Welcome back to The Rate of Change with York
Wealth Management. As advisors to some of the
wealthiest families in the country, The Rate
of Change is a podcast designed to help you in
the pursuit of burning long -term wealth through
the insights of some of the brightest minds in
asset management. I'm your host, Murdoch Gaddy,
and in today's broadcast, we're joined by Eric
Chan, co -founder and group managing director
of Aura Group. Starting out in law, Eric went
on to co -build Aura into... Asia -Pacific leading
multi -strategy investment house, spanning venture
capital, private equity, and private credit.
Eric's main responsibility is overseeing the
venture fund, essentially hunting for the next
unicorn, the next company that's going to go
10X in Australia. How they structured it is a
seed stage vehicle, conditionally registered
as an ESVCLP. where investors commit capital
via stage calls, gain tax benefits once fully
registered, and back founders across Australia
and Southeast Asia. A standout holding they have
had previously is HOST, H -A -S -T, an AI compliance
platform already used by, currently used by Telstra,
Zurich. As Eric points out, the best measure
of AI success and whether or not he's doing his
job properly is cost savings. So Host has reduced
compliance costs by roughly 60%, cut review times
by 80%, and scaled rapidly from a number raising
over the years. I'll let him dig into that. On
the other side, since they do have the capital
call structure, the other issue a lot of clients
discuss is... What do I do while I'm waiting?
So they have available the private credit income
fund, an evergreen wholesale fund that's delivered
greater than roughly 9 % since 2017 by financing
non -bank lenders with short duration loans,
first loss protection, monthly liquidity. It
also offers stable income and strong risk controls.
One thing I really liked, which we get into,
is the logic that... If hypothetically you have
a million dollars in a private income fund over
a four -year period, if that's averaging 10%,
you're looking at roughly greater than a $400
,000 income from that fund. You can technically
use the income from the fund to invest in more
growth -based businesses like the venture capital
strategy whilst protecting the capital. which
I find a very interesting strategy, which Eric's
going to dig into. Eric also explains why venture
capital must be run as a portfolio, how to balance
write -offs against a fund. are the cyclical
nature of venture capital markets and where they're
hunting for the next unicorn. Specifically, their
main attention right now is on AI businesses
and how to spot an AI business that's actually
solving a problem instead of a legacy business
that goes, hey, AI is the new flavor of the month.
We need to tack on the word AI into some part
of the business when it's not really an AI business.
So before we get into the conversation, please
remember this broadcast is made for entertainment
purposes only. I encourage you to listen to the
disclaimer at the end of the broadcast and keep
your feedback coming. You can reach me at mgatty
at ywm .com .au. So with that being said, I hope
you enjoyed this conversation as much as I did.
So sit back, relax, and enjoy. Eric Chan, Aura
Group. Welcome to the Rate of Change with York
Wealth Management. Thanks for having me. Good
to have you on, Eric. Always good to see you.
Great lunch we had the other day. That was fantastic.
We could sit here and talk about that all the
time, but why don't we begin like we always do
and why don't you tell everyone a little bit
about who is Eric, how did you get into finance,
and a bit about yourself. Yeah, sure. So I was
born in Hong Kong. Came here, went... I came
to Australia when I was pretty young, about five
years old, with my mom and my sisters. I, you
know, did my primary higher education in Australia.
Throughout that kind of education process, my
education process, you know, I actually ran a
couple of businesses, like little startups, as
you want to call them now. But, you know, back
then it was just little side hustles. I actually
did that with my co -founder, my current co -founder.
So we did everything from selling secondhand
books on eBay to building computers for people.
So we always kind of had this entrepreneurial
spirit. As we finished university, I kind of
went and became a lawyer. I worked out pretty
quickly that I wasn't a very good lawyer. I cared
everything about the deal, but nothing about
the legals. So there was a pivotal moment. I
remember in my life when I decided that it was
just, it was time to move on. Like I've learned
everything that I wanted to learn and it was
time to move on. And that moment was when, I
can't remember, it was like maybe 1, 2 a .m.
in the morning, we were on a transaction and
I was working for probably one of the best banking
finance lawyers or partners in town. And I remember
turning around and I just saw my partner just
slaving away, drafting documents at 2 a .m. in
the morning. And I just thought, I'm the best
in town and I'm doing that at 2 a .m. I don't
think that's what I want to do for the rest of
my life. So at that point, I decided to leave
and set up my own business. Yeah, I said it once,
I said it a thousand times. I love in finance,
everyone has a roundabout way about how they
got there. And it's the number of people that
get into this game, they go, I want to be in
finance. They end up doing a different thing,
developer. a phenomenal skill set and something
completely random and then bring it back into
finance but wouldn't you agree that like things
like law accounting uh sales or just sales and
marketing or or i spoke to a bloke the other
day who had a it was pretty much like a computer
engineer right it's just fascinating these particular
these four or five main skill sets are so important
as a foundation. And then you bring it into finance,
into also like a deal or be it property or anything
specific. And people that are coming with finance
that don't have that, I actually find they're
missing out. You know what I mean? Wouldn't you
agree? The majority of what we do is predominantly
contract -centric or numbers -centric or AI -centric.
You know what I mean? It's invaluable. Having
a law, I wish I had a law background. I think
I did one subject at Sydney Uni. I think I just
passed with 66%. I'm like, what the hell am I
doing? I'm not doing a law subject again. Then
I knocked over a master of commerce and my main
thing was all strategy, you know, playing chess,
you know, like seeing the big picture. But, mate,
having a law background with contracts, even
though, you know, 2 a .m. would have sucked,
but how important is that when you're looking
at deals and everything now? Absolutely. I think
it gave me the infrastructure to do a lot of
things that I did today. A lot of people, when
they're doing investments that's new to the game,
they don't realize actually how meaningful it
is if you kind of understood the legals or the
accounting side of the transaction because it
just allowed you to actually understand. or call
bullshit sometimes on negotiations or when you're
running your own due diligence or managing your
service providers. I think that infrastructure
allows you to be a lot more effective in deals.
But also, when we started the business, we were
pretty young. I was 26 years old. I didn't have
a brand, didn't have a track record, didn't have
any money, which meant that I kind of had to
do a lot of things myself. having that legal
background allowed me to really push out the
use of engaging lawyers right to the end. And
even then, I was able to manage how much time
that they got involved and therefore reduce my
costs really early in the piece because we just
didn't have any money to spend on the necessary
things. I mean, engaging legals and lawyers is
important, but there are certain parts of it
where you know as an ex -lawyer that we can shave
time off. yeah devil's in the details i say but
yeah look one entrepreneur to another mate the
legals if you don't understand it you can end
up spending a lot of money yeah it's like i always
say it's like engaging a builder like if you
don't understand how building works you could
end up spending a lot of money on variations
a lot of money it's like i gotta get a great
idea that's fantastic here's the boilerplate
and then you change it six times like why don't
my bill just go for a you know 40 grand to 200
grand i'm gonna make money here again again if
you but if you don't you need a good lawyer right
but it's all scale and everything like that so
you look you mentioned um So just while we're
on the topic, because this is fascinating on
the entrepreneurial side. So when you were growing
this stuff, you didn't need the legal capacity,
right? And you're building this business. So
what did you find was the easiest and the hardest
thing about starting Aura and Aura Group? Yeah.
