Venture Capital - the HFL approach
24 May 2022
HFL has built its reputation amongst Venture Capital clients over the last decade. According to Managing Director Matt Westgarth-Smith, it’s a ‘tight-knit’ sector with a specific set of challenges compared to the Private Equity or listed funds space.
In this interview, Matt explains how HFL has developed its Venture Capital expertise and why Guernsey is so well placed to service this sector.
‘Our experience in this space started over 10 years ago when a long-standing private client came to us to discuss setting up their first institutional Venture Capital (VC) fund. We’ve grown alongside them, and because it is such a tight-knit and collaborative sector, we have become well known for meeting the complex and diverse needs of fund managers in the VC space. Those managers also like Guernsey’s funds framework, and of course our location is a big part of our success.
‘We have had a unique opportunity to help clients grow their businesses, whilst we grow with them. Most of our clients are with pre-seed and seed funds, which then evolve into later-stage and growth-stage companies for the winners from the earlier funds and pre-IPO stage funds for the select few unicorns that go on to listing. As our clients have evolved through the VC life cycle, we have been there alongside them. We particularly enjoy working with first-time managers and helping them grow both their funds and their operating businesses from the ground up.
‘The breadth of our experience means we can anticipate what is around the corner for our clients – we can help them to address challenges before they arise.’
Keeping up with the pace of VC
‘Although there are common themes, the needs of VC clients are different to the broader Private Equity industry – the pace and volume of deals and the approach to valuations being key examples. Everything we do is geared around being super responsive. We’re very good at moving quickly and speed is a particular trait for Guernsey too.’
How we do it
‘Typically, we are more of a partner to our clients than just a service provider because we advise them, problem solve and often perform many business support functions for them. From the usual fund offerings, to advisory services, to providing an outsourced CFO function, we can help both our clients and their portfolio companies evolve their businesses.
‘Our clients typically need to focus on sourcing deals and fundraising, rather than worrying about the back- and middle-office requirements. They think of us as a partner, working alongside them so they don't need to worry about those elements and can focus on the job at hand.
‘We often find ourselves looking after a client’s personal wealth, their business and the institutional funds that they are operating. Therefore, we become incredibly involved and much more able to help holistically. There is a lot of crossover with our private wealth business. For example, we might be working with a founder of a portfolio of companies who is looking for a private wealth structure to help with succession planning, as well advising them on how they can approach investment opportunities they want to jump on.’
‘There are products or structures we can offer in Guernsey that are very well suited to VC investments. Single-asset co-investment vehicles are very attractive as they don't require their own regulatory licence and are therefore both cost-effective and quick to set up. Many first-time managers we work with will establish a number of these co-investment SPVs as a means to build a track record before launching their first regulated fund.
‘Fund managers choose Guernsey because it has a robust but pragmatic regulatory framework, so we have the ability to move much more quickly than other jurisdictions and offer innovative solutions. We can generally move more quickly than they can in Luxembourg or the UK, for example. In Guernsey we have good intermediary banking relationships, a great network of specialist legal and accounting firms and a pragmatic approach from the regulator, all of which means that we can respond very quickly.
‘Guernsey provides a great environment for innovation. For example, one of our clients had been doing a lot of co-investment SPVs alongside their main funds, and because deals have been getting increasingly competitive and time-pressured over the past two years, we found that sometimes our clients would have only a handful of days to set up a new structure. Even moving quickly, this could sometimes be a challenge if establishing a vehicle from scratch.
‘So we came up with a regulated co-investment fund solution that enables investors to opt in and out of investments on a deal-by-deal basis - essentially you have an existing vehicle that you could use to be able to respond incredibly quickly to opportunities. Now if the client is presented with an urgent co-investment opportunity that is super competitive, we can get that up and running and closed within three to five days.’
So, what’s next?
‘Since the beginning of Covid, we have seen a lot of activity in the fund industry, particularly in the Venture Capital space, and there has been a huge opportunity for investors with the emergence of new start-ups that have reacted to the situation.
‘Despite the current market challenges, we expect this growth to continue and to see more and more focus on ESG investments. We are talking to clients about the social impact of a fund and of course technology has a huge role to play here. We have recently been working with a client who is seeking to link half of their carry to the impact their investments make rather than the profit they generate. There are always new players, disruptors and innovators in this space, it's only going to grow. So I think it's probably going to become increasingly competitive, and we plan to use all of our experience and the advantages of Guernsey’s fund regime to help ensure our clients don’t miss out.’