Saints Capital flourishes during a downturn
The VC liquidity drought drives venture capitalists to consider direct secondary markets
Investor interview by Bambi Francisco Roizen
April 14, 2009
There are few to no exits for venture-backed deals and limited partners are having a tough time making capital calls. All this is good news for direct secondary market players, like Saints Capital and Ken Sawyer, the founder of Saints Capital.
BF: U.S. venture industry is suffering its worst liquidity drought. Has this made VCs more open to doing deals with you?
KS: I think they’re becoming more open to doing direct-secondary transactions. This market hasn’t been around for long. As a venture capitalist, you typically think of exits in two ways – sell it or take it public. It’s been only two forms of exit opportunities.. your optinos are few and far between. As a result, people are saying much like the buyout market, which has both strategic exits.. in the buyout market during the heyday were form one buyout firm to another buyout firm. Part of our rationale is that this is a third leg of a stool of an exit environment. You too can sell to another investor much like the buyout world has done for years.
BF: What percent of exits are you accounting for?
KS: In the public markets, one super smart investor – a hedge fund or mutual fund – sells to another super smart investor. It’s about 98% of trades in the market. In the buyout world, one says between 25% to 50% of exits are one smart private equity investor to another private equity investor. We think that in the venture market, less than 1% of exits are from one venture investor to another venture investor. We think there’s an opportunity that it can go from 1% to 10% of the exits from venture firms could be done on a secondary basis.
BF: Let’s talk about pricing and valuations. In your letter to your investors, you said that you thought the prices would continue to decline. When you talk about prices declining, are you continuing to see that and at what stage do you see the prices declining?
KS: I think there’s no question that the Nasdaq market fell about 40% in 2008. In VC pricing, when you think of discounts or valuations falling, you have to think about last-round valuations. If the last price was when Nasdaq was done mid-2007, undoubtedly, the valuation is lower. We’ve bought at significant discounts at last round valuations from ’06 and ’07. We saw an average of our purchases at 60% discount from ’07. That’s not materially different than the price you would have paid for eBay back in ’07 and where you’d buy it today.
BF: Which sectors have taken the brunt of the hit?
KS: Semiconductors have been hugely hurt due in part to high-capital requirement in terms of funding. We happen to focus more on med-tech. The rationale for that was that we still believe the economic outlook and other countries is highly uncertain and we think in this downturn, things won’t turn around in ’09 and ‘10. We think those companies based on growth in revenue and profits will be valuation challenged for time to come. Med-tech companies are slightly less capital intensive than biotech companies. Their valuation increases are based more on clinical trial results, which are uncorrelated with the economic environment.
BF: Are you buying early stage or late stage? Where’s the value for you?
KS: We’ve always been a growth equity investor. While we have early stage companies and late-stage, for the most part we’ve been focused on growth equity and we remain focused on growth equity. We’re focused on companies that don’t have high capital needs, often are profitable, with material revenues and growing. These companies traded at 15 times EBITDA in the public markets. Those companies are often eight times EBITDA. If we can buy at a discount to those valuations, we do see those valuations expanding in a few years.
BF: Let’s talk about the dynamics of pricing these purchases whether it’s a whole portfolio or an individual company. How do you value these portfolios, particularly when you have a lot of chaff and not much wheat?
KS: We see a lot of folks saying we have a lot of companies we don’t want to continue funding. Our answer is thanks but no thanks. People recognize that as an investor, we need to invest in quality companies. We will solve a problem and provide liquidity across a whole portfolio of investments. But if all of those portfolio investments were worth zero or a lot of new money has to go into them, the price that we’re willing to pay is immaterial. We need some good companies or we’re not going to have interest in buying a bunch of companies that are worth zero.