So when we started the business, it was actually
back in 2009. So my co -founder and I, we actually
came out on our own accord. or left our businesses
or now in a court. So I, you know, it was during
the GFC, so I was super bored because there was
no transaction as a lawyer. At that time, I was
in private legal. My co -founder actually got
made redundant because he was at Everest Backhocking
Brown, which was one of the most spectacular
blowups in Australia. He came out and he was
kind of doing his own thing. I was doing my own
thing. And then eventually we just said, why
don't we just do something together? And the
truth was no business plan. um was in place we
just said we want to do something and but what
did we want to do we wanted to get into early
stage businesses but we but how do we do that
if we had no money then we say well the only
way we can do is invest other people's money
right um which you know people call it funds
management eventually um the easiest part for
us i think was actually at that time deciding
that we wanted to basically give it a crack and
um and do something on our own because it was
during the gfc anyway so it was you know he he
was out of a job at that particular point in
time i was bored um and we just always knew with
the skill set that we um and the experience that
we had we can always go back to a job so actually
making taking the punt as hard as a lot of people
thought it was for us it was actually relatively
easy the hard part was everything else which
was you know we you know we even though we wanted
to get into investments We wanted to get into
an area where it was completely niche, which
was venture capital. And venture capital wasn't
even a terminology in Australia back in 2009,
2010. We also, as I was saying before, we had
no brand, no track record. We were 26, 27 at
the time, but we looked like we were 16 and 17.
And it was just like, no one's going to give
us any money. It was impossible to raise money.
With the entrepreneurship that we had, we started
off actually as a corporate advisory business
because what basically that was, was we leveraged
up the skill sets that we had to advise other
early stage businesses, whether it's their business
plans to helping them raise the next round of
capital. So for us, it was definitely the raising
capital bit and actually just getting set up
was definitely the hardest, but coming out and
deciding to do it wasn't actually that. Yeah.
It's fascinating what you just said there. So
if anyone out, entrepreneurs out there listening,
right? You can't just go get, look, okay, let
me rephrase that. Doesn't matter what deal it
is, the single most important, be it property,
be it venture capital or anything, wouldn't you
agree? The most important thing is having a good
deal, right? But... If you don't have the ability
to raise the money and bank that deal for the
deposit, right, the next best thing is to, you
need to develop a reputation in the market for
understanding what a good deal is and people
to understand that. So how good is it when you
have a consultancy business, which is generating
cashflow, which is number one, the hardest part
to pay for everything else, then you need to
build up your reputation. And then along the
way, you are looking for a good deal. And as
friends of mine say, like, say you're looking
at 200 deals, you're not looking at 200 deals.
You're trying, you're not saying no to every
single deal. You want to say yes. You want to
say yes to the right deal that's right for you,
right? And only maybe one or two or three deals
that year or the next two years, maybe a yes,
but you need to see two, 300 transactions to
go to say yes, because you want to say yes to
a transaction, right? And then wouldn't you agree
that, you know, with the cashflow and everything,
you're building up your reputation. Then when
one deal lands, how much easier is it to close
that transaction? You know, when you're in the
game. I think, you know, one thing I learned
over the last 15 years is people or fund managers
always underestimate what it means to run a funds
management business or build a funds management
business. You know, you always have exceptional
investors that come out of big or small firms.
They've got great track record, great performers,
and they come out and they just think, I can
do this on my own. I don't need the infrastructure.
because there's no value in it. And it's all
about me and my ability to invest because at
the end of the day, people are backing my performance
and not the infrastructure around me. But 10
out of 10 times, it would be they realize that,
fuck, I didn't realize how expensive it is to
build this infrastructure and two, how difficult
it is for people to actually raise money, right?
Because sometimes even if you have the track
record, historically in other funds, it doesn't
mean that people are willing to invest into your
new product, your new fund, because no one wants
to be the first investment or the first investor
in the door. That was, you know, we always say
raising the first 10 million in any fund is always
the hardest. But for us, not only was that difficult,
it was also, well, how do you create a sustainable
business? Being a fund manager isn't just building
a strategy, it's actually building a business.
And I think that's a big distinction that a lot
of people don't realise until they really get
stuck into it. And so if you're building a, if
you want to build a business, you know, it doesn't
start with, you don't start at 10, you start
at zero. And when you start at zero, you need
cash flow. Or you can raise, you know, if we
were a tech business, maybe we would have raised,
you know, a whole heap of money, but we weren't.
And therefore, we had to basically just be entrepreneurial
and kind of hustle our way throughout the beginning
and generate the cash flow outside of not necessarily
what we thought was our core business. But I
think what you need to do very quickly is realize
over time what is not your core and what is your
core and kind of reduce the non -core part as
quickly as possible. The flip side of being entrepreneurial
is actually everything is super interesting.
Everything could make money and you could just
get poured into 100 directions and you'll try
to do everything, right? Because everything sounds
interesting. So to balance that, it's really,
you know, how do I then stop doing the corporate
advisory stuff? Because, yes, it gave me the
nice sugar hits of revenue, but it wasn't what's
going to build my sustainable business that's
going to build them. most terminal the highest
terminal value in this business over time um
and and basically say and be willing to say no
to that cash flow or that revenue here um as
you kind of get bigger and you will be able to
but you just learn to have to learn to say no
at some point yeah it's a it's a it's a lesson
that everyone needs to learn but you can't have
a without having b so with with um the with the
fund right now right um what what is the fun
what's the what's the philosophy like where did
you land as you caught it you know what is your
core now yeah so i run our venture capital strategy
inside um at awara which was actually our first
strategy um within the group um but maybe to
give you some history on how we where we how
we got here because right now we don't do just
adventure we do venture capital we do private
equity and we do alternative credit but early
in the game um We kind of had a philosophy in
the way that we invested, which was we believe
that in order to invest in Australia, in venture
capital in Australia, you kind of have to play
a very different game than any other investor
around the world. So as to you're going to have
to play the field a little bit. In Australia,
while it's a great country, you have a lot of
disadvantages. We're far from everyone. We generally
have small markets in most industries. and you
also have less access to capital than anyone
else not only because it was nascent it was just
a small market um what that meant was that you
you know australia has developed this very capital
efficient dna um and if you look at some historical
data like australia has been able to deliver
more unicorns than any other region per dollar
invested But when you look at the absolute number
of billion dollar businesses that have come out
of Australia, it's not that many when you compare
to the rest of the world. So our philosophy is
that if you're chasing billion dollar outcomes
in your portfolio companies and as your only
way to deliver the returns that you need for
your fund, then your probability of success is
relatively low just mathematically. So the way
we're kind of thinking about it is, well, how
do we generate? our venture style returns when
these companies don't have to reach a billion
dollar outcomes. And the only other way is you've
got to get in earlier, right? And which is why
we focus so much on seed. By focusing on seed
investing, it allows ourselves to focus, to get
in at the right valuation, get the right ownerships
in the businesses so as to be able to return
our fund even before it gets to the billion dollar
outcome. So what that meant for us was... in
vc we wanted to basically continue to build muscle
around a stage of the investing we also took
the view that you can't actually invest um so
you you can't be a um a specialist in terms of
us particularly industry or sector in australia
because we didn't feel like the market was deep
enough at that time or even now but we do believe
that You know, investing, it is a muscle that
you get better at as you kind of do it, and which
is why we wanted to focus on a stage of investing
as opposed to an industrial sector. But what
that kind of translated to was, well, actually,
we don't think that you can actually effectively
deploy hundreds of million dollars in C -stage
investing in Australia at that time. Arguably,
I don't think, I think probably 75 to 100 mil
is probably the most effective. fund size for
seed stage in Australia today, but definitely
not back then, even definitely not hundreds of
million dollars now or definitely not back then
either. So what we did, so we said, okay, so
if we wanted to stay true to our philosophy in
being, I guess, disciplined and high conviction
in the way we invest, that's fine. But then it
means that we're only managing 20, 30, 50 million
dollars at a time for each fund. But how do you
create a sustainable business that way? And so
our decision was, well, rather than kind of just
do bigger funds and kind of compromise the way
we wanted to invest, we said, well, why don't
we expand into other strategies so as to we can
continue to be patient in the strategy that we
run and be disciplined in the strategies that
we run while kind of build our overall business
by introducing more strategies into the fold.
