I and our lawyers are comfortable with the paperwork that we signed. So transparency, clarity, and more often than not, simplicity. keep things simple. So because in private markets, very often, the funds have to be based in a jurisdiction.
That means they will be, nevertheless, they may be raising money from investors around the world. So those investors, whether they're sending money from Germany or from the US or from Saudi Arabia, need to be comfortable to have the money reside in that jurisdiction. So an example there is Singapore. Singapore has come up very quickly as a quasi offshore location for some of the funds.
And when you speak to those fund managers and say, why did you move your fund, for example, from India to Singapore? It is very often transparency. We can trust the government that there will be no sudden changes. Don't forget, we're running a 10 year vehicle, right?
Sudden changes will make my life complicated if I have to then explain to my investors why we're not getting money back and so on. And ultimately, simplicity and clarity. So we can execute very quickly. We know there's a level of trust that my investors know moving the money in a Singaporean entity basically will make this a proposition that they can rely on. So I think certainty around it.
And then obviously where governments come in as well is helping the whole space to become a healthy ecosystem. And ecosystems are difficult. They're difficult to build and easy to break.
Because ecosystem usually requires that there are a couple of pieces, a couple of parts of the ecosystem that have to be there at the same time. One example, take for example China. In 2017, I wrote a paper with a group of Chinese MBA students. 2018 was the first year.
the only year in the history of venture capital where a country deployed more money into startups than the U.S. And that was China. And at the time, everyone was super excited. It was super excited and it was all nice and fine.
And we mapped that in a paper called Red Unicorns. And we nevertheless mentioned at the end that whilst this is an exciting first step worth celebrating in the interest of China. What is now needed is follow-on investors.
So not just seed and round A, we need those young startups at one point will come back and will raise the next round. Do we have those investors, number one? And then ultimately, let's talk about exits. All the investors in those startups are looking for an exit.
Having to take a non-American company and going all the way to Nasdaq It works. I mean, of course, I mean, that book has been written, right? But, you know, that it's ultimately as a country, I would like those companies to stay home, right?
Which is, as we know, a big issue in Europe, right? A lot of companies basically leave for the US to raise their successive round and then never come back again. So I think as a government, you want to ensure that you have that ecosystem.
And why do you want that? You have that ecosystem from early stage funding all the way to IPO. without gaps, ideally.
That way you keep your companies, and I mean by that grown at home, your homegrown companies in your country, which ultimately means they benefit the economy. They will hire local people. They will bring talent in from abroad. They will attract more funding from abroad and they will go outside, but they will always be made in.
So they have that stamp on the back, which I think is fantastic. And so I think there and I would argue a lot of governments really understand that. That doesn't mean that you need to be, you know, a competitor to Silicon Valley.
I mean, that's a high bar to jump. But if it benefits your economy and your people, if it brings them back home, for example, after having gone to INSEAD and Harvard and Stanford for their MBAs, so they can come back home and start a business at home. I think that's a worthwhile effort for governments to get involved. Gladly, there's so much that we can unpack there, but I'm going to try and kind of dig into one or two points. Specifically on private capital, if we double down on the kind of private equity versus venture capital, you talk about the importance of an ecosystem.
We've spent considerable time understanding what the venture capital ecosystem is. How different and what are the nuances of a private equity ecosystem to a venture capital ecosystem that maybe we're less familiar with because of the activity of private equity being much bigger transactions, fewer number of transactions and kind of more established companies than VCs, which are considered as sexy and fun and tech and hip and etc. What are the kind of characteristics of that ecosystem that we need to be aware of? Yeah.
So so on the venture side, you know, you have young companies. They are by what I call default debt, their cash flow negative, which means they have to come back regularly and raise money. So you need to find appropriate rounds of funding every 18 to 24 months.
So it's so there I would argue it's reasonably simple. Right. You want to find talent as well.
So you. Don't have to go for your DevOps guys to hire them expensively from abroad and so on. But just on the financing side, it's pretty straightforward. Now, private equity or buyouts is a different environment, right?
Because you're not dealing with young companies anymore. You're dealing with established entities. Those established entities on the growth equity side may have a certain need. For example, take a Southeast Asia champion.
a Southeast Asia champion who wants to open up the European markets. They have no experience, no one on the board that can open doors. They may bring a private equity partner in, sell them, let's say, 20, 30 percent of the company, so they have an equity stake in the company, but with a clear idea that you've got to help us open up the markets in Europe. Why? Because we feel we've done research, we know there's a market for us.
