Sustainable Growth Inside the Institutional Pivot to Long Term Value

[music] Well, thank you very much. Uh good afternoon everybody. We have our work cut out for us as all the panelists have with uh 25 minutes. This is ambitious and agenda uh because we have and this is both the the challenge and the opportunity the gift for the audience is we have a very diverse group of individuals here uh representing a very diverse group of strategies and asset classes. uh and our task is to kind of paint a picture and thread a story of how we have emerged in private capital from let's just call it the financial engineering and wizardry of 30 40 years ago to strategies that are now focused on creating operational sustainable value durability and we're going to try to weave our way through each of these asset classes and how that theme has played out in recent history.

So, uh, I'm going to start at a high level for each of these asset classes and then we're going to try to end with a little bit of application for this part of the world. So, that again is our our blueprint. We'll see how well we do. Um, so Courtney, I'm going to start over there with you kind of representing BC on obviously the equity side and we're going to get to the very unique I think Riad story that you've got to tell that we talked about in the green room a minute ago, but let's just zoom back out to BC generally. Usually when you think about uh funding a a founder, it is about TAM and product market fit story, maybe even the personality, right?

So in this theme, how do you weave in in addition to all of that kind of a a sense of sustainable value and business model durability?

Yes, I mean that's a it's a fantastic question and just to give a little context uh for my answer here, 500 Global is an early stage investor. uh we manage about three billion in capital today and invest in more than 90 countries uh across the world. Uh and you know certainly there's a different look at uh at this strategy by market but by and large following the correction for venture capital that happened over 2021 and 2022. You've definitely seen a return to uh taking a look at the unit economics of the investments that are being made particularly in the early stage and you really saw people digging into that 2022 2023 and then the AI boom hit in 2024 and since then and I think you've seen a little bit of loosening actually around some of the the valuations particularly in our uh US investment practice but um as an early stage investor and the discipline that we're uh able to apply not just from you know the actual investment selection uh but we also apply a bit of a programmatic aspect to our investing. So um we invite some of our portfolio to sit with us during a program that provides kind of capacity building and and development of the actual business model and that added value allows us to um have a more uh I guess evaluation that's a practice that's a little bit more disciplined.

So providing that extra value as an investor a it gives you the ability to really negotiate the valuations a little bit more than just coming in as as straight capital. Uh but by and large it's market specific. You're going to see um you know continued investment in AI where the valuations don't seem to be settling anytime soon.

Uh but you can certainly still find great opportunities to to dig into businesses that have really strong unit economics. One of the previous speakers talked about intuition and I think VC is growing up from just intuition to something a bit more diversified as far as due diligence and investing and I think it's going to certainly rationalize those that do well and those that perhaps don't in this new regime you're on the earlier side. I know you do more than VC debt but I want to focus on uh in my preparation for this you were often cited as a pioneer in India uh V uh venture debt. Uh and I'd love to hear because I think the story is just fascinating in your early parts of your career kind of what what were the insights, the triggers, the catalysts that you learned that started to kind of formulate this idea that eventually led you to start your current firm firm.

Uh first of all, it's always a pleasure to be in Abu Dhabi finance week. Uh the energy here is very very vibrious and actually that's what we do. Uh we do funding, right? So finance is an integral part of what how we started it stride in 2018. We believe that capital solutions for sponsor bad companies is missing.

So where cotney starts at 500 global till the time a company goes public there is a layer of institutional investor which comes in every company. How do you become a de facto credit provider for all that layer? And if you if you speak about theme financing in general or private credit in general, I think that layer of sponsor bad companies and be a go-to player for that is what we wanted to start from India in 2018. I did it previously from banks and realized it's a bigger market to cater to and fast forward today u while we naturally started from India and that's been the prime market. We've deployed upwards of a billion dollar but more importantly we grew outside India three years back we started from Abu Dhabi ADGM and now we very relevant for Middle East uh including UAE and Saudi we do a lot of transactions recent ones being as as big as 30 $40 million depending on what kind of requirements the company has and the base premise is pretty simple that you try to understand the cash flow of a company and understand the asset coverage they have and create a capital structure which becomes non-dilutive And when you do it with an extra protection layer of institutional investors sitting in the company, there's a better corporate hygiene.

So how do you become that stack of layer which ensures that if a company produces a 1520 gross per margins in a business, you provide a financing at one two person per month but they are able to rotate their turnover much better to have a better value of the business. So every business is unique. Uh fintech is a unique business than a consumer. It's different to a digital business. It's different to a SAS business.