And as a result, we kind of went into then. private
credit, and then eventually private equity. But
I think one thing that kind of applies across
our business is regardless of what the strategy
is, we generally believe that you kind of need
to solve white space, right? So, you know, right
now we're in the process of, you know, the business
is in the process of launching a new real estate
credit fund as an example with a great partner
that we're bringing on board. The first question
was, does Australia really need another real
estate credit fund, right? Like there's so many
of them out there. But what we've discovered
or what we worked out with this partner was actually
there is white space in real estate private lending.
And it's in this sort of $1 to $20 million construction
space where the big guys or the successful guys
don't really want to fund because it's getting
too big. And the smaller guys don't have the
skills and capabilities to actually do these
loans, right? And as a result, there's borrower
demand and the risk -adjusted returns also stacks
up in this space. So kind of going back to your
question there, today we – so the way that we've
kind of, I guess, grown our business was I think
we've actually eventually developed not necessarily
just a funds management business but a fund platform.
whereby we can consistently grow or develop new
strategies within the platform that shares a
middle and back office infrastructure. And it's
almost the same as the way I look at VC, funny
enough, which is it's about people. I want to
find, like I do in VC, I want to find the best
founders to back. In this case, I want to find
the best portfolio managers to back and then
give them the infrastructure to get them successful.
No, 100%. Completely agree. It's interesting
you say that because if you look at the history
of fund managers, like how many fund managers
have fallen over? And what's interesting about
when you go back and look at the fund managers
that may have fallen over, they're normally just
being a single asset fund manager. They normally
just only do one particular thing. And that's
fantastic when the market's ripping and everything's
in their favor. But when you get a particular
winter or a tough time and then you get funds
being pulled out. you know, it's very challenging
for them. Where's that money go? The money doesn't
vanish out of the market. You know, like to me,
there is a unspoken truth about funds management
that doesn't get talked about a lot, which I
think it's obvious, but it just doesn't get talked
about a lot, which is there's a natural conflict
between growing a funds management business and
performing. or staying true to your your strategy
because growing your funds management business
is means just increasing the amount of funds
under management you have in that strategy but
there's a certain inflection point in your strategy
where there's too much capital and then as a
result you have to change the way you invest
right or you know for example As a fund gets
bigger, you might have to do bigger deals because
the smaller deals no longer make sense because
you can't actually manage as many deals if you're
only still running small deals. Or otherwise,
you're kind of sitting on too much cash and you're
causing a cash drag in your fund. And it's interesting
because we're starting to see this play out now
across the industry. across the us but also in
australia where single asset managers are now
expanding into other asset classes or doing or
expanding their strategy um you know we're seeing
like for example lightspeed in the us following
some of the other large players like your acs
and zeds of the worlds where they're they're
no longer if you kind of look at them they've
they've now registered as a i think a roa which
basically allows them to unlock the type of deals
that they can do where in the past it was venture
capital but now they can do secondaries they
can do listed equities they can do debt um you
know they can do um acquisition buyouts etc now
if you kind of look at that like they're no longer
just a pure play vc and they've kind of moved
into multi -asset and we're seeing that in australia
like if you look at the most recent air wallex
deal like some of the funds that have gone into
that deal like you you kind of honestly say that's
a venture capital investment it was a series
f it was a you know I think it was a $10 billion
valuation. And if you're doing a VC deal and
you're trying to get a 10x return on that, it
means Airwallex is going to have to eventually
be $100 billion. I don't necessarily think that
they... I mean, it could be, but I don't necessarily
think that's the chase people are going after.
So I feel like the mindset and the strategy has
shifted. And that's partly driven by that conflict
of... the size of capital that the funds under
management that you grow. So when we've kind
of thought about that conflict or kind of how
it's played out is how do you solve for that?
Which is, well, in order to do that, we could
have a platform where you have, where we could
house a bunch of managers that allows them to
be disciplined on the size of capital that they're
raised so as to be most efficiently effective
for their strategy. without overgrowing but yet
being able to be a sustainable business because
you then become a house of strategy right um
that can leverage off the the infrastructure
and the cost base across the group um and you
know while but if you were on a single strategy
there's no way you can do that and be a sustainable
business which is why you know unfortunately
in vc in australia what we're gonna what i think
we're gonna start seeing is we're gonna see a
bit of contraction in the market because I love
the pure play feces in the market that came about
maybe five, seven years ago. You know, their
funds are probably sub scale in terms of being
able to run a business wherever they're probably
managing sub 50 million. And they're going to
in this particular market, they're going to struggle
to probably raise the next fund. And if they
don't, how do you how do you, you know, even
if they're on a 2 % on 50 million, how do you
actually, you know, maintain a business? on 100
grand a year in terms of management fees. Yeah,
it makes a lot of sense. So in summary, to run
a good business, you need multiple strategies
because as you mentioned, the venture capital
is a long -term strategy that takes time. The
equity side can become shorter, but you need
cash flow through the door, right? And then Australia's
turned into a bridging loan economy and there's
demand for it, right? There is demand for private
credit because why the banks aren't lending.
So the three main strategies you have are private
credit, venture capital, and the equities. So
why don't we just do the private credit first?
So the private credit, what return would a client
expect to be in there and what are the mechanics
behind that fund? Yeah, so our private credit
income fund, that's going into its eighth year
anniversary. and that's been averaging about
9 .9 and a half percent per annum over the last
that entire period since inception. It's got
monthly liquidity and it pays distributions monthly.
It prioritizes capital preservation over alpha
returns and basically what the strategy is to
provide in simple terms warehouse lending to
lenders. such that it allows us to scale by and
create diversification across the book through
multiple lenders and multiple asset classes.
So if you look at underlying loans across this
strategy, there will be tens of thousands of
loans in there, which provides real diversification.
These are all corporate loans or SME loans in
most cases. And so it doesn't have personal lending
exposure in it. That fund is now, you know, rated
by multiple agencies. It's on platform. It's
an evergreen fund. And it's just allowed investors
to leverage off the credit wave over the last
couple of years. But it's one of the few credit
strategies that's been around for about, you
know, eight years in Australia. How much is in
the fund now? uh uh in excess of half billion
yeah right and the private equity strategy so
private equity was probably one of our latest
strategies um although we've um probably about
seven eight years ago it's um at the moment we
do predominantly spvs um so we don't have a blindfold
phone but that's probably the next chapter for
us um across the spvs we kind of focus around
um sort of sub quite a sub 100 mil ev businesses
um you know for people that are familiar what's
an ev business so enterprise value so um so the
market cap or the market value of the business
um and the then these businesses Generally, it's
a situation where you've got a set of founders
that are looking at taking some money off the
table, not necessarily want to walk out the door
today. And there's still a lot of growth trajectory
to go. And we kind of come in, we help them take
some money off the table, maybe fund a little
bit more for growth. And then we've the plan
to exit over the next sort of three to five year
period. and is industry agnostic. One thing,
and so we've invested across Asia Pacific, but
one particular strategy that we're looking at
is predominantly across Southeast Asia. And,
you know, in simple terms, what we're looking
at is almost like a time machine kind of strategy,
which is there are certain industries or certain
models that have played out really well across
certain regions, which are similar to... um southeast
asia um so for example china is a big one all
right so there's certainly um there's certain
models or industries that have played out really
well in china and then we look across southeast
asia where you know where they're similar where
which regions have similarities um with china
across that industry um and then we look at um
where is the market at in terms of maturity in
those industries and those in um in those sectors
and we look at that from both you know capital
kind of that's been invested in this space but
also liquidity that's happening in this space
and we look at kind of you know what could have
the tailwinds that it's um that those comparable
countries have received over the next few years
and we kind of look at every opportunity or every
business in that space and then kind of make
our bet in one in what we think is the market
leader at that time um that has room to grow
um The other thing that we kind of look for as
founders maybe just looking to take a little
bit of money off the table or looking for some
growth capital, it's also possibly a management
buyout situation where the people that's running
the business is really the management team, but
the shareholders that own the business, the original
founders own the business that's no longer involved,
own most of the equity, and then we kind of come
in and do a leverage buyout, a management buyout
with the team. So unlike traditional private
equity, we're not stepping in, taking over operations
and trying to rip out cost synergies. It's really
about growth capital. And it's really about working
with our founders in those businesses to grow
the business or founders on management teams
to grow the business. So that's why an SPV structure.