And we've seen this in the past. I mean, whether it was German companies into China, Chinese companies into Europe. I mean, you can look at this from any perspective.
There's a certain skill set required. So you need to have those growth equity funds that very often are the first external money that comes into those fast-growing companies. So very often, I mean, here in Asia, we saw that over the last 15, 20 years. The first external money that came into some of the family businesses that we have here, some of them substantially of size, were growth equity funds.
What was their role? Their role was to ensure that the company is institutionalized, that they have processes, that relates to diversity on the board, not just family members on the board, payment of bribes, and so on. So all those things get the company to the point where they can play on a global playing field. So when you ultimately exit them, maybe a strategic comes in, maybe a European, American or Middle Eastern strategic comes in, looks at the asset and says, hey, that's interesting for us to invest in. And then when you go to the buyout side, I mean, just look at the due diligence and buyouts.
What do you want to find out? You're looking for companies that are that are on a growth trajectory. As one of my guest speakers calls it, we want to take the company from good to great.
So you're looking for something that you can bring to the table as a private equity investor. But more often than not, you want to buy them out with debt. So the leverage buyout idea. Now that obviously requires that you can find debt wherever you are.
So I mean, in the beginning here, when you look at the late 90s here in Asia, A lot of the buyout funds that started doing buyouts in Southeast Asia did the initial one or two funds with straight equity in the deals. Why was that? Not because they didn't want to use debt, but there was no one there.
The banks were not ready. There were certainly no private debt funds out here yet in the late 90s. So now fast forward to 2024, no issue. You find a decent asset.
You basically decide you want to use debt. to acquire the asset, you will find debt in most Asian markets, I would argue. And interesting when we're talking about, so if we look at venture capital specifically, we're bringing out a macro report next week, which looks at some of the geographies, the macro trends, size of market, et cetera. If we characterize venture, and I'm putting it crudely, that the Middle East is about 10 years in its evolution. I would say Southeast Asia, maybe 15 to 16. If you look at some of the early VCs, Africa probably five years in its maturity.
When you look at the actual structure, you have Singapore, which is the financial hub, the operating hub. And then obviously it's not large enough as a scalable geography. So you're having to operate in Indonesia, Malaysia, Vietnam.
When you looked at the Middle East historically, a lot of people based in the UAE operating in Saudi, then operating in the Levant and in other geographies. Scale in venture has always been the name of the game. But we're now going through somewhat of an economic downturn where actually some of those challenges come to fruition.
What from your research, your insights, your conversations are learning lessons that we can take from the Southeast Asian journey and trajectory that maybe some of the people here in the Middle East may not be aware of? And I speak to a friend of mine, Elie Habib, who is the founder of Angami, who famously said. we have a superpower here in the Middle East that we can predict what will happen in the next couple of years or the next couple of months, because you can see what happens in the US and it's likely to happen six months retarded here in the region. And similarly, if you look at Southeast Asia, you could probably have an indicator of what's happening here.
So I'd love to get your perspective of either learning lessons, longer term or short term kind of trends that we should be aware of here in the region from the Southeast Asian experience. So, I mean, OK, let me let me kind of like unpeel this a little bit. So starting up on top, I think there is it's very clear that ultimately as a as a region, as a as a founder, you have to build good companies that are well structured, being very much aware of what is happening around you. So being aware of, for example, changing consumer tastes.
directional movement of people, so people moving away, people moving in. What attracts people to the region? Take for example the Middle East right now.
What is welcome in certain regions? And here, I mean in Southeast Asia for a long period of time, everything was consumer focused. It was very much consumer focused, which ultimately get a lot of people excited, because a lot of money went into consumers. But because we were in a time where GDPs were growing at 8%, 9%, 10%, it wasn't really important to pay attention to the price level, the cost level at which you were producing.
So everyone was excited just on the revenue side. So I would argue, build good companies, keep an eye on margin. Do not ignore, do not get too carried away just on the revenue side.
At one point, cost will matter. So try to keep an eye on building a solid company. Once you build good companies, a good company will always be investable. Because again, you don't know as a founder where certain trends will go.
Do you want to be bought out by a strategic in five years time? Most founders won't really have an answer to that, right? Will it be more advantageous for you to go IPO?
Again. That may not be your choice, right? If we're in 2008, you're not going IPO. It doesn't matter how good a company you built.
