How to invest in early stage software companies

Bailador Technology Investments Ltd (ASX:BTI) has an interesting portfolio of software investments.

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The recurring revenue subscription model of a Software as a Service (SaaS) business can make for a compelling investment opportunity, however, other than XERO FPO NZX (ASX: XRO) and a few others, there aren’t too many currently available to invest in on the ASX.

Investors looking for more exposure to this type of investment could consider Bailador Technology Investments Ltd (ASX: BTI). Bailador is a listed investment company which manages a portfolio of unlisted internet technology businesses. It has been operating since December 2010 and listed on the ASX in November 2014.

Bailador has been backed by the iconic investment group Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which holds around 20% of the issued shares.

Investment focus

The fund avoids start-ups and instead focuses on companies in their early expansion stage with revenues of $2 million -$10 million.

Bailador is aiming to have around 10 investments and currently holds seven; five of which are cloud-based software companies with a SaaS subscription revenue model.

Revenue growth across the portfolio in 2015 was around 42%.

The largest investment (26% of portfolio) is in SiteMinder which is used by hotels to manage their bookings through integration with key distribution channels. SiteMinder is well established, with 400 employees, and 20,000 customers in 160 countries. It was recently named 17th in the Tech Pioneers Report of Australia’s top 50 innovative companies.

An investment in Viocorp International accounts for 24% of the portfolio. Viocorp offers a platform for publishing and broadcasting online video content.

Bailador also holds investments in Standard Media Index, iPRO Solutions, Straker Translations, Stackla, and Rezdy, and holds around 25% of the portfolio in cash.

Management team

Fund managers in this space typically take a very active role in their investments. This is the case with Bailador, which has placed a director on the board of each of its investee companies.

Bailador’s management team consists of David Kirk and Paul Wilson. Both are well incentivised by large personal investments in the fund.

David Kirk was previously chief executive of Fairfax Media Limited (ASX: FXJ) and is currently chairman of Trade Me Group Ltd (ASX: TME) and Kathmandu Holdings Ltd (ASX: KMD).

Paul Wilson is an experienced private equity investor from CHAMP Private Equity. He has had numerous director roles and is currently chairman of Vita Group Limited (ASX: VTG).

Performance

The portfolio has generated annual returns of around 24.5% over five years.

Shares were issued for $1 in November 2014 and are now trading at $1.18, with underlying net tangible assets of $1.16 as at 31 May 2016. However, Bailador adopts a conservative approach to valuing its portfolio, so this may be somewhat understated.

A recent presentation from Bailador estimated potential portfolio upside of between 1.8x and 4.1x in the next 24 months.

Fees

Access to private equity investments is never cheap. Bailador charges a management fee of 1.75% and a performance fee of 17.5% of returns above an 8% hurdle.

What could possibly go wrong?

Bailador could be a good opportunity for long-term investors looking for exposure to high-growth early stage software companies.

However, with the high potential growth comes high risk – the future is unknown, and anything could happen to knock these companies off their current growth trajectories.

Either way, Bailador will be an interesting fund to watch for the next few years.

Motley Fool contributor Matthew Bugden has shares in Xero. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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