So essentially every single deal is its own standalone
transaction. So how does the venture capital
fund work and why is that different? Because
it sounds like, well, venture capital is seed
-based investing, right? I'm just saying, to
a layperson having a listen, they're like, doesn't
venture capital just sound like equity investing?
What's the difference and how does the venture
capital fund operate? Yeah, look, I mean, let's
talk about the asset classes. So if you simply
put, venture capital is much earlier in terms
of the business's life cycle than private equity.
Even in venture, you separate it from kind of
seed to post seed and post seed will be like
your series A, series B, series C onwards. And
the way that we kind of define it, because we
don't, you know, even though we say we're a seed
stage investor, we don't define it based on a
naming convention. It's not about the round that
you raise. For us, it's about, you know, has
the business reached product market fit? And,
you know, product market fit could be defined
as, you know, Does the business or the founders,
are they solving a problem in a way that has
a material impact to the way that the problem
is currently solved? And is they solving a problem
that's meaningful enough and material enough
that customers are willing to pay for it? And
you're just generally seeing signs that we normally
see is just generally this love for the product.
that the customers have. And that's kind of sort
of signs of product market fit in very simple
terms. And in that particular case, it's not
like you're late stage investing, even in late
stage VC and definitely not private equity where
you've got a set of numbers. It's almost like
partly a spreadsheet exercise where you already
know what the defined metrics are. You're running
spreadsheets and you're kind of doing analysis
of the business. It's really, it's more predominantly
on who the founder is. basically building conviction
on the founder, building conviction around the
thesis in the market and the problem that they're
solving, how it should be solved, why it should
be solved, and the way that they see the world
about how that problem should be solved over
time. But then also having a product and having
signs of engagement on that product. So if you're
going to distinguish VC and private equity, then
private equity is a lot later stage. So the businesses
already have product in market. They basically
have customers. And it's really about, okay,
what is the next stage of growth? How do you
then go from what they are now to expand whether
in product, expanding to regions or to take more
market share in the business or across the industry
or the sector? Generally, these businesses on
private equity side are profitable, right? Whereas
in the seed stage side, they may not even have
revenue or they're just on the brink of revenue.
So very different deal cycles. So naturally,
if you kind of think about it, like, you know,
there's one thing that I think in the nascent
market, when we first started in VC, a lot of
people didn't understand or LPs didn't understand,
which was failure rates at normal, like businesses
not working or going bust is normal in venture
capital, right? And which is why it's so important
that you have to run a portfolio. So when we
first started in venture capital, because the
market was so nice and it was so difficult to
raise money, it was almost a means to an end
where we started off doing SPVs. But we very
quickly pivoted away from SPVs into a blind pool
fund or into a fund structure whereby, because
we just knew that you have to build a portfolio,
you have to run venture as a portfolio, whereas
you don't have that type of failure risk. in
private equity and therefore you can run it as
SPVs for as long as you want. The benefit of
running SPVs is it gives investors that certainty
in terms of I know exactly what I'm investing
in. Half the time it's actually I'm kind of backing
the business as much as I am backing the fund
manager because it almost allows them to pick.
Now, there's this like overall, there's this
up and rising syndication model that's coming
out in Australia. And look, and I think it could
work. But I think when they start managing LP
expectations, that's where it becomes difficult.
But that's the distinction at the moment. Yes.
So, Eric, with the VC fund and the SPV, you know,
how is it structured? So, if we're investing
with all in these types of businesses, how is
it structured? Do we just... i don't know does
an investor just give you half a million dollars
and then the money's in there for five ten years
because the life cycle of some of these businesses
can take a very long time like how do you structure
the transaction because we've had a conversation
before that it's done a bit differently but do
you want to explain how that all works please
yeah sure so on the venture capital side um so
first of all we don't do spvs anymore like That
was something that we did at the beginning when
the market was still nascent. But we generally
believe that venture capital has to be run as
portfolios. So we don't do SPVs in VC anymore.
We do in private equity, but not VC. And the
fund structures that we run in Australia, it's
what they call the SVCLP or the Early Stage Venture
Capital Limited Partnerships. And what that is,
it's basically a partnership structure. whereby
our registration has been, if approved by the
government, it basically provides certain tax
incentives for our investors or our LPs. And
these incentives are things like, you know, any
returns, whether it's income or capital that
comes out, it's tax free for the investor. There's
up to a 10 % tax offset for our investors for
deployed capital from their capital cause. And
I think there's a pass -through in franking credits
as well. What's a capital call? You said capital
call. What is that? Yeah, so the way that the
fund works is it's a capital call structure,
meaning that we call capital as when we need
it or as when we find opportunities to invest
in the fund. So let's just say an investor wants
to invest a million dollars. So they come in
a million dollars with us up front. And basically
they're investing off the back of our strategy
and our track record. So we take that commitment.
Typically on day one, they might fund 5 % of
that commitment. So they give us 50 grand from
day one when we do the first close. And then
thereafter, as we find opportunities, we'll make
capital costs, generally between 5 % to 10 %
capital costs. So progressively... we will over
the next sort of three to four years call this
capital until it's fully called. And what happens
is we combine, in terms of our strategy, we do
our first check investments and we do our follow
-on investments in the same fund. So what that
means is we'll build a portfolio of assets or
companies. and for the ones that we think are
potential outliers we'll continue to follow on
on their future round of capital raisins so we
combine those two exposures together into one
fund so you know for the first probably two to
three years we'll probably call more of the money
faster because we're building out the portfolio
and then We will reserve an amount for follow
-on investments and that reserve will get called
based on, it's a little bit less predictable
because it just depends on when the company is
raising the next round and we want to participate.
One thing that we've leaned into is one of the
benefits of a capital core structure is you're
not sitting on cash, right? So you don't have
the pressure to deploy capital. But I think there's
a natural pressure to deploy capital when LPs
are saying, you know, from LPs where if they've
committed to something, mentally they've kind
of set it aside. So they want to deploy it, right?
And this is general, well, why, you know, if
you're slowing calling capital. Let's call it
what it is. It's called cash burn. And if cash
is sitting in that bank account not being used,
an investor goes, well, I will pull that money
out and stick it somewhere else or it's costing
me money. You know, what's going on? cash back
so there's this like general conflict between
well i want to be able to um if i have to call
the capital faster in order to satisfy my lp's
sort of expectation then i need to find somewhere
to stick it so for us is well we don't think
that that's right we we think that we should
only call it when we find the right deal and
which is why actually if you look at our last
find our 2022 vintage we actually did our first
close in 2020 so we closed off um we did our
first close on that fund in 2020 and we started
deploying in 2020 but actually between 2020 and
2021 we actually didn't make a lot we actually
didn't call off capital because we didn't make
a lot of investment because during a period of
time we just thought the market was too frothy
we kept getting priced down on valuation um and
we were just very slow in deploying and that
us that was us leaning into the ability to do
that because there's a capital core structure
um but at the same time we copped a lot of you
know criticism from investors in terms of how
come you're not deploying how come you're not
calling capital um where every other manager
is deploying um and i've got this money set aside
for you that's not really earning any money like
you know what i do with it um but if i kind of
look back today like it was probably the best
thing that we ever did right just being disciplined
in the way that we deployed um So if you look
at our 2022 fund, even though it was first closed
in 2020 and technically it's kind of four and
a half years now, our weighted average in terms
of time of us holding that capital from investors
based on the capital cost has only been about
two and a half years. How many investments in
that fund? So that one's got 12 at the moment.