Every business has a receivable cycle. Just understand the cash rules and create a structure.

So just connecting those first two questions, say a word about the the archetype of the founder or or perhaps the company itself on why debt versus equity in the venture stage is the right fit. Look uh as I said venture stage typically most of the founders are not very natural to finance and that's that's our surveys that's our portfolio companies that's the companies we have analyzed and that provides a unique opportunity as I said because they know their product market fit they know their business they know their TAM what you spoke about how do you make sure that you become you make a company corporate credit ready day one right how do you have the best CFOs in the company you can't have it so how do you become that credit partner to say okay you have a 60 90 day or you have two your agreements with a with a counterparty who's a large corporate let's just count it up front and give you the capital

right so it's it's as I said at the early stages it's more about what kind of revenue orientation you have so we only start when the companies have 510 million of revenues but we can go up to $510 billion of revenue so that's the entire stack we play right and since we do now multi- geographies we can fund across jurisdictions so if companies in Middle East want to take credit in Europe or India or any part of US we can fund the companies globally so you create structures as per the business use cases.

Fantastic. So, Borha, as we kind of climb on our hands and knees up both the capital stack and the maturity cycle here, you do various types at Santander of structured credit uh across kind of the the full flavors. Uh you talked about wanting to invest in complex situations in businesses that have tailwinds. So from a financing perspective, there's obviously a threshold in delivering on those financial objectives. But again, title of this panel is about ensuring that there's also sustainability in the business model itself.

So tell us how you thread that needle. Right. First of all, thank you very much for having me here and thanks for the Abu Dhabi finance weekend organization. Um indeed for us, I mean and to put numbers into perspective of the tailwind that private credit has and the sustainability of it. I mean if you think about private credit it's a three trillion market.

Now if you compare that to the world's largest balance sheet the banks world's uh largest balance sheet that's a 100red trillion. If you compare that to the global fixed income basically listed is 145 trillion. So private credit is very small. Now what we try to do in private credit normally me and the rest obviously of the different GPS that are there is trying to extract say opportunities for the basically monetizing the liquidity premium. Now but it is fundamental for us and for any GP to think about the strategy and defining the strategy.

Now when we define a strategy that we invest in it has to have first intrinsic value in it. So it has to have alpha in itself. Then it's about the team. It's about the people. It's about who is managing basically that portfolio of investments that you're having.

And third for us is very important being part of the one of the global's uh largest financial institution to ensure that the financial institution in case there delivers further alpha for us and that is either through data knowledge origination capabilities. One of the examples that we have is what we call alternative leasing. where we basically financememes which was touched upon before we think that thememes are at the core and the backbone of any economy in the world particularly in Europe and what we want is to financememes but we want to ensure that it's a sustainable financing and what we do basically is a sell and lease back of their industrial equipment to ensure that obviously it is more efficient but also to ensure that we're the last entity to stop being paid by that theme and that we have an intrinsic asset in case that theme were to default or be liquidated. No. And hence that's the way that we think of the strategies that we put together.

They're relatively niche, but we need to be able to offer that alpha generation to our investors.

Yeah. And we'll get back to the the nichy nature of lots of the different variations that you have in a moment. Uh, as I promised, I want to shift to maybe applying some of those answers and principles to this part of the world and perhaps some words to the LPS in the room for each of the strategies. So, Courtney, back to you. Um, we talked a little bit about you moving from the Bay Area to the kingdom to Riad.

I just returned from 4 days in Riad and was just blown away. So, I can I can I feel the magnetic pull that you probably felt when you did this. But, you've been involved in an incubator as I understand. You've got a relationship with PIF. Talk us through your journey and why this is such an exciting part of the world.

Yes. Um well I would say at large um you know just when speaking with sovereign funds and in governments around the world who want to see their venture capital ecosystem really come online it takes a whole host of strategies. It's not just capital deployment in emerging markets. It typically needs to be you know working on what the capacity development what the policy with the regulatory landscape looks like. So we began investing in this region actually back in 2012.

We cut our first check into Saudi in 2016. We've done a lot of work here in Abu Dhabi and today we're actually the most active early stage investor across the Middle East. Um but as we were on the ground more and more uh particularly here in in Saudi Arabia, we realized it was just going to become a major financial epicenter. Uh so I did move to Saudi in in 2021. Uh not only to build out our teams even further across the region.