So then nevertheless, if we're in 2014, you should consider public markets. Why not, right? Again, there are local comments to be made around it. I'm keeping it generic. So I think what is really, really important is to build good companies that cater to the needs of the local population, right?
So and thereby... you will build your own products, your own ecosystem. That doesn't mean you shouldn't keep an eye on what's happening in the US, in Europe, in China, in India right now.
India particularly, I think it's really worthwhile keeping an eye on right now as the potential, yeah, arguably the next growth place here in Asia. So I think it's really, really important that you just build good businesses. Then basically you will find investors.
whatever stage of investors you may need, whether this is a venture fund initially, whether it's a growth equity fund, or whether it's a buyout fund. And then if your country has built an ecosystem that's suitable, you can do all that at home, or at least in your region. But if not, then you have to have as a founder, the awareness of where you should go, where would be the best home for your next fundraising round, for your next IPO, and so on. And those things are not static, right? I mean, it changes all the time.
I mean, again, China, the perfect example. I mean, just look from 2015 till now. There are various stories were written along the way. And quite a few of the developments surprised.
Surprised founders, surprised investors. I remember when I came to Singapore last year to meet with many of the leading VCs. I'm going to share an insight that was given to me, and I don't mean to put off any of the founders, but it was pretty blunt.
And it was a 15 minute coffee chat said if a startup is not operating in the US, China or India, then they're wasting their time. They'll never get to scale. And that was his view and opinion.
So I don't know if you have a thought with that or not. But one of the things that you mentioned was margin. In the liquid years leading up to 21 and 22, for instance, in the Middle East, companies would operate in every geography, regardless of margin, because they wanted to get to scale and users base. Now they've all retracted from many of the geographies where that doesn't make sense.
Is there an opportunity for cross pollination across continents where companies are based out of Singapore, operating in Indonesia and then exploring the UAE and Saudi Arabia that have much more? much higher GDP per capita and opportunities for growth. That is not a Southeast Asia play, a MENA play, but a cross-continent play to counter the argument of you have to only operate in China, India and the US.
Yeah, it is. It's a story that's told very often, right? And it's a good argument if you define regions purely by GDP, right?
Southeast Asia can stand on its own next to China, India, and so on. Nevertheless, let's not forget, Southeast Asia is many, many countries. And if you have capability to operate in Indonesia, which is a big market on its own, going to Thailand is a very different story. It requires a very different behavior.
Consumer tastes are very different, again. And so I think Southeast Asia is... much more complicated than we give it credit to.
So and all the funds that are operating in Southeast Asia deserve a huge amount of respect because things do move very quickly to here. Right. Indonesia continues to do well. Vietnam was the big winner during COVID, post-COVID, and the Philippines as well.
There are stories written around it. But again, even as an investor, It will require for you to have boots on the ground in those countries. You may base your headquarter in Singapore, but investing from Singapore only without boots on the ground in the whole of Southeast Asia, I think, would be very, very complicated.
So I'd be very suspicious around that. So you need boots on the ground for any of the countries. And people argue that in India you need boots on the ground, in China you do.
I would argue the whole of Asia. Usually when I'm being asked to give a talk on Asia, I usually start off with a map to show people what Asia actually is. And there is no such thing as Asia. So that's what I came to. And we can have a long conversation on Thailand and the Philippines and Malaysia and Singapore, and it will be a long conversation because it deserves to be dealt with on a very granular level.
So I think it's complicated, right? So I think the same applies to the Middle East. And I haven't spent enough time there yet.
But especially if I take the Middle East and North Africa, which, again, from a GDP point of view, from a population point of view, demographics point of view, great story on paper. Does the reality really play out like that? I think we're still waiting for a use case to be written.
Yeah, no, I completely agree with that. And obviously. the cracks come out when there's an economic downturn when there's lots of liquidity everything sounds wonderful i think that's a perfect segue to the question of um what are lps saying right now um and interestingly i mean i've done my research but obviously temasek gic have been big funders big supporters of the ecosystem based out of southeast asia of course there's many others whether family offices and corporates here in the mina region large sub-wealth funds, both in Saudi Arabia and the UAE and even the wider region, have been big protagonists. But at some point, if you don't get your return on investment, then focus may shift elsewhere. What have you been hearing from LPs and the interest in venture and private equity from that perspective in emerging markets?