That's got 12. I want to dig into this a bit.
Because I've known you guys for a long time.
A colleague that used to be with you guys used
to go to school with us. I've known Aura for
a long time. From an investor and advisor's perspective
where we look after a client's capital, we might
allocate 10%, 15 % of a client's portfolio to
these investments. Early on for me, a capital
call structure is very challenging to go into.
When you're an advisor allocating money, if you're
a private investor, really simple, easy because
you can account for it. Yep. Because how can
I tell the client they're going to stick $100
,000 into something and it may get called down
if and when it does? Because the other issue
is if I'm, say, hypothetically using your private
credit fund or someone else's, that money might
be stuck in there quarterly, half -yearly, but
you need that money out within a timeframe. We
get in trouble. And the other thing with an investor
is we're doing an asset allocation to a particular
strategy. The money is sitting there. They know
it's sitting there for four years, but if it's
not... But the money is actually sitting somewhere
else. It doesn't make sense. So we actually discussed
at lunch a solution to this problem that you
currently have that you're starting to discuss
with other financial advisors about how to restructure
the venture capital fund with the use of private
credit. Do you just want to walk through how
you've gone about solving that particular problem?
Yeah. It's quite important. It's quite important
because I love what you do. We love the upside.
We'll get into the deals. The deals are fun.
Like your back channel, it's been magnificent.
But solving this particular part, which people
aren't familiar with, is very important to get
their head around how best to work with you regarding
the capital calls. Yeah, it is. It is a structural
issue that has... been a barrier for us in the
past. So how we solved it initially was actually
similar to exactly what you said. Investors are
like, well, I've got this cash sitting aside.
On one hand, I want certainty that I'll be able
to fund your capital cause if you call for it.
But at the same time, I don't want it just sitting
in cash and not earn any money from it. So what
a lot of our investors have done, and this is
the benefit of us being multi -asset where we've
got venture capital and we also got private credit,
is they basically park the committed capital.
Let's just say they committed a million bucks.
They park the million dollars into our credit
fund, which has a monthly liquidity profile.
Because we manage, because it's under the same
tent, we kind of obviously have insights into
how, when we're likely to be calling capital,
right? And we know what the redemption window
is for the private credit fund. So it's a lot
easier for us to actually manage a redemption
for one fund to move into the next fund because
we just understand the processes behind it. Now,
you could obviously do it with a third party
credit fund and someone could do it themselves.
But I think, you know, where they could put.
you know the money into another credit fund that's
with a completely different manager but it's
just the the because without the insights um
behind the operations of the two funds um and
the insights in terms of the timing of the capital
cause etc it isn't very hard to match it as well
as we would by owning the two funds in the same
in the same group um so that's how we kind of
have currently solved for it I think in the future,
one of the things that we're considering is actually,
does it make sense to kind of do a feeder fund?
Basically, it's a feeder fund that has the ability
to invest into both funds. But the intention
is whatever you invest into the feeder fund,
that is 100 % commitment into the venture fund.
But while it hasn't been called, we will invest
into the credit fund and move it across. That
way, you will be able to get distributions. when
you're basically making a venture capital investment,
right, on a monthly basis to a certain level.
And you don't have to worry about sort of the
cash drag on your capital just sitting in the
bank account doing nothing for the period that
it's not being called. And still at the same
time, we have all the benefits of actually, you
know, having the capital core structure in the
venture capital side and not impacting performance.
Yeah, it's very important. uh topic to discuss
because like i find with these podcasts you can
read through all the information get your head
around it right but then the same one thing with
every single fund manager pops up the one problem
they have and i found with uh all right it's
that capital call because like you do great work
the deals you do a great the team's fantastic
right but that capital call not knowing when
the money's gonna hit but I've been chatting
to another one of our colleagues that oversees
a number of fund managers. He's fantastic. And
how myself personally and him, we've been running
money is very similar to what you're discussing
now for clients. But we've actually been doing
the same thing where instead of, we don't have
a credit fund, right? But we've been using, say,
your credit fund or other people's credit funds.
And that's a defensive part of the portfolio.
The defensive part of the portfolio generates
income. And then we're taking that income. And
then going offense. Yep. So we've been doing
that for the past handful of years now. And it's
been fantastic. Because guess what? You don't
get as volatile choppiness. You get very little
risk on the original equity, right? So capital
drawdowns are less. People psychologically are
a lot more comfortable because when people are
taking risk on money which they made from a profit,
guess what? right yeah you know they're only
potentially if the market goes down on the profit
piece they don't feel as comfortable as say you're
losing a 20 drawdown on a three million dollar
asset which you spent your entire life building
right yeah so i'm a really big fan of the solution
which you've come up with but it's inside a fund
structure so we're just doing this based on you
know a normal portfolio right you know having
these uh you know alternative assets generating
a large amount of income than taking the income
and allocating it to strategies like yourself
i just find it very interesting that you're now
you know looking at it from internally or the
other thing which was discussing at lunch is
that you're helping um financial advisory firms
create their own uh managed fund so to speak,
or their own particular vehicle where the clients
can go in, where there is an income component
and then the income's used to essentially assist
and help with the capital calls, you know, as
they come about, right? Have I got that correct?
Because it's brilliant. It solves a lot of problems.
Yeah, and the way, and, you know, at a very high
level forecasting, what we've kind of worked
out is about 40%, so you could potentially cover,
um your cap your commitment in the venture fund
which equates to about 40 of um sorry the distributions
of the way that you can um ensure that the distributions
out of your credit fund investments matches your
um venture capital exposure is it's it's circa
40 so let me explain how that works so let's
just say hypothetically you committed a million
bucks into um invested into the credit fund Based
on the average yield over the last eight years,
call it, and based on the timing of capital calls
historically that we've done, what we've worked
out is the distribution that comes out will allow
you to invest about 400 grand into the venture
fund and be purely funded by the distributions
from the credit fund. Love it. How good is that
strategy? Yeah. And then it's all compounding.
It's great. And it's actually on the venture
side. Yeah. And you're taking the income from
an asset which you're not risking to take the
income to then have a nudge on something that
may go nuts. Correct. But okay, let's talk about
risk, all right? So you've been doing this for
a long time, right? What do you reckon the true
numbers are on... Sorry, true is the wrong word.
What are the numbers based on... deals that have
been successful compared to the ones that have
failed. And the reason for anyone listening,
why I'm discussing it this way instead of what
are the percentage returns, right? Is in the
VC game, everyone knows that we're at the risky
end of, but there's a lot of upside, but you
know, deals, businesses can fall over, right?
And we account for that, right? So what do you,
what do you reckon the, the, how many deals have
you done and you know, what has been, you know,
successful and you know, what has gone by the
wayside? What do you reckon the actual? statistics
are because that's the only way i can really
gauge a venture capital strategy yeah so the
rule farm in the market and this and now going
to what our our data is so the rule farm in the
market is you expect a third of your portfolio
to go to zero you expect the third of your portfolio
to do kind of what's 2x and then you expect the
third of your portfolio to do kind of 2x plus
yeah um What we've seen is because we take a
more high conviction approach, we've made 25
investments in VC over the last 13 years. Four
of those have gone to zero. We've had about three
or four of those that have gone and done 5x plus.
