The relatively new generation of entrepreneurs has probably only known the “easy money” era, a time that has also made investors more competitive, less meticulous in their decision-making processes, and more rushed to close deals. All this for a piece of the action of the last decade or so. All for a promise that now seems hard to keep.
Times are changing and investors have now come to realize that declining market liquidity requires a new and different strategy for assessing investments.
Titan Capital Partners, which has just announced a new $100 million global fund, claims that the rapidly changing reality can also be an opportunity. As liquid assets are a particularly important safeguard to have, they base their investments on this key factor.
“A transactional strategy allows us to benefit from market volatility. Stakeholders place a premium on liquidity that is readily accessible rather than profits12 years down the line from a poor M&A deal,” says CEO Ben Topor. “We monitor thousands of data points pertaining to each of the shareholders in the companies we have our eyes on; that, along with knowledge of companies’ share structure and liquidation preferences, enables us to forecast and predict secondary situations faster than others.”
Through its secondary program, the fund plans to address the need for shareholders’ liquidity. Secondary transactions serve as an important tool for realigning and balancing shareholder bases.
According to Topor, the present dynamic leads different investors to put pressure on the CEO and the founding team and leads to premature sales. Secondary transactions, he insists, make it possible, now more than ever, to internally align these conflicting interests.
The fund is expected to execute between 10 and 15 transactions, with an investment of up to $15 million per transaction. It focuses primarily on software and Internet companies that are raising a Series B round or higher, and has rigorous financial investment criteria that include only companies that have at least $10 million in sales and at least an 80% annual growth. “We are very selective about the companies we team up with, and therefore examine financial benchmarks that are hard to hide.”
One of Titan’s most notable investments is a $14 million investment of both primary and secondary capital. in Verbit.AI, Israel’s fastest-growing tech company.
“The secret in venture capital,” says Topor, “is access. Structuring flexibility and a combination of investments in both company and fund vehicles is a significant multiplier in the market.”
Unlike traditional funds that primarily deal with management teams, they foster relationships with shareholders and limited partners. “We provide liquidity to angel investors, funds, LPs, founders, and employees who wish to obtain liquid assets unrelated to the performance of the underlying company.”
The Russian Affect
Topor claims the secondary market is heavily affected by the politics that are inevitably beginning to reshape the market: “One of the interesting trends we witnessed in the last few months that affected the secondary market has been the changes in regulations against some venture capitalists. The Chinese government is now discouraging foreign investments in funds and companies and more recently, we heard about the global sanctions against Russia. Due to these circumstances, we have seen an increase in demand for liquidity in Chinese and Russian investments.”
Having said that, he claims that shareholders with links to Russian investments are now exploring their strategic options. “We also meet management teams of tech companies that are interested in reducing the involvement of some of the Russian related investors. We have not witnessed the “forced sellers” dynamic so far,” he says, referring to a situation in which investors are interested in selling at any given price.
With an overflow of evaluations of the past few years, the fund suggests that there’s a new method for investors to determine the intrinsic value and the right valuation for entry. “Too many funds are passive and have strict valuation policies that limit their flexibility. We do an up-to-date valuation of the company and don’t just rely on the last round. We move very quickly, taking a record two-three days to make a decision once we have the necessary information. Most importantly, the fund’s partners personally evaluate the companies and funds and do not delegate the tasks to junior analysts with no personal connections or experience.” Topor adds, “We utilize historical, cycle resistant, publicly comparable companies to analyze companies in every area of expertise. We focus on the software and internet industry that has historically traded between 1-5 revenue multiples depending on growth momentum and profitability. Today public valuations have dropped from 12x forward revenue to 5x or less since the highs of October 2021. Going forward,” he adds, “we expect the market to continue to decline to provide us with exceptional buying opportunities in the year ahead.”
They say that to be hopeful means to be uncertain about the future, to be open to possibilities, and to be dedicated to change from the bottom of your heart. When it seems like the financial future is rather unpredictable, it might be a good opportunity to rethink strategies, assess investments differently and set new objectives. The future might come faster than you think.