Um but also just to be able to witness firsthand the enormous economic transformation that was taking place here uh in the Emirates as well as in the kingdom. So I think it's a very exciting part of the world. There's a lot of optimism uh around the creation of new sectors today. Um, and I think you're starting to see that to convert not just from into optimism, but real tangible value that's been generated as these um these kingdoms and the emirates have shifted their non-oil uh you know non-oil revenues. So it's been wonderful to see venture capital be a part of that story and I think um it will play an even bigger role moving forward.

uh Ishri you have a similar velocity of growth as we were talking about um started in India but now are planting flags in several emerging economies around the world. I I'd love for you to spend some time kind of addressing LPs because I think when you think of risk premia for venture debt and as I promised to get back to also uh some growth credit um they've got elements and pieces and layers that perhaps cross our traditional asset classes as far as portfolio construction. So how should LPS think about uh these types of strategies especially in emerging economies and how they fit in their portfolio?

No uh great question actually. Um so venture debt and growth stage the reason why we counted uh in tandem because it's an extension right venture companies will seed the way to private equity firms to come into the business ultimately before the company gets listed or strategically sold out. So I think that the as I mentioned earlier the use cases to your question why emerging economies and what's so special about it I think with the Indian experience what we realize especially to Kotney's point as well of Saudi Rad that generally companies on venture and private uh gets built onto the government infrastructure and it's an integral part of evolution of any tech ecosystem. So we did lot of uh we have now almost 18 unicorns in our portfolio in India. We did lot of financing of fintech companies when the government opened the public infrastructure finance.

So they opened this GST which is like goods and service tax for small business. They open the uh the Aadhaar which is a social security status in India and on the basis of that lot of companies started making the private infrastructure and by default these companies had lot of u uh tailwinds going for them because of the fact that the the the the stack of the solution never existed. Similarly, if you see the electric mobility in India, it got built around the fact that there is a natural reliance of going away from oil economy. In India as well, we we're net importer of oil. So, I think when we look at Saudi, we realize the similar ecosystem.

We require we saw a young population, very dynamic, eager to go and ready to go in order to create an economy which is beyond oil and for that there's lot of evolution of thoughts. The government is very open and I've seen tremendous difference in three years and that's how we created asset back financing on fintech. We said okay we'll fund small business using an anchor as tech companies and then it's important to understand what are the use cases that the industries are trying to solve for. We recently we funded a company called bricks which does construction tech. Construction tech is getting embedded people who provides u uh small vendors who are doing large construction sites giving a platform for them to procure steel and that those are the businesses we have already funded seven years back.

So the emerging economies is is to make sure that you you find the analogies what you've seen previously replicate that success and go into that economy at the right time.

Yeah. Yeah. So I think it's the intersection of that knowledge and things which makes global investors especially in credit from a LP perspective they become very different because you sector stage agnostic four five year fund two three year structures. So you get to know an economy through us with a fixed income product. So that's how you structure it.

Before we leave kind of the the startup economy just for a minute Courtney and you can jump in here again too uh as well. One of the themes of course of today and of of certainly of Abu Dhabi in the 15 years I've been coming here is this transition from c you know distant capital allocator to actually GPS and kind of full-fledged uh system of of uh of of being now a global financial hub. Uh and that is now that there are many many uh GPS that are that can be deployed right here. We had Nor Swed sitting in this seat a few moments ago. you're here.

You've again set up shop here. How have you seen this part of the world change as far as the the opportunity for GPS that actually are on the ground?

Yeah, I mean I think it's been incredible. I I remember actually coming to kind of the earlier iteration of ADFW in 2018 2019 which was more fintech oriented and if you look at the scale particularly I think Abu Dhabi does not get enough credit for what their regulatory regime what ADGM has meant to fund managers and to startups in this region. Um, I think the ease uh that Abu Dhabi has created for being able to start and launch your GP here, to be able to start and launch your startup here is really gamechanging not just for the Emirates, but the entire region. And more recently, because we invest worldwide, we see companies coming from Africa, coming from Central Eastern Europe, from the UK. It's now become a real magnet because of the ease and that you know they've converted their ambition and their desire into real practical measures.

