Venture Capital Q&A: Natalie Hwang, Apeira Capital Advisors
When is a hedge fund manager a venture capital fund manager? When it’s Apeira Capital Advisors. AlphaWeek’s Greg Winterton spoke to Apeira Capital Founder Natalie Hwang to learn more about her firm’s approach to generating returns in later stage venture investing.
GW: Natalie, Apeira Capital shorts private company valuations as part of its overall strategy. Tell us a little bit more about how this works, exactly.
NH: We are a long-biased fund but can leverage derivative transactions to synthetically invest in opportunities that may allow us to benefit from both falling as well as rising prices as we seek to capture both positive and negative value across the broader venture ecosystem. More specifically, we internally originate our own synthetic transactions to express either long or short directional interest in specific companies or even potentially a basket of companies to create the native capability to trade directly within private markets. These transactions typically involve two counterparties who have agreed to underwrite the opposite P&L exposure on a bilateral trade, which ultimately expands our ability to invest on a multi-directional basis, as well as the range of liquidity options available to us beyond what secondary markets can offer or what companies can achieve on their own timeline.
GW: You went for the open-ended approach to your fund structure, something else that’s non-traditional for a venture capital firm. What’s the rationale there?
NH: We launched as a series limited liability company to provide our investors with multiple avenues to participate in our investment program, be it on a full strategy, sub-strategy or deal by deal basis, so that we can provide some of the benefits of customization inside the context of a single vehicle as we strive to meet a broader range of objectives for different segments of clients.
GW: 2022 saw private company valuations fall in line with their public equity cousins. What’s the outlook for the shorting part of your strategy in the coming 12-24 months when start ups have given back a good chunk of their value this year?
NH: We see significant opportunity for Apeira to remain acquisitive as we believe the current environment presents a strong pipeline of opportunities to capture both positive and negative value. In terms of our long-only portfolio, we believe there will be an increase in attractive investment opportunities that will be priced at more reasonable multiples using more rational baseline metrics. We continue to focus on investing in high quality companies that have demonstrated tangible performance, while simultaneously focusing on opportunities that have the potential to turn periods of volatility and market dislocation, like the one we are navigating through today, to our advantage by capturing negative value.
GW: Moving onto the longs – and more traditional venture capital investing. Are there any particular sub-sectors of the broader technology sector which you like the look of, and why?
NH: We like investing in more fundamentally defensive or protected sectors that are better able to withstand market volatility and inflationary pressure. In particular, the last two years have been years of open-ended tail-risk, highlighting the importance of making measured equity investments in fundamentally sound businesses that offer relevant products, services and offerings in nearly all economic conditions. These businesses are better positioned to maintain strong pricing power to preserve revenue growth and profitability even during periods of market downturn. We have exposure, for example, to tech companies operating in the consumer staples, space and telco sectors. We have been pleased with the share price resiliency of the companies in our portfolio, which continue to trade upwards even during a cycle where many companies are beginning to consider the “flat round” to be the new “up-round,” or are otherwise experiencing multiple compression in primary and secondary markets. We also like sectors that involve massive markets that are sized in the trillions, which is an important consideration for later stage investing as the potential scale of opportunity in the public markets needs to be significant enough to position our portfolio for growth in value at high rates.
GW: Your firm and fund is nearly two years old now – your journey so far has been something a baptism of fire given that 2022 saw all kinds of market tumult. What’s been the biggest challenge for both you and your team in terms of being a newer fund trying to raise and deploy capital and what’s been something that’s gone better than you expected?
NH: We have been gratified by the support we’ve received from our investors who were early to embrace and recognize the value to our multi-directional approach. It has taken more effort on our part relative to what we would expect to expend for a more traditional offering to acquaint the market with a new paradigm of investing and to catalyse adoption. Our investment of effort has been worthwhile as there has been very little innovation in private markets investing and we believe it is important for fund managers to push the boundaries of how we invest, align, and adapt to changing market realities, particularly for an asset class that is focused on championing innovation. We believe that recent market shifts have also sensitized investors to the benefits of dynamic new strategies that create more opportunity for generating uncorrelated and durable returns. Our focus is to seek to serve those clients who align with our adaptive approach to investing and for whom we can generate transformative versus accretive value as we strive to occupy a unique position across the value chain of providers.
In terms of what’s gone better than expected, we believe that the current window for capital deployment presents tremendous opportunity to invest in higher quality companies at competitive if not depressed entry prices. Although 2022 has presented unique challenges to investing, we believe that history has also shown that it’s often a good time to lean in when investor sentiment is running weak. We are excited for our current investments and to grow our portfolio as we seek to support daring founders in their mission to build impactful companies.
Natalie Hwang is Founding Managing Partner at Apeira Capital Advisors
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