Again, there are different views, right? And obviously, as you mentioned, some of the sovereign wealth funds and some of the endowments obviously are much, much more patient capital. So they are less chomping on the bit.
Then again, family offices are usually quite impatient capital. And let me just take a step back. In general, comment on Asia, Southeast Asia, now anywhere in Asia, has really been from the LPs. Show me the money.
Okay. So it's all you're writing up there. You have good companies. You have good portfolios.
There are good, basically good valuations that are being written up. But where is my cash on cash return? And ultimately, I mean, for you as an LP, just for context, again, back to the definition early on, you are ultimately purely focused on cash on cash returns.
I gave you a million. You gave me 1.5, 2x, 3x back. or in what time period, which then drives my IRR. So ultimately, we need to see more exits. And why is that important?
The moment I can show an exit, even as a single fund, the moment I can show exit, my conversation about fundraising for the next fund becomes much easier with my LPs. Without giving money back, without showing exits for earlier funds, It is really, really complicated to keep on going back to the LPs and say, look, we need to, we're raising our next fund. Do you want to re-up?
Do you want to be part of that fund? So, and that's really complicated. So we just, we need to see more liquidity.
There's no doubt here. Now, you know, can you, now the question from the other side, you said at one point investors will move their wares elsewhere. In theory, yes.
Nevertheless. When you're sitting, whether you're sitting in Canada, whether you're sitting in the Netherlands or in the UK, and you're arguably running a global portfolio, you cannot not invest in Asia. So that would require a substantial rewriting of your mandate as an investor.
And as a pensioner, you may question that, right? As a stakeholder in a pension plan, for example, why are we ignoring that part of the world? If you nevertheless.
consciously have a mandate that says we want to be part of emerging markets. Again, the only way to get into emerging markets, because usually public markets are very nascent in emerging markets, is through private capital. Does it mean you're not going to see the same liquidity that you're seeing in buyouts in Europe and North America? Very likely.
So you just have to, it goes back to the kind of, you know, the mindset on risk appetite and risk capacity. You just got to be mindful of that. And I really want to double click on this point. I'm actually right now in Abu Dhabi, and thanks to Hub71 hosting me here for today. But we're doing a roundtable discussion outside of here to discuss capital markets and the role of IPOs and exits here in the region.
The struggle that you see in Southeast Asia is somewhat the same here. Magnet's data shows that over the last 10 years of investments, less than 6.5% of all companies that have raised funds have exited, and I can't even speak to the quality of the exits. from that perspective.
And yet when you speak to government and the wider ecosystem, and it is very interesting when it depends who you're speaking to, obviously power law for a VC, it takes one unicorn to pay off the rest of your portfolio. But there seems to be an obsession with IPOs and the opportunity for IPOs, whether it's here or in Southeast Asia. And having looked at the data in Southeast Asia, remarkably, there have not been as many as I had anticipated. companies that can IPO. And therefore, my question to you is, one, is that a flawed obsession, whether it's unicorns and the pursuit of IPOs in emerging markets?
Are we ready for that? And two, you say that we would like to have more exits. Well, what needs to change, either psychologically or promoting the ecosystem, for us to start seeing more exits and return of investments to founders? employees and VCs, as well as governments in the emerging markets. Yeah.
So let me start with your earlier question. So is this kind of like a flawed view and looking at it? I mean, I know that 2020, 2021, with the irrational exuberance around fundraising, made people, got people used to seeing one unicorn minted after the other. Let's just be clear. A unicorn, by definition, hence the label, is rare and should stay rare.
So no, you should not, as an investor, anchor your return expectations on a unicorn. You mentioned power law. I don't have a whiteboard here, so otherwise we could draw it.
But absolutely, power law, meaning that very, very few exits are responsible for 97% of the money given back to investors. That is the reality of a power law. So, which requires a certain risk appetite, right? Because, I mean, there's a very high chance you may not be part of those investments, and hence you're not getting the returns that you're asking for.
So, number one. Also, let's also not forget, and again, now the anchoring on IPOs. So whilst it is all wonderful to be a founder and obviously everyone has the picture of the Nasdaq in mind where you ring the bell and the confetti comes down and all the good stuff. So there's a whole generation of entrepreneurs in China that was really, really anchored on that. All they wanted is go IPO.
Let's just be realistic. A startup is not a sprint. A startup is a marathon. What does that mean? You got to manage your investors as they come in and as they step out.
