How Apeira Capital is fusing venture capital with hedge fund investing

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Nathalie Kwang, Apeira Advisors

Established by founder and managing partner Natalie Hwang (pictured), New York-based Apeira Capital Advisors is a creative venture capital asset manager which uses long/short hedge fund investing techniques to invest in a broad range of private technology companies.

Prior to unveiling the firm in spring 2020, Hwang had been founder and managing director of Simon Ventures, the venture capital unit of Simon Property Group, where she built and managed a global consumers-focused technology fund.  Her experience also encompasses hedge fund seeding at The Blackstone Group.

Apeira focuses primarily on early growth companies that have reached an inflective point of scale, typically at the series A through C stages of the funding process. Though it invests predominantly on a long-only basis, through traditional and synthetic equity structures to capture positive value, Apeira also looks to opportunistically short private company valuations it sees as being vulnerable to near-term correction to capture negative value, Hwang explains.

“When I look back and connect the dots of my most recent prior experiences which span public to private, then a long/short equity venture capital fund makes all the sense in the world to me,” Hwang says of Apeira’s origins.

Noting the current failure rates for start-up companies, which are estimated to run at more than 90 per cent plus, Hwang says this sector is by its nature a “risky asset class”, which makes venture businesses “mostly strike-outs, and very few home runs.”

This, she adds, helps form the basis of Apeira’s investing style. “What we’re ultimately able to do with our strategy is to create limited duration and controlled exposures to specific stocks, or baskets of stocks,” she observes. “For the first time within private markets, you’re able to not only capture positive value, but you’re also able to capture, and profit off, of negative value, which we are able to achieve by manufacturing through synthetic liquidity moments that replicate the P&L impact that results from the purchase and sale of stock under very deliberately timed conditions.”

How would you describe Apeira’s investment approach?

NH: “The biggest point to stress about venture is that there’s always a lot of value that’s accumulating within this market, whether positive or negative, given that gains and losses occur at an extraordinary scale.

“But unlike liquid public markets, the vast majority of this value remains largely inaccessible to investors for two reasons. One, they can only invest in one direction and, two, it’s challenging to get in and out of deals within the right window of this position.

“Due to thin volumes, high fees, and wide buy and sell spreads, secondary markets provide for very limited recourse and often force investors into this binary decision framework of having to sell at deep discounts or having to manage through post-IPO volatility risk and significant value erosion.

“This challenge highlights the importance of the venture economy as a store of value, and also the relative lack of financial sophistication of this capital market in capturing that value which has contributed to challenges in performance capture.”

“Our value proposition is that we fundamentally believe in a world of better odds where, despite high failure rates, we can manage every investment to a successful outcome because we can generate returns from both private company gains and losses to decorrelate the odds of venture capital success.”

How does Apeira differ from other venture capital-focused strategies?

NH: “Unlike other venture funds, our focus on capturing both positive and negative value allows us to invest on a multi-directional basis. We can go long, we can short, we can hedge, or even run positions on a delta-neutral basis to manage both bullish and bearish bets to generate returns across a broad range of valuation scenarios.

“To do that, we leverage derivative technology to bring our own bespoke, private company-based derivative instruments to venture, which we call private synthetics.

“The strategy is intended to offer good downside protection, but also intended to deliver high alpha on relatively low beta in relation to the rest of the industry.

“We aim to generate returns from both private start-up companies’ gains and losses to offer highly attractive and differentiated fund economics that ultimately entail enhanced venture upside and reduced risk.”

Where do you look to deploy capital?

NH: “We exclusively focus on private technology companies. We have extensive sector expertise within the world of consumer technology, but we span the gamut from tech-enabled to deep-tech, depending on the category. These are companies that are not publicly traded – they are usually fairly illiquid companies which leverage technology as their primary differentiator for scaling.

“We may also look at tech-enabled companies where their primary differentiator may not necessarily be tech, but some other area of capability.  However, the ability for these companies to leverage tech to create operating or scale efficiencies will always be a dominant criterion that we look for.”

The lines between hedge funds and private equity strategies have become increasingly blurred in recent years. How does Apeira’s offering fit within this evolving landscape?

NH: “We’re firmly a venture capital fund given the types of companies that we invest in. We have deep domain expertise within the world of technology. But we differ from other venture capital funds in that we invest on a multi-directional basis similar to hedge funds.

“I think the traditional venture model in its current form has proven quite limited in terms of its ability to manage against overvalued or otherwise inefficiently-priced market environments. We believe there’s value to leveraging well-worn public market strategies for innovative use in cases across private markets, which has lacked innovation for quite some time.”

How do you build your investment ideas?

NH: “We invest in two separate frameworks. There’s a framework for investing on a long-only basis and one for tactical investing. When we invest long-term, we care about the underlying fundamental attractiveness of the companies that we’re targeting.  Opportunistically, we may also look to arbitrage value dislocations in the market that are largely momentum-driven and become disconnected from the underlying fundamentals of the company, which is why you can often see such significant gaps in pricing between companies in terms of book to realisable cash values.”

To what extent does the macro perspective shape your investment process?

NH: “Our approach combines top-down views with bottom-up company analysis. We’re constantly monitoring and analysing the market as well as shifts in company performance to protect the portfolio and single positions from both external as well as internal shocks.

“It’s also important for us to be able to understand what the extent of dislocation is between the public versus the private market. Oftentimes when you see multiple compression occurring in the public markets, that particular pricing trend may not be felt within the private markets for an extended period of time. There’s often a lag effect in terms of the trickle-down effect. So we’re constantly monitoring the macro markets because that provides us with a sense for the exit constraints that we have to keep in mind when we’re thinking about what makes sense in terms of capitalisation strategy for the long book as well as the tactical ops book.

“We also look to the macro markets to determine what the appropriate exposures are for purposes of managing the portfolio, which are not just driven by the supply of ideas and conviction levels – they are also driven by the extent of perceived correlations in the private market.

“As with hedge funds, our strategy involves capturing a spread in pricing.”

What were some of the challenges and opportunities in launching a new fund during the pandemic?

NH: “I think we’re launching our strategy at quite a timely point in the market cycle. If you look at the extent of optimism that investors have around technology, there’s significant appetite.

“People are deploying more capital than they ever have before in the search for alpha, but I think venture as an asset class is characterised by extreme volatility which creates a very strong environment for investing on a long/short basis.

“There’s a tremendous need for strategies that protect against that sort of volatility, and to generate durable returns irrespective of what the market conditions present. It's an exciting time to be introducing this strategy to the market.”

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