And then everything else is in between kind of
probably call that a third is kind of in between
one, two, three X, and then everything else is
in between. And which is very different to the
third, a third, a third. But ultimately, I think
the message would be like failures in venture
portfolios. it's expected like you are expecting
that businesses go to zero certain parts of your
portfolios will go to zero if you look at the
success rates of sme businesses in or the amount
of sme businesses that actually fold in australia
or around the world in australia in particular
is a pretty high percentage right we're talking
about like 80 90 um so you know it is not unusual
for a business that you invest in to go to a
part of your portfolio go to zero um and i think
that people just need to understand that which
is why we believe that venture capital has to
be done as a portfolio. It can't be done as SPVs,
right? And then you will always kind of have
a number of your, maybe a small percentage of
your portfolio that becomes outliers that will
return your fund. The way that we look at investing
is every time we make a first investment into
a new portfolio company, We take the view of,
do we have conviction that this investment could
potentially return our entire fund? So let's
just say our fund was a $75 million fund. We
have to take the view that we'd be able to build
a position in this portfolio where it can ultimately
deliver me $75 million of return, as an example.
If it's a $20 million fund, then can this portfolio
company deliver me $20 million of return? And
I'm going to make sure I do three of those. That
is very different to actually how some of the
guys in the larger markets will play, which would
be, you know, if I was in the US, I might say,
I want 5 % of my portfolio companies to do 100X.
And I want 15 % of my portfolio to do 10X as
a C -stage investor. And that is the way that
I can deliver my, you know, four times return
on my multiple on investor capital. and that's
palatable in the us where you've got billion
dollar outcomes that happen every year you have
10 billion plus outcomes um happening every year
um and you know if you were one of the best in
the us you i mean that is what you should probably
be shooting for in australia While we've kind
of been, I think I mentioned this before, while
we've been efficient in the way that we've invested
and we've delivered more unicorns per billion
dollar invested than any other region, the absolute
number of unicorns that have come out of Australia
is pretty low compared to the rest of the world.
Which means that from our perspective is we want
to be able to make sure that we can return our
fund at least one times with the portfolio company
not having to reach a billion dollar outcome.
We just assume that doesn't happen. But it doesn't
mean that we don't have conviction that it can
happen. But we don't want it to rely on that
for it to be able to return our fund. So what's
been the past returns in the fund you mentioned?
And what's if you've got a new strategy currently
happening? So if a client goes into this, how
long are they looking to hold in this strategy?
And what's the expected return? Yeah, so when
we did the SPVs at the beginning, which we've
stopped doing in 2015, on average across all
of them, it's been about three times multiple
in investor capital. In what period of time?
So the first investment we made in that was 2013
and then the last investment we made in those
SPVs were probably 2015. The 2013 one. We fully
exited, so we exited partially along the way,
but fully exited in 2023, but we made exits along
the way as well. So that portfolio is fully gone.
Our 2017, 2018 vintage, we, again, it's about
three times multiple in investor capital. That
we've now, that was, so we did our final close
on that in 2018. So it's coming. So we're now
in our eighth year. That has done, we've returned
about 35 % of 0 .35 DPI or 35 % of called capital
today. Then we expect that to increase because
there's an earn now from an exit that we've done
to come through. So called that, we expect that
to get to about 0 .45, 0 .5 over the next sort
of few months. And then on our most recent fund,
which is our 2022 vintage, that is still pretty
too early to deal. So that's just sitting at
one times at the moment, partly because I'm mentioning
before, while we did our first investment in
2020, we actually did our final close in 2020,
first close in 2020. We actually didn't do a
lot of investments between 2020 to early first
half of 2022, purely because. We just didn't
feel like the market was, there was asymmetric
return opportunities during that period because
valuations were getting frothy, et cetera. So
most of our investments were actually done in
the last 24 months. So on a weighted average
basis, you know, it's been two and a half years
and hence a lot of the portfolio companies haven't
re -rated. So that's sitting at about one times.
So can you give a couple of examples? Now we're
into the fun part, the deals and the transactions,
right? So in the... The only thing I find hard
with, right, is I get it. You invest in the strategy,
you invest in the asset class, and I do completely
agree, mate. Ex -stockbroker that used to do
a whole bunch of mining IPOs and such, right?
Completely get it, right? That you're better
off as an asset allocator when you're dealing
with lots of money. You know, allocating a portion
to a good manager, you know, that can do a spread,
right? I'm all for that, right? But the only
thing I find a bit touch challenging is when,
you know, We're saying, we were telling the client,
hey, let's invest in a private equity transaction.
It's like, what's the private equity transaction?
No idea. When's it going to land? Not sure. But
the strategy is great, right? So I get that question
quite a bit, right? So I suppose maybe the only
way to kind of cover that is in the most recent
vintage, what are some of the businesses that
you've gone into and why? Okay. So I don't think
this is a secret, but... We honestly believe
that we're going through a new technological
cycle with AI at the moment. We've been watching
this space for the last three years. And actually
for the first 18 months, we felt like it was
a space that it was almost impossible to invest
in because everything that came out since the
launch of the release of the first LLM by ChatGPT,
by OpenAI. was basically just people innovating
around UXs or user experiences or sort of the
user interfaces that's wrapped around the large
language models. One thing that we always look
for is basically going back to first principles,
which is what is the problem that you're solving,
right? Why are you solving it? Should it be solved?
And then you're solving in a way which has material
impact that people are willing to pay for over
time. And we just didn't see that with any of
the businesses that came out that were basically
Chachiviti wrappers. But we do believe that AI
is going to, agentic AI is going to solve a lot
of industry problems. And it's almost like what
we were seeing with SaaS 10 years ago, we think
that's where we are with AI now, which is there's
still a lot of problems and a lot of industry
that hasn't actually been automated with AI.
which can be and will benefit from it. So, you
know, one of those investments that we've done,
which actually is a good example to this, it's
a business called Haast. So Haast is a compliance
AI business, yeah? So, you know, for yourself,
you'll probably understand it given you're in
the financial services space. But if you think
about highly regulated businesses as opposed
to consumer businesses, whereby, you know, you...
the content that you release is highly regulated
in a sense that you know you need to make sure
you're not misleading you know um you need to
make sure you're not greenwashing all these kind
of stuff so what happens um what happens is in
the organization like for example a large telco
to a large financial service business to insurance
company what happens is you know they would have
a piece of digital content that was going to
get released before it gets released it goes
through a bunch of compliance checks legal marketing
compliance etc but what happens is once it gets
released no one's actually really monitoring
those that content whether it's a blog post to
a video to a you know linkedin post to a web
page etc um and the way that it used to be managed
um or the way that or the status quo is you know
we would either be businesses will either be
reactive meaning that you know someone has found
something or noticed something or maybe they've
even been tapped on the shoulder by asic right
and they go oh we've said something here it seems
misleading we'll fix that and maybe we'll look
around yeah um or they might be proactive if
you're large enough like a telstra or something
you might be proactive and you'll go, I might
hire an external law firm or maybe I have a small
internal team that does spot checks, right? But
your obligation to be not misleading or your
obligation to not greenwash is not spot checks.
It's just 100 % coverage. But it is almost impossible,
well, it is impossible to be 100 % coverage when
you're a business like Telstra where you've got
maybe hundreds of thousands or millions of pieces
of digital content out there. The other issue
is your digital content is not just written content.
You could have audio. You could have video. It
could be an image where there's text within that
image that's formatted as an image where it's
got a misleading statement in it. Or it could
be five seconds within a three -minute video
that you've said something that could be greenwashing.
