Nobody wants your new asset class

There's a gap in the market, but is there a market in the gap?

• Conspicuous consumption & hitting a market niche
• Market niches for investment
• Left-field investment strategies

Tikto aren’t in the business of dishing out fashion advice - we won’t start now - though this piece of clothing / marketing was brought to our attention recently. The EBITDA Gilet (Technical Vest, for proper vernacular) will set you back a cool ￡1170 if you can get a hold of one.

For any readers who felt a stirring of consumer-demand in your pot on seeing this: the ￡1170 cashmere blend version is sold out so you’ll have to make do with the boring old wool version for ￡275. It’s a bit early for an April Fools so it seems as though Cavour have hit the bullseye of (probably) men who (likely) wear gilets and (possibly) indulge in conspicuous consumerism then (maybe) talk about examples of that consumerism with their friends and colleagues.

One of many ways to describe this is: a niche market. It’s an opportunistic gambit from Cavour, the clothing brand responsible, at super-monetising a section of their customer base (+ drawing in new customers) who enjoy being super-monetised in this way. Credit to Cavour, literally.

For those that can remember this, the gilet has big Bill of the Week vibes. Not a good thing.

A niche, in investing terms, sounds like it could be a good thing however. It might imply specialism or perhaps even less competition in a market yet to be fully developed as competitors may overlook the niche. Frequently pitches that address these niches are described as:

“we’re building a new asset class”

“we’re revolutionising [insurance, payments, middle and back office banking, etc.]”

“We’re democratising [access to hedge funds, PE, a.n.other exotic illiquid]”

These can work well for VC pitches. They’re remote possibilities promising a big payout if it goes in your favour.

That sort of skewness doesn’t work quite so well with the money behind the money: the institutional backers of investment vehicles. There is an understandable dislike of not fitting neatly into an asset class / box which investors are used to and have built skills and processes to assess.

This dislike extends beyond what you invest in to how you go about doing it. A good example of this is “The Ackman Discount” expertly explored by Marc Rubenstein in recent days. The storied fund manager should have probably earned the trust of his backers but he’s been penalised whenever he has chosen to raise public money for some of his investing activities.

Permanent capital may sound like a good idea for investors, fund managers and investee companies (returns) alike but in reality? A brutal discount to NAV. In the public world, where the lights are brightest, no-one thinks innovative structures and niches are very clever. This is a problem for most publicly listed private equity and venture capital firms too: particularly in the UK.

At Tikto we have experience with this issue. We see value in sub-VC scale tech businesses + those companies that need to get off the VC juice. It’s a niche. It isn’t well understood. In an LP’s mind that = unnecessary risk. As a result, when we’re out funding our deals (and fundraising for our fund - which is happening atm) we’re extremely cognisant of the need to fit into investing paradigms that are more easily understood.

Given this experience, we have a long list of investment ideas and strategies that we’ve mused upon on a lazy Sunday…knowing full well that they don’t fit into an institutional investment box or are unpalatable, plain and simple. Nevertheless we thought that we would share a few of them for a bit of fun.

Activist investing in AIM (or other small exchange) companies

AIM is a public market for businesses which are too small to be on the main exchange. AIM is a great idea in theory: give companies access to public investors’ funds that otherwise wouldn’t be accessible. It’s great for the economy and arguably a public good/service.

Nevertheless, there are also a bunch of businesses in there that have been lured by the promise of funding but are simply sub-scale for public endeavour. A heuristic to identify these particular cases might be the size of the Finance / back office teams relative to their front office counterparts. Ie// is the tail wagging the dog?

Clearly this is fraught with risk. AIM companies are often very illiquid, with small % floats, and cozy exec <> non-exec management structures. Nonetheless almost by definition of being sub-scale in the public markets some of these businesses are being run suboptimal-y so there’s alpha there.

The Vice Fund

If your morality didn’t get in the way of your investment strategy: there are a number of businesses out there with extremely strong cashflows owing to the fact that their products are addictive. Squint at it and you might put Gaming in this bucket. Of course, you’d be living in constant fear of regulators taking your underlying investments to zero and/or radically changing their cost structures. Fast, loose, and you’ll probably lose friends along the way.

Defense

In recent years, as conflict has and is occurring closer to home, defense investing has become more palatable. Indeed in Silicon Valley it’s now becoming a focus of many a VC firm. If you wanted to wear your “realist” hat, there are a number of technologies that can/are/will be translated to the theatres of conflict (including space) in the coming years. Tangentially, it’s good to see that Limited Partner Agreements can and do change and evolve to meet the market…sometimes.

Tikto

At Tikto, we purchase stakes in EBITDA profitable businesses or tech businesses with challenged business models and follow that up with incremental growth capital. We bring our network of experienced operators to help execute a business plan for the next phase of our portfolio companies’ growth.

Get in touch: [email protected]