Your seed investor is unlikely to be around when, if you go IPO. So back to the ecosystem again. You need at any point in time, let's say in 2010, you raised your seed round. By now it's 2024. You will be many, many rounds down the road.
Your seed investor is likely not around anymore. Why? Because he or she got to year nine or 10 of their fund.
and likely sold out their stake to the round C or D investor that came in. So no, an IPO is not needed to return money to the LPs. But what is needed is exactly the ecosystem we were talking about. So you can consistently raise money, and you are a company that can raise money.
You can stand your ground in due diligence when you're pitching your wares to your round D investor. At which point you're not a startup anymore. You're a scale up. You're having very different conversations with your round D investor that you had with your round A investor.
So I think that is really, really important. And there's a huge amount of education still to be done. And I think young ecosystems like the Middle East have to make that also clear to their entrepreneurs.
So you manage expectations for everyone around the table, the LPs and the funds. The funds usually quite aware of that. And then also for the entrepreneurs. So I find, especially when entrepreneurs get to the point where they're scaling their businesses, it's often not clear to them that they have to keep a very, very close eye on your cap table.
Keep your cap table simple. Keep it clear. Be mindful, your investor from three, four, five years ago, which year of the fund are they in? When you're going out for your next round, chances are they are asking you to raise a bit more to sell some of the secondary shares. So I think...
All those things have to come together. So it's not just one or the other. But no, don't get anchored on unicorns and don't wait for the IPO.
And on the second part, the kind of catalyst for M&A activity. Catalyst for M&A activities. God, where do I start? So let's go to Silicon Valley, right, where you have.
all the way back to, let's go all the way to the 1970s, right? Startups that by now are very established incumbents. Even a Google, it by now is an incumbent. Nevertheless, it's very mindful of the ecosystem, the role it plays inside that ecosystem, and obviously becomes interested in certain innovation that they themselves don't produce anymore, but are seeing outside.
in startups, often done by alumni out of those companies. So that connection here is really important. And then obviously having those successful entrepreneurs, those few that actually did go IPO, then stepping back into the ecosystem and saying, I'm interested to be an angel. I may join the next VC fund as a partner looking for, I don't know, consumer or AI in that spot.
Again, It requires time, right? And to be fair to Asia, especially Southeast Asia, it's still a very young ecosystem and it still needs to evolve. We need to have those exits at one point that show the younger entrepreneurs that it's possible to do so.
And then that those entrepreneurs that have exited come back and contribute back to the ecosystem. So I think it's really, really important. And unfortunately, it's a game for the patient.
which usually when it comes to capital, there are not many patient investors out there. Yeah, and I was going to say, there's a lot of people can tell you how hard it is to start a company. There's quite a lot of people that can tell you how hard it is to build a company. Unfortunately, there's not so many people that can tell you how to exit a company and actually want to go back and tell that story. So that's part of the challenge.
I want to open it up in five minutes to people who have any questions. So if you do have any questions, please do share them and I'll pass them on to Claudia. Before we do that, I have two questions out of academic interest and then personal interest. One. One of the things that we've been doing at Magnet is obviously looking at kind of the wider macroeconomic environment that we're in.
And one of the things that I found very challenging over the last two years is if you look at the public markets, you've literally been consistently hitting record highs in the public markets. And yet when you look at venture capital, private equity transactions and private capital markets, we're seeing a complete slowdown in investments from the peaks of what we saw in 2021 and 2022. I was speaking to a leading head of one of the banks here in the region. And he says, Philip, the problem is that you try to put yourself into the shoes of a founder who is also looking at the public markets.
Public markets are forward looking and have taken into account current macroeconomic environments, whereas the founders and the private capital space is actually dealing with the here and now. So what's your take on how we can resonate with the public market euphoria versus the. private capital challenges that people are facing and any anecdotes that you have from that?
Public versus private has always been the conversation, and investors will look at performance obviously in both of them. Nevertheless, but let's be also very clear, the private markets are continuing to grow in terms of AUM globally. We have just a conference early on here in Singapore.
We now have 1,600 family offices here in Singapore that are based here. I mean, that is, A, a large number, and B, by looking at history, what we've seen, startup family offices or new family offices are heavily biased towards private markets. So when I look at the public markets, thanks to share buybacks and various structures out there, public markets in terms of growth have a... best gone sideways.
So and for some LPs, this is a huge concern. So there comes a point where you're saying, OK, how relevant is the public market of a specific country? Does it still reflect the growth that's happening on the ground?