So it's actually almost impossible to manage
this properly and have 100 % coverage. Is it
true as well that even like, say you have a license,
you're an advisor in whatever capacity, if you're
on social media and you make a comment, that
can be potentially even a breach? Yeah. Is that
accurate? So this software you're discussing
can potentially canvas all of it and just quickly
flag if there's something that may be a breach
and needs to be fixed. Is that in a nutshell?
That's basically it. So basically using its platform
will allow it to basically screen everything
that's live, right? But what it does as well
is, and this is also the other part of the power
of AI that they're embedding into their platform.
It's you as the user, maybe you're a large telco,
you can then put in, you can feed it your rules
and policies into the platform. But the platform
will also suck in things like legislations, regulations,
et cetera. And then you'll process it to basically
formulate or come up with these rules that you
can ingest into the platform. And what these
rules do is they basically bring back anything
that they think is potentially non -compliant.
You as the user can then maybe go, here's low
risk, medium risk, high risk, et cetera. And
if it needs to be fixed, you can go into a workflow
to fix it. And that's kind of the basis of the
platform. But then the second stage of their
platform or phase of their platform, which they're
kind of already in the process of doing, is they
then build AI agents whereby it will work with
the user to basically fix some of these problems
with the user. And at some point when users become
comfortable and trust AI, technically that AI
agent can go off and fix it alone, right? So
basically you identify this is a problem and
then the AI will go and fix it. Like that is
ultimately the goal. But I think there is a barrier
between enterprise customers willing to do that,
at least in the early stages. The platform also
then trains a model for every single customer
such that the model will learn about the customer
and become more hyper -personalized. So a perfect
example is, you know, you might be a large telco
and you're... you have a very low risk tolerance
because it's such a large business. But then
another player might be, another user might be
a little suburbian telco that, you know, don't
really care as much, right? So what the model
does is it learns about you using the platform
and then learns about you and your risk tolerance,
right? And other factors, but risk tolerance.
And so as to basically be more meaningful in
the way that it produces you results to the platform.
And that ultimately, we believe, is what will
create the defensibility with a lot of these
businesses, which is the personalized data that
gets fed through over the time. Because if they
ever wanted to basically move to a different
platform in the future, they will lose a lot
of that data in terms of the model understanding
who you are. I mean, it happens now. I don't
know if you use ChatJBT. Yeah. My wife and I
used to use the same account. And I'm pretty
sure ChatGPT probably thought we were bipolar
because we were asking questions completely opposites,
right? And then eventually she decided, actually,
I'm going to get my own ChatGPT account because
it just worked so much better because it started
understanding who I am as a person and the responses
and results, which is just so much more tailored
to me, right? than when we were sharing the same
account. And that's like a perfect example of
how that stickiness will happen. The machine
learning capabilities that are starting to happen
with AI, it's fascinating. One thing I wouldn't
mind you covering, because I was chatting with
your other colleague, when you're looking at
this particular space, how hard is it to find
a legitimate company that is an AI service company
instead of just a legacy business that try to
just tack on? something with ai and then you
know come across as hey we're ai when they're
just not i would say that there is a lot of how
do i put it there's a lot of ai fairy dust out
there where a lot of businesses kind of i guess
image or um uh facade themselves as an AI business,
but they're not really, right? And kind of claim
about automation that they don't really do. I
think that's always going to happen. And you
really just have to look under the hood as to
what it is. I think there's two things, though,
to your question. One is who's going to have
a better right to win in this space, right? Is
it the incumbents or is it the AI native businesses?
On one hand, we think there's pros and cons on
both sides. On one hand, the incumbents are the
ones that have a lot of probably the proprietary
data about the existing customers, right? Which
I think is very, very useful if they're able
to leverage of it. But at the same time, because
AI is almost has created a new baseline, what
we've seen is a lot of the AI native businesses.
Basically, and what I mean by AI -native businesses
is basically AI businesses that build ground
up thinking AI first, as opposed to software
and then going into SaaS and enabling AI. And
these AI -native businesses are able to move
a lot faster because they don't have the handcuffs
of traditional thinking. They don't have the
legacy tech systems that they have to consider
in terms of building out their AI platform. What
that means is that we're definitely seeing a
lot faster speed in these AI -native businesses
than we do in incumbents. But I think if the
AI incumbents can actually move quickly, they
actually have a competitive advantage with the
data that they've got. I 100 % agree with that.
So one particular space I'm quite familiar with
is financial advice, CRMs. There's a number of
competitors in the market. Everyone knows them.
You've got X -Plane. You've got a whole bunch
of people coming through. But one particular...
way of maybe for people to think about this is
it's it's scalability making something more efficient
and actually legitimately solving a problem right
so one thing with an advisor like yourself we
have these meetings if you don't record it right
or you're not writing notes how can you trust
an advisor giving you advice if they haven't
taken notes right but the other problem is how
can you trust someone to physically sit there
write everything out and be engaged to solve
a problem if their entire thing is note -taking
they're not actually listening to what the hell
you're talking about So the one thing we're seeing
now, which is coming out of the UK, we use in
Teleflow, they're bringing out a thing in 12
months where you can audio record your meeting
and then essentially pull all the information.
You take the audio file, drop it into the system
and it'll pull everything from the transcript
and the audio and then systematically place all
that information inside their software as a service
into their CRM. right and automate it through
which will save an advisor like four hours from
a day and then and to your point about compliance
and regs right they've got compliance and regulation
feeding into the software and then you can pull
the audio file and all that information and then
it all feeds directly into the advice related
documents so if i'm understanding you correctly
that business and the business you mentioned
before is a phenomenal example of what you're
looking for as an ai business is that something
that would fit in the type of businesses you're
targeting? Yeah, I mean, that could be an example.
I think that if I was to summarize it, it's we
are looking for businesses. It's not about AI.
It's about, again, first principles, which is
what is the problem that they're solving in that
industry that's meaningful, right? And then it's
ultimately, you know, should they solve it? Does
it need to be solved? Is it a real problem that
people care about? And then it's the way that
it's been solved. Maybe it's AI that it's allowing
them to solve the problem in a way which is a
10 times impact. Or maybe it's until AI came
along, they couldn't solve the problem in the
past. Like the company I was talking about, Haas,
it was, like I said, it was impossible for anyone
to actually have 100 % coverage of making sure
that the digital content is compliant. Now they
can. And that's through the power of AI. Actually,
just thinking about it then, on the costs, the
costs alone, like they would have just – from
a business perspective, how many people would
you have to hire to cover and look after all
that stuff? Okay, let's talk about a real example,
right? In the Biden administration with that
Biden election and Trump lost, you had – They
lent on the major social media platforms and
they said, you need to stop. And quite rightly
so. You need to stop bigoted speech, you know,
child sex offenses, you know, all these horrible
dark things that can exist, you know, on social
media, right? But in doing so, the human problem
is human beings are human beings. And if you
have a large number of people in an organization
like Twitter at the time, they vote one way.
And then when they're in the hiring policy, people
try to hire. people like themselves unfortunately
you get skewed too far one way too far the other
what ended up occurring was normal business operators
that had an opinion ended up getting banned and
their entire businesses shut down right it just
it didn't work there was there was a certain
human bias to it the other problem is they can't
oversee it and the cost right, of I think when
Musk bought Twitter, didn't he fire like 80 %
of like, you know, they're just not required
anymore? So are you saying as well with, so from
solving a problem on a scalability standpoint,
this particular, it's Husk, isn't it? H -U -S
-K? Husk, H -A -S -T. Husk, H -A -S -T. Yeah,
okay. So Husk can potentially like a company
now like X. You can give it parameters with the
regulation and legitimately sift through it in
an unbiased format and go, what is actually legitimately
dangerous and shouldn't be there? And then, you
know, what is potentially an opinion and why
we won't kill that person's business, which happened
quite a lot during COVID and destroyed families.
