5 Qs WITH A DEALMAKER
Happy Monday, Term Sheet readers. Lucinda here, taking over until Polina returns from travel abroad. As always, please send deals in her absence to email@example.com. (And tweet congratulations to @polina_marinova—preferably with the hashtag: #WePrayedForPolina—for running a marathon in Greece.)
We’re starting the week with a Q&A with Credit Suisse NEXT Investors, the bank’s growth equity-focused fintech shop that raised $261 million over the summer for its second fund.
A team of five full-time investors led by co-heads Alan Freudenstein and Greg Grimaldi, NEXT Investors has made investment calls equally using data from outside the firm, as well as using what is heard and submitted from within Credit Suisse’s many division.
Over the firm’s 18 years, Grimaldi and Freudenstein have made bets on firms including data-provider Market, lending platform Prosper, as well as management oversight software maker, Sapience.
In a conversation with Term Sheet, the duo chat about how they make investment calls, their first fund-two investment, and why they aren’t invested in blockchain technologies.
TERM SHEET: What’s been helpful, being part of a large banking operation, for your team of growth equity investors?
FREUDENSTEIN: We are able to do a couple of things that a typical independent fund might not be able to do. So for example we have sourcing capability directly out of Credit Suisse practitioners that are involved in those Fintech activities whether that be traders, or operations people, or back office IT people or front office accounting. Our perspective is to leverage those people globally as well to source ideas that are relevant to our space. While a lot of funds tend to have access to their own network, we think that the bank is a powerful multiplier effect for that network—especially for a fund of a size that we are.
GRIMALDI: We do have to deal with any regulations related to the banks. I don’t think it’s hindered our ability to make investments or make money, but It’s is something that we have to be very conscious of all the time.
How exactly do you source investment ideas from within Credit Suisse?
FREUDENSTEIN: There’s multiple levels of this. Broadly defined, the first is we have some institutional processes around this. About half of our deal flow come from within Credit Suisse. So we have a formal submission process online, and we have regular standing meetings once and twice a month with senior folks because they are involved with our fund or have been involved with us for years. We also have ad hoc meetings; Being an employee we have access to the cafeteria and everywhere in the building. There is also a cash incentive process to incentivize people submit ideas.
GREG: We are also traveling to various offices talking not only to senior people about where they are planning to spend money, and where they are going to invest their own capital.
FREUDENSTEIN: All of those things combined, bank people show us a lot of deals.
What is an example of an investment that Credit Suisse NEXT Investors has made using this internal bank network?
FREUDENSTEIN: Our first investment for our second fund was Sapience, a workforce productivity software. (Editor’s note: It monitors for example how much time an employee spends on their monitor and if they are for example moving the mouse around.)
They were based in India. But a member of senior management in our center of excellence there in Pune used the online submission process and said “it’s really great. We use it to manage our contracts and temps. We think it saves us a lot of money and it’s helping our productivity. They are looking to raise some capital, would you like to take a look.” So we looked, took majority control in the company, and transferred it to the U.S. added senior management from IBM, Oracle, and HP.
Let’s talk about the rise of mega-funding. As an investor in the growth equity space, has the emergence of these giants such as Softbank and Tencent priced you at all out of any potential investments? A Wall Street Journal report following the conversation looked into how more venture capital has gone into fewer startups.
FREUDENSTEIN: It really hasn’t impacted us too much. The companies we invest in are very small relative to these mega funds. We’re looking to do like $10 million to $25 million investments and they are doing $100 million, if not billions of dollars of investments. They typically take large capital deployment projects, ones that have huge capital needs such as WeWork, while we are sticking to capital light, software and business services kinds of models which are very different when it comes to customer acquisition costs or building out the brand. And the mega investors don’t seem interested in playing in that space.
Last of all: Blockchain and crypto. Its enthusiasts have often touted its applicability to the wider financial services industry—whether it be a way to speed up transactions or as a way to transparently track the flow of assets. What is your view of blockchain?
GRIMALDI: We invest in companies, and cryptocurrencies are not companies.
Separately, Blockchain is a technology like any other technology that we evaluation within the context of real solutions—so are people paying real dollars for a real commercial application? It’s still early in those days. There are lots of pilots, lots of discussion, but not a lot of mass adoption in terms of a commercialized end product. When we see a deal that fits the criteria of having a real commercial application and we think the price is reasonable, we will make the investment just like any other. So far, we haven’t seen that, though we’d love to find it.
Though some of the blockchain solutions out there right now are really expensive.
So what about investing in a crypto exchange like Coinbase (which was valued at $8 billion recently, following a $500 million raise)?
GRIMALDI: Probably not. It’s not a typical choice for us (because it’s too tied to cryptocurrency). We are looking more at blockchain-enabled back-office reconciliation, and exchange related things. But this is crypto, and we don’t really have any expertise in crypto within the firm.
THE LATEST FROM FORTUNE…
• Alibaba Sets Singles’ Day Record With $31 Billion in Sales
• SoftBank Looking To Raise $21.1 Billion Through Share Sell-Off
• PatientPop, a Santa Monica-based platform for healthcare professionals, raised $25 million in another round of funding. Leerink Transformation Partners led the round.
