Out of the ordinary

Written by: Gill Wadsworth Posted: 16/11/2023

Emerging funds illoA fund focused on national security, crime prevention and public safety… a systematic venture capital fund relying on system-based scoring rather than manager discretion… demand for new investment opportunities is driving an increase in unusual and unique solutions 

With a team consisting of a former director of the UK’s National Criminal Intelligence Service, an individual responsible for delivering the country’s first active cyber defence programme, and people with decades of experience working for national security organisations, you’d be forgiven for thinking you were looking at a crack squad from 1980s TV show The A-Team.

The reality is, however, that these are members of Heligan Investments who, alongside private equity specialists, provide investors with opportunities to allocate to companies supporting national security, crime prevention and public safety.

Heligan’s proposition is that it “looks to generate sustainable, long-term growth for portfolio companies, impressive returns for clients and positive change for the world around us, making it more secure”.

It says it does this by combining its national security, crime prevention and public safety specialisms with investment expertise.

So is the Heligan approach a signifier of a growth of specialist, niche investment vehicles – and, if it is, does the approach of combining specialist sector experience with investment knowledge provide a cutting-edge opportunity for investors?

James Syrotiuk, Partner at Heligan Investments, says: “Our USP is our unique combination of deep sector insight from [people] who have operational backgrounds across the national security and crime prevention and public safety sectors from within relevant government agencies (UK intelligence community, policing, National Crime Agency), as well as the acumen of hundreds of years of combined financial investment and private equity structuring, growth and exit experience. 

“That gives us deeper-level insights and the ability to assess and understand strategy, detail and technology that other more generalist investors out there cannot access or understand.”

Heligan does not invest in companies that sell armaments and weaponry, he says, but in technology businesses that “help make the world a safer place and that help protect companies and nation states from external threats and bad actors”.

“When you talk about national security, people automatically assume you mean projectiles or ordnance, but we are absolutely not about that. We are investing in businesses that can make the world a safer place. 

“We look at the technology these businesses are building, be that in cybersecurity or bespoke electronics that focus on our chosen end sectors.”

As an example, Heligan recently acquired a minority shareholding in Interrupt Labs, an international vulnerability research company focused on identifying and exploiting vulnerabilities in software and hardware, via its first private equity fund.

Security clearance

While firms such as Heligan are quick to espouse the benefits of such an approach, there are challenges that come with it. One of the challenges of such vehicles investing in companies that are, by their nature, secret is that accessing the usual financial information on which investment decisions should be made is not always straightforward.

This is where the Heligan team’s background in national security and crime prevention further comes into play. 

Syrotiuk says: “In these [security] industries, there is a level of clearance required to have open discussions, which a large number of our investment teams have. Companies feel comfortable and have confidence in providing the level of detail we need to invest. 

“Again, that is in contrast to a generic investment house that does not employ individuals who are vetted to the highest levels, enabling open and protected conversations to take place.”

Demand for such an esoteric fund comes, Syrotiuk says, from investors who are looking for an alternative to private equity funds that are “all doing the same thing”.

Emerging funds illo2“If you look back 15-20 years, there’s been a proliferation of new funds entering the market, which are all investing either in generalist sectors or picking traditional sectors such as manufacturing, IT or business services and consumer. 

“National security, crime prevention and public safety businesses aren’t something investors typically have exposure to and that’s driving a lot of interest.”

Indeed, it is hard to find any other funds offering exposure to companies supporting national security. 

Aidan O’Flanagan, Head of Funds at fiduciary manager and funds services provider Highvern, says that while funds with a national security focus exist, these are not centred on technology.

“There are older funds that are investing in the defence sector, but they are less on the tech side. The newer venture capital funds have a proven track record in private equity as well as expertise in the tech and security sectors.”

Jersey, where the Heligan fund is based, proffers the requisite skillsets and infrastructure to run specialist venture capital and private equity funds from the island.

Syrotiuk notes there