Yes. I mean, technically you can apply a use
case like that. I think, though, but to your
point before, like the number one thing that
we are. So when this business kind of goes into
a proof of concept with a customer, like there's
one metric that they try to prove in terms of
proving the value. In the past, when we first
looked at this, we thought it was, well, it has
to be the amount of risk that you're reducing
in the business. But it actually is not because
it's... them trying to reduce risk is the ever
going thing. Like no one wants risk, right? And
they're trying to reduce this compliance risk
all the time and they're already doing it. What
the immediate real value that you can actually
demonstrate and quantify is on your return on
investment is how much cost you can save. How
many people you're going to, how many costs in
terms of external people you're going to reduce
in terms of hiring like an external law firm
to do this stuff. And then comparing it to, well,
if I wanted to increase my coverage from, let's
just say they were doing 5 % to 10%. I couldn't
do it before because it means I had to double
my budget. Actually, now you don't, right? You
can do the amount, but with the same budget or
less. So at the end of the day, especially in
this macro environment, like the easiest way
to prove value to a customer at the moment is
how much cost it can save you. and still delivering
if not the same or more value or more um yeah
more value to the business wow so with with um
a client that hast has i don't know if you know
any numbers off the top of your head like is
there is there a a client which they have that
comes to mind that the actual percentage saving
like the the cost that they've saved this particular
client yeah so in one particular case um First
instance, I think they saved them about 60%.
60%. And the coverage, as you mentioned before,
like you may have only been seeing 5 % or 10
% or 15 % of the flow, and now they're seeing
pretty much as much as they can. So the exposure's
gone up, the scalability's gone up, the efficiency's
improved, and they've saved 60 % of the cost,
which can be redirected somewhere else. Yep.
That's cool. It's cool, right? That's really
cool. So just questions of time. Is there another
business that you're currently looking at in
the space? Look, we're just about to make another
investment. And it's slightly different. It's
not in the vertical AI SaaS enabled space. It
is in actually the large language model space.
So one thesis we have is, you know, there's obviously
an LLM war that's happening in the US at the
moment. And it's probably a war that we don't
want to get involved in because I just don't
think we have enough capital in Australia to
basically participate, so to speak, especially
us in terms of our fund size. But where we think
is interesting is actually not the general LLM,
but the specialised LLMs, where there's certain
LLMs which are trained for a specific industry.
whereby it's actually lower cost to actually
train that model. It's more accurate than the
general models generally, or it can be. And it
understands and has better output for the users.
And one business that we're looking at and then
investing in is a business called Isaacus, which
basically has built a specialized LLM in the
legal industry. So what they're not trying to
do at first instance is they're not trying to
be the next Harvey AI. What they're trying to
be is actually a model that Harvey AI can plug
into, right? And especially where everyone is
now moving to multi -models as opposed to single
models. And there's actually very little cost
in actually moving models. So the idea is that
they... by providing them with a more accurate
model we're competing against the more general
models um and they can and we can basically plug
straight into a lot of these planes um but that's
another space that we're looking at so the league
the league the legal one i love like let's let's
be honest chat gpt anyone else there out there
that does contracts right or even just normal
people you know you plug the thing into chat
gpt but sometimes it spits out something if you
don't sorry how do i say this if you don't teach
it correctly and feed it the correct legislation,
then what you'll get out is not necessarily what
you want. So when I heard this was happening,
I'm like, this is genius. This is magnificent.
Why isn't everyone using it? But then when I
spoke to a lot of my friends that are lawyers,
their main concern was privacy, right? So how
does this company deal with a privacy standpoint?
Like if you're dealing with, I don't know, a
major acquisition, right? And you've signed NDA
agreements and essentially you need... you know,
an AI, a large language model to plug in to make
your life easier and go, okay, what am I missing?
What clause has been pulled out? You know, save
my ass, please. You know, I've got a three -hour
deadline to get this thing done. The client requires
it. I don't want to stay up till 2 a .m. in the
morning, right? What protections do the users
have, you know, on that side? And where are my
thoughts on this? It's kind of like something
like Snapchat, right? You know, everyone says
Snapchat's fantastic. You know, don't worry about
it. The message has vanished. It's great. Fast
forward a number of years, there's a data bank
in some dam somewhere that's just collecting
everyone's data. Or like Ashley Madison is another
great example. Your data will never come out.
Someone does a hack, everything's there. And
then all of a sudden, from a legal standpoint,
back to the contracts, you're in a whole world
of trouble, right? So how have they gotten around
that particular problem? Because they are their
own model, right? they are actually so and they've
built it and because it's a specialized model
they um they have so as a user as a customer
you can run that model within your own environment
all right so it's siloed yeah so it's on its
own server so it uses the language model everything's
there is the tool that you can plug in and purchase
your own server and then everything's essentially
in your own server bank so it's not public it's
on a private server Technically, but basically
you can run it in your own environment and it
can be on -prem or it can be off -prem, but still
within your environment. Yeah, that makes so
much sense. Yeah, this has been brilliant. We
can talk all afternoon. But Eric, is there any
questions that you normally get from investors
or large family offices that you'd like to cover
that we haven't touched on? Look, I think that...
We're just generally in a market where capital
raising for funds has been very difficult. And
one of the questions that investors always ask
is, why do I want to allocate into venture capital
today? And I think it's one of those ones where...
Unfortunately for an industry that's relatively
nascent, a lot of the managers that they've invested
in or the funds that they've invested in haven't
gone through full cycles or where they have,
they probably haven't created enough liquidity
for them to demonstrate DPI performance and only
TDPI performance. But what I would say is regardless
of what, you know, you've invested anywhere else
or with the managers that you have and sort of
what the outcome you've had today. One thing
that is undeniable is venture capital is cyclical,
right? And we are at the beginning of a new cycle,
and we can see that from the balance valuations
that's in the market. We're also compounding
that with this AI technological platform shift
that's happening, which, again, I was saying
before, it's like what we were seeing in SaaS
10 years ago, but it's now with AI and valuations,
what's SaaS. was 10 years ago by an ai right
and we think that if you miss like because venture
capital is so cyclical that if you the the risk
of missing a vintage in the next few years you
basically run the risk of missing the asymmetric
return opportunities in this space right it's
been an explosion anyway now i think it's a lot
of time it's it's it's logical it's easy to say
um and people can appreciate it but it's it's
always hard to do right like i think the reality
is generally when it's the when no one wants
to invest is always the best time it is if you
want to just have an overlay of like a general
rule right and i think that's what's happening
with vc yeah it's uh it's been a bit of a crypto
winter the past three years this whole uh Companies
want to stay private for longer routine. I think
we've had the lowest numbers of, you know, IPOs
on the Australian market for a long time. The
other thing as well, the IPO market's been very
challenging because 10 years ago when things
list, the percentage of things listing at a premium
or a profit was higher. These days things list
and they just sink kind of nearly immediately.
It's been quite challenging. So, but again, it's
all cyclical, right? Yep. That's right. Hopefully
the boom times are coming back. Well, hopefully
the boom time's not coming back too soon because
we want to get our position set before then.
Yeah, let's get set first and then let the boom
time rip. Well, thank you very much, Eric. If
anyone wants to find you or get more information
about Aura Group, how can they find you? Always
send me an email, eric .chan at aura .co or just
LinkedIn me. Perfect. All right, Eric, thank
you very much for coming on The Rated Change
with York Orth Management. Have a great day.
Awesome. Ciao, mate. It's been a pleasure. The
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