So as a GP today versus you know when we were starting here I think there's just enormous opportunity and it is no longer a capital seeking relationship. We are deploying we've written 400 checks in the region. We are deploying into the region because there's great value here. Um and so I think that's a real testament to you know the the the work that has been done. Just to add up u we actually were the first Indian fund to be here three years back in ADGM and we we totally recognize the fact that for GPS opportunity is only there when you have to be on ground you have to be in the ground meeting the founders understanding the ecosystem and I think that's how you can only be embraced and how do you bring in your cross learnings so if that's the intent and similarly for Saudi right you have to be in the location to understand the nuances

and if that's the intent and you're able to crosspollate your understandings of either India or US or other geographies. I think there's there's a lot to play.

Well, I think particularly on the VC side, I think it's critical you've got the expertise here. It's just really tough to do that from the west. Um, Borha, I want to let you have the last word and kind of circle back to again this this variation, the spectrum of structured credit and maybe particularly ask you to focus on assetback lending which uh again because I have the the blessing as Kaya to sit up on a lot of stages. There's there's always an opportunity for me to just get a sense for what is being talked about the most. And I will tell you more recently that ABL is the buzz around AL is probably as hot as I've ever seen it.

On the other hand, these things are snowflakes. They're all a little bit different. I'm not even sure they are an asset class. So maybe that's the question. How do you think about the category if there even is one for this wide range of credit structures?

So for me [clears throat] ABL to define it simply is anything that is private credit that it is not direct lending that is not distress lending basically and hence is it a category probably not because you have there from investment grade say type of risk to say non-investment grade I think also I mean there is a buzz word right now on the AL because a there's been some cases in the states of fraud and that obviously has a lot of repercussion in the in the news but also because the growth potential that the ABL market has. And again to put into perspective, out of the three trillion that is private credit in general, a very small piece less than half is APL. But that is anything from leasing that we touched upon, trade finance, uh infrastructure financing, real estate financing, um consumer ABS etc. So it's a massive sector and the addressable market is massive and the penetration right now is on the single digits. No.

So there is a massive growth. Now when we talk about ABL I think also there's a lot of differentiation with how you originate ABL visa v direct lending because direct lending tends to be a sponsor base and hence it is easy to penetrate but on the ABL market there's a lot of regional differentiations just to put it into context no in the US 80% of the sources of financing come from either the capital markets or the private market side in Europe around 80% of the sources of financing come from banks and hence the dynamics there of how you're originating ABL is very different. You're it's a totally fragmented market in terms of different laws, different tax environments, different you know any transaction that you do in France is very different than Spain. The same as if we were a totally different say region. No.

Um also why do we think it makes a lot of sense ABL in portfolios? No. So there are three components to this. The first one is the diversification angle that it brings. No.

If you think again direct lending and we are a believer in direct lending it's not that we're not. No, but in direct lending, it is relatively correlated to the broadly syndicated loans or high yield market. But when you talk about infrastructure or trade finance or real estate, it is fairly decorrelated to anything that you can get in the public market. Second is the waiter average life that you get in ABL. Think about all the semi-liquid vehicles that are out there in the private credit side or even on the private equity side and think about shorter duration assets that you get into your portfolio can do for that liquidity that you may have to derive because of say redemptions from your LPs.

No, so the AL can be a very interesting one. Just first example there is trade finance. Now these are invoices that are paid every 30 60 90 days. So you generate a lot of liquidity. No.

Um and lastly is uh basically the alpha that you can obtain within especially the investment grade landscape. So again most of the private credit has been on the double digit or close to double digit returns but the al you can get easily access to say investment grade expected loss type of transaction and still get a premium of around 100 to 300 basis points and that's where we think the market will start to evolve and and grow significantly. I'm curious in this part of the world where you've got these deep deep pools of sovereign capital and also significant expertise in heavy industry operation meaning they own a lot of these operating companies for hospitality infrastructure projects etc. What is the role of a GP in AL in the Gulf? Are there are there big opportunities here alongside of the asset owners?

We think there's a massive amount of opportunities in the region and in particular in Abu Dhabi. I mean any economy that is growing as as Abu Dhabi is growing with, you know, you go outside and you see it in terms of everything that is developed, it just brings a lot of opportunities for financing in a market that, let's face it, is not as developed as either the US or Europe in terms of the financing metrics and parameters that it has. So, the opportunities are huge. Yeah.

Well, I think we're going to have to leave it there. Uh, ladies and gentlemen, let's give these panelists a round of applause.

Thank you.

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