There are few ways to invest in private venture capital companies for investors who are not high-net-worth or accredited. Stack Capital Group Inc. STCK-T is aiming to change that.
The company, which launched and went public on the Toronto Stock Exchange (TSX) in June, raised $107-million and will invest that in rising venture capital companies.
In fact, Stack Capital made its first investment in September: US$5-million in Varo Money Inc., the parent company of Varo Bank NA, the first all-digital bank in the U.S. with a national bank charter. Next up was a US$6-million investment in Bolt Financial Inc., a one-click checkout experience platform. On Oct. 18, the company made its next move and invested US$5-million indirectly into Space Exploration Technologies Corp. – Elon Musk’s SpaceX – through a special purpose vehicle.
Globe Advisor spoke with Jeff Parks, Stack Capital’s chief executive officer, and Brian Viveiros, vice-president of corporate development and investor relations, to find out more about the company and its intentions.
There are few ways for average investors to invest in venture capital or private businesses. Is Stack Capital an avenue to open up access to this sector?
Brian Viveiros (BV): We were able to take this underserved area for many investors in Canada, private equity, and put it in a structure that eliminated a lot of the traditional barriers to entry. Being on the TSX gives investors in our stock a valuable liquidity option. The impetus here is to give people the exposure that they otherwise don’t have and build better portfolios. We want to give investors exposure to companies before they launch an initial public offering (IPO) or before they’re acquired so that they benefit not just from the lift of an IPO or sale, but from the last private round of financing.
Jeff Parks (JP): Many companies are staying private longer and longer. They’re doing series E, F, G [of financing] – and all that capital is being made in the private markets for the big institutional players, the hedge funds, the early venture capital investors. Now, the average retail investor has the ability to participate and have a part of some of those companies.
How did you determine that you could list on the TSX as a pool of cash, not an operating company? How did that come to be?
JP: We went through the TSX Sandbox program, which allows you to go through different avenues to get your company public. Generally, when a company is going public on the TSX, it needs three years of revenue. But because they’re trying to increase the number of listings on the TSX, the exchange has been working with the Ontario Securities Commission on changing the rules. There was one ahead of us, Fax Capital Corp. FXC-T [an investment holding company]. I saw its structure and thought, ‘That’s interesting,’ … so we mirrored a bit of that and that’s how we were able to get on the TSX.
BV: To list on the TSX, we had to raise a minimum of $100-million. We ended up raising $107-million, of which $7-million came from the management and leadership team here at Stack Capital. [That portion is locked up for five years], so it was a challenging hurdle … and we were able to get over it.
What kind of investors have you attracted so far?
JP: For us to leave where we were [working], we needed some pretty good assurance that we could sell the hardest [people on the idea] first. And the hardest [people to sell to] are pension individuals. I’ve done business with them, [chief investment officer] Jason [Meiers] used to cover them. They trusted us, and we got the pension capital in first. With us knowing the hedge fund community in Canada, it was very supportive of us as well; same thing with those in the U.S. On top of that, Brian’s background comes from the retail wealth network, so we were able to tap into a lot of retail brokers.
BV: It was very helpful that the IPO was led by RBC Capital Markets, TD Securities Inc. and Scotia Capital Inc. That was instrumental in helping us get to that number.
Do you think you’ve attracted retail investors as you had hoped?
BV: From the IPO data we received, institutional investors represented roughly 30 to 35 per cent of the capital, and the rest was retail. That dynamic has probably changed since mid-June, with secondary trading in the market, but I still expect most of it is retail held. That’s not too much of a surprise because, from our standpoint, it’s the target market. It also appealed to the advisor community and particularly certain advisors who understood the value of having this type of exposure in a diversified portfolio.
JP: If you’re not a big hedge fund trying to get an allocation on a hot U.S. or Canadian IPO, it’s very difficult. So, this is the back doorway in. The same thing goes for mutual funds because some have restrictions on buying private holdings. Because [Stack Capital has] a public wrapper on it, that allows investors to put it in their portfolios.
How does it work for investors after they buy shares of Stack Capital?
JP: We’re looking to compound book value per share over time. That’s our goal. We want to grow the capital base because [once you’re at a certain size], then you can start leading deals and getting more informational priority. That’s what we’ll look to do ... try and grow into a bigger entity and have the price appreciation for the underlying shareholder. That’s how they will ultimately capitalize [on their investment].
Tell us a bit about your first investment
JP: The first investment we made is in Varo Bank, [which recently raised US$510-million]. It’s the only U.S. fintech that has a U.S. banking licence, which took them years to get. It has about four million users right now. We think the company can accelerate that drastically with the capital it just brought in. [Varo Bank] is also going after the 184 million people in the U.S. [without a bank]. In addition, the younger generation is mainly digital and don’t really need a retail branch to go into, they’re fine using an app-based [product].
Are there particular markets you’re looking at for investment?
JP: We’re focused on growth and late-stage companies. We don’t want to go near the seed or early-stage [companies]. We want companies that have proven products, for which the capital we’re coming in on is going into a sales force to propel that top line higher. We have to buy in at the right multiples.
We’ve seen more than 60-plus companies since we’ve been around in the past three months. There’s a lot of companies we’ve passed on, and a lot of companies we will look at putting in the portfolio. In terms of geographic distribution, 85 per cent will be in North America, that’s our bread and butter.
This interview has been edited and condensed.