NAOS shows nouse in going private with new fund
Specialist small- and micro-cap Australian equities investment manager NAOS Asset Management has taken its philosophy into the private markets, with the launch of its Private Opportunities Fund, for which it is seeking to raise at least $35 million.
The fund will invest in up to 20 private companies that NAOS identifies as being profitable, having a competitive advantage, a strong track record and long-term growth potential in industries that have strong growth tailwinds. It will invest in a concentrated manner and seek to provide long-term expansion capital to founder-led businesses.
NAOS chief investment officer and managing director Sebastian Evans says the new fund is a logical extension of the firm’s philosophy on managing money. “We’ve always believed that backing people who’ve shown a track record of successfully growing a business over the long term is the best way to approach stock investments,” he says.
“Typically, in our LICs, that leads us to focus on founder-led businesses, and that’s what this fund will do; provide a unique exposure to high-quality private companies with long-term growth potential, run by passionate people, who live and breathe what they do, and they really want to keep driving that success. We want to invest alongside these founder-led businesses, and help them to scale-up their businesses.”
Evans says that many high-quality private businesses want to “stay private for longer,” and NAOS can take advantage of this trend to generate strong long-term returns for its investors.
“The opportunity set in this sector is great – there are almost 50,000 private businesses with turnover in the $2 million-to $10 million range, compared to only 375 listed companies in the $5 million-$100 million turnover range. Many of the private businesses in this category need capital, whether it’s for expansion, M&A, selldown or succession, but often, their options are limited.
“They might have enough bank debt, and in any case, they don’t want to re-mortgage their house. So, even though they are great businesses, they don’t really have anywhere to turn in seeking that capital. Generally, it’s family and friends, and while they might be able to raise $500,000 or $1 million, raising $5 million-$10 million is a very different conversation, and a very different network of investors. That’s where we can come in.”
But NAOS does not want to be solely an investor, Evans says. “We want to be a partner with these firms, we want to be a trusted advisor to private businesses that we think can grow over the long term and create something very special. We don’t want to just be passive, provide capital and make money quickly through an IPO.
“There are many companies that do not want traditional private equity investment, do not want to IPO and do not want to cede majority control, but have a need for increased capital; this fund will offer these businesses patient capital and access to the NAOS network of business and advisory talent,” Evans says. “We see it as empowering exceptional private businesses, and we feel there is a real need for that kind of approach.”
The fund is open to sophisticated and wholesale investors, with a minimum subscription of $100,000, and the manager says it is suitable for investors with a long-term investment horizon of at least five years.
Lead portfolio manager for the fund is Brendan York, who joined NAOS in July 2021 from his role as CFO and company secretary at ASX-listed marketing services business Enero Group Limited, which was an investee company of NAOS.
The fund will not invest in any companies that do not meet NAOS’ stringent ESG hurdles. The exit strategy options for fund investments include IPO, trade sale, management buyout, merger and on market sale, among others.
“As is our practice, NAOS and related parties will be fully aligned with investors’ interests, and intends to contribute at least $2 million to the fund,” Evans says. “We have deep experience in small-cap and micro-cap investing – the characteristics of these markets and private markets are very similar.
“High-profile investors such as The Future Fund, Oaktree Capital, and Berkshire Hathaway are making more private investments than ever. It’s becoming a very core part of portfolios like that – but in Australia, the sector is misunderstood and very under-invested,” Evans adds.