• Festicket, a London-based firm for music festival ticketing, raised $10.5 million in Series D funding. Beringea led the round, and was joined by investors including InMotion Ventures, Channel 4’s Commercial Growth Fund, and Lepe Partners.
• Eximis Surgical Inc, a Louisville, Colo.-based medical device company, raised $7.5 million in funding. Questa Capital led the round and was joined by Venture Investors.
• Idelic, a Pittsburgh, data and analytics platform for safety in the transportation industry, raised $2 million funding. Bain Capital Ventures led the round and was joined by investors including TDF Ventures, SaaS Venture Capital, Birchmere Ventures, and M25 Group.
PRIVATE EQUITY DEALS
• Vitrek, a portfolio company of Branford Castle Partners, acquired XiTRON Technologies, a San Diego-based maker of precision power test and measurement equipment. Financial terms weren’t disclosed.
• An affiliate of Vista Equity Partners acquired Apptio, a Bellevue, Wash.-based business management system of record for hybrid IT for $1.94 billion.
• Mercer Advisors Inc, a Genstar Capital portfolio company, acquired Sigma Investment Management Co., a Portland, Ore.-based wealth management firm serving high net worth clients in Pacific Northwest. Financial terms weren’t disclosed.
• L Catterton Asia and Mitsui & Co, Principal Investments (MCPI) invested in Owndays, a Japanese retail eyewear brand. Financial terms weren’t disclosed.
• Motive Partners acquired a controlling stake in Lucht Probst Associates GmbH, a Frankfurt-based software and advisory services firm focused on the financial services industry. Financial terms weren’t disclosed.
• Stada, a German drugmaker, and Angelini, an Italian healthcare firm, have been shortlisted to make final bids for Bristol-Myers Squibb’s $1 billion French over-the-counter drugs business, Upsa, Reuters reports citing sources. CVC Capital Partners and PAI Partners have also made it to the list. Read more.
• Bristow Group, a Houston-based helicopter provider, acquired Columbia Helicopters, an Aurora, Or.-based service for heavy-lifting helicopters, in a $560 million deal.
• Lia Diagnostics, a Philadelphia-based flushable and biodegradable pregnancy test maker, raised $2.6 million in funding of a $3 million goal. Pink Ceiling alongside existing investors participated. Read more.
• Boat Rocker Media, a Toronto-based entertainment firm, acquired Matador Content, a Los Angeles and New York City-based content production firm. Financial terms weren’t disclosed.
• Kofax, Inc. acquired the document imaging division of Nuance Communications, a Burlington, Mass.based AI firm.
• Legacy Housing, a Bedford, Texas-based home manufacturer, filed for a $69 million IPO. It posted revenue of $128.7 million in 2017 and earnings of $26.4 million. B. Riley FBR and Oak Ridge Financial are underwriters. It plans to list on the Nasdaq as “LEGH.” Read more.
• Moderna, a Cambridge, Mass.-based biotech startup creating medicines based on messenger RNA, filed for a $500 million IPO. It posted revenue of $205.8 million and loss of $269.8 million in 2017. Flagship Pioneering and AstraZeneca back the firm. Morgan Stanley, Goldman Sachs, and J.P. Morgan are underwriters. It plans to list on the Nasdaq as “MRNA.” Read more.
• MOGU, a Hangzhou, China-based online fashion platform, filed for a $200 million IPO. It posted revenue of $69.4 million and loss of $181.5 million in the year ending March 2018. Tencent (18% pre-offering) and Hillhouse Capital Management (10.2%) back the firm. Morgan Stanley, Credit Suisse, and China Renaissance are underwriters. plans to list on the NYSE as “MOGU.” Read more.
• Cable One Inc. agreed to buy Clearwave Communications, a Harrisburg, Ill.-based operator of high-capacity fiber networks, from Stephens Capital Partners LLC. Financial terms weren’t disclosed.
• Aurelius Equity Opportunities acquired Hellanor, a Norwegian automotive automarket wholesaler, from Nordic Forum Holding A/S. Financial terms weren’t disclosed.
• LibreMax Capital LLC acquired Trimaran Advisors, a U.S.-based investment manager focused on managing managing about $3 billion in collateralized loan obligations, from KCAP Financial. Financial terms weren’t disclosed.
FIRMS + FUNDS
• Omega Fund Management plans to raise $400 million in its fifth fund, according to an SEC filing.
• National Grid, natural gas and electricity provider, launched a $250 million corporate venture fund, National Grid Partners. Read more.
• Teamworthy Ventures, a New York City-based venture firm, plans to raise $80 million for its sophomore fund, according to a SEC filing.
• Mantra, a private equity firm in New York, Paris, and Luxembourg, closed its €120 million Mantra Secondary Opportunities II fund. Its Mantra Primary Opportunities 2018 also announced its first close.
• 1984 Venture, a San Francisco-based venture firm, raised over $42 million of a $50 million goal, according to a SEC filing.
• Triago named Charles Lemon as a partner. Lemon previously was at Agilitas Private Equity.