So it will be interesting to see how this is being how that story will play out. But it is a conversation amongst LPs right now. So I think the competition will always be there.
And so I had a conversation last week. and actually related it to my class this morning with an LP that basically said, look, we just love private markets. Why?
Because just by having it in our portfolio, it moderates volatility. Obviously, because by definition, because you're only doing quarterly updates, you're not writing your startup even up and down like you do your NVIDIA shares. So the lack, the moderation inside the portfolio.
I think it's not to be underestimated. There are some investors that appreciate it. There are some investors that don't, right?
So I don't want to generalize for all investors, but it has to do with that. Yes, I mean, public markets are much more, succumb much easier to what I call irrational exuberance. Usually, we pay the price for that. Now, the one time where we saw the irrational exuberance you mentioned was 2021, 2022, where we hit...
one record after the other, a trillion dollars worth of deals done. And so, I mean, it was just incredible, 2021. And unfortunately, we're kind of suffering a little bit right now with the hangover. Partly, though, because we're anchored on those valuations we saw, those unicorns that we saw in 2021. And it's just hard to adjust your expectations, usually on the seller side. But it will happen. I'm confident about that.
And selfishly to ask the question, I mean, we've seen BlackRock acquiring Frequin recently, which is a great milestone within the data space. I mean, for those in the audience to understand, what is your view of data transparency and the opaqueness of data in the private capital markets compared to the public markets, which creates a massive challenge for investors, founders and transparency of information around that space? I'd love to hear your thoughts and even suggestions on how that can be improved.
Yeah, I mean, putting just my academic hat on, yeah, I would love to have more transparency on data. It would make my life a lot easier just for the work that we do in academia. But look.
It is private, private markets, private capital with big red capital letters of private. So that's just the nature of the industry. I mean, unless we, and obviously data providers like yourself, like Prequint are doing a great job, but the data that is being given to them is being given to them voluntarily, right? We have no regulation that forces anyone that raises public funding to disclose it. And to be honest, I mean, some of the investors like that, too, to some extent.
Would we benefit from more transparency? Absolutely. And I argued that already in my book in 2017, where I said basically, look, the industry has grown so fast. When it was a cottage industry, it was OK to be reasonably private.
I think it's time to explain a bit more what is being done, how it's being done. So. There's no one benefits from an investor that goes into an asset class and only finds out after the fact what they have signed up to.
So to me, I mean, transparency means that you have better investors, more patient investors, and that will ultimately basically help the industry overall. So, yes, I would ask for more transparency. And when we've seen like Ilpa have done a fantastic job.
the Private Markets Association has done a great job. So there are efforts going on right now. But yes, we're nowhere near where we are in public markets.
Couldn't agree more. Cool. I'm going to try and get through as many questions as possible. So this is coming from the audience. There's a question here.
Mohamed Qadhuda is asking, thank you for the session. Within the MENA context, that Dawal and Saudi has offered growth startups the opportunity to access elevated multiples and liquidity. at relatively early stages.
More specifically, we've seen a handful of companies foregoing series D, E and F to successfully list on the local exchange. Can you discuss the dynamics of having a robust and accessible public market in an emerging market region, i.e. should we expect regional mature startups to migrate towards IPOs in Saudi Arabia? Okay, that's a good question and I think the it is worthwhile having a look at some of the Asian exchanges in their history around it.
So let me just unpack a little bit what define a successful IPU. In most people's minds, successful IPU means you have that proverbial pop on day one, meaning you list at 100 and your share price finishes the day at 140 or 150. Okay. That is not a successful IPU.
That may get the media excited and gives you something to talk about in the evening. But that's not a successful IPO. A successful IPO means that your shares are consistently trading at reasonable valuations, ideally increasing valuations, yes, that they have liquidity. That means when I want to sell my shares, there will be a buyer there.
So and ultimately, the exchange at which you are listed understands what you are doing and has analysts that are working with the exchange, at the exchange, that can help basically promote the company and the shares. So I think as a company, and it's literally, it's bespoke, you want to be careful when it comes to the conversation on should we list yes or no. Depending what exchange it is, you want to have a certain size. You don't want to be too small before you go on to an exchange.
You want to have an exchange where arguably you would be well-treated, meaning the investors understand what you're doing. There are plenty of analysts writing about you and you have liquidity. There's nothing worse than going IPO and not having the liquidity that you need.
So I would basically test the exchange based on that, which is complicated if it's a very new exchange and doesn't have much history. But have a look at what companies have been listed. You don't want to be too different from those companies. You want to basically make sure you want to have a conversation with your investment bankers. they can usually give you a pretty good idea on what is being what is liquid on the exchange.
So I think it's a good question, but it's really there's no one sentence answer to the to address it. Fair enough. I'm sure all of these questions can be one hour webinars. What are the biggest challenges in developing private equity markets in the Middle East and Southeast Asia?
And what would Professor Claudia wish for in order to improve both markets? I would wish for, starting from the back, I would wish for liquidity. I would wish for exits because it would put the regions on the map with international investors.
That's just a measure that they have to see liquidity. I would also wish, though, to make the ecosystem work for more investable companies. So ultimately, I would start at the beginning and try to educate the population, the young population or the more senior population on starting. what it means to start an investable company.
The moment you have an investable company, there will be investors coming. They may be local, they may be foreign, there will be follow-on investment. So, but make it clear that building good companies is ultimately the start of a thriving ecosystem. Can you comment on any of the trends from MENA investments into private markets in Asia, Southeast Asia particularly, and vice versa?
And I guess anecdotally, I mean, we've been trying to track the data for VC, but anecdotally, the growing interest in the cross pollination into both markets. Yeah, I mean, absolutely. I mean, we have to we have to connect the markets.
Globalization is remains remains a thing. And obviously. The markets also can benefit from each other. So I just hosted two months ago for my students a panel that was talking about Asian companies connecting with African companies and where does the value lie. Now, that's a huge task, right?
Just looking at the size of the locations. But that's potentially also, back to your earlier question, a space where governments can play a role. So can we have trade missions that can go to those respective countries?
Take basically either your startup or your growth companies or your potential buyout targets and let's go and have a look. Are there connections to be made? I did this many years ago between family businesses. Family businesses in Asia versus family businesses in Europe.
It's not obvious when you're a family business, you would like to engage with more families in other regions, but how do you find them? if you don't have the ecosystem. So there is, I think, there's room for improvement.
Absolutely. We need to connect the regions and we need to ensure that at every level, whether it's investors, funds, or companies and entrepreneurs, that they learn from each other. My two cents is that that is probably one of the least utilized tools of trade, trade fairs or trade visits to different geographies. For the M&A question, when you talk about catalyzing M&As, go meet your counterparts in different geographies. under the guise of a geographical visit by a government.
Very conscious of your time. And I'll ask the last question before I let you go to class. We discussed this very briefly and we didn't really go into it in too much detail. But what do you believe is the opportunity for private debt asset classes developed across emerging markets and specifically in Africa is the question. And then I will very kindly let you go.
It is, it's a huge opportunity. But let me just be very clear. Ultimately for any investment vehicle, It is horses for courses, right? So debt, in whatever shape or color, requires a certain amount of cash flow because debt at one point needs to be serviced.
So we cannot basically overload companies with debt, whether they are startups or whether they are mature companies that they ultimately cannot handle. I mean, that is just a recipe for disaster. Then we better start working on our.
quasi chapter 11 and bankruptcy laws to help them basically work this through. So I think it's horses for courses, but overall, if you want to build the ecosystem, equity is wonderful. Risk equity, risk capital is fantastic, but you will need at one point, you will also need debt.
And there, whether it's private debt, whether it's the banks that are being kind of like brought up the scale. and to contribute to it. All of them are important and they all matter.
I have a hunch that some of the places in Africa may, and obviously again, same argument, Africa is a big space, where do we go? There are certain countries that may start with private debt and later on only go to equity, but others may start with equity and then later on add on private debt more. Ciao, Jim. Thank you very much for all of your time. We didn't even get to discuss your recent report, but I want to do a shout out for the MENA evaluation.
or with the gender fund of funds and it's a great piece talking about the haircuts to global markets and the trends that are happening globally and here in the region so i just want to make sure that we plug that and we'll share that as part of the follow-up email that gets sent tomorrow but personally this has been extremely insightful i can't thank you enough for all of your time and i appreciate it and i hope it was useful for the audience i think this is an area that continues to grow that needs education exactly as you mentioned um and i personally look forward to hopefully grabbing a drink or coffee with you in FII, if not here in the UAE, the next time you come. For sure. See you in October in the region.
Thank you. Thank you very much, Philip, for having me. Thank you.
Bye-bye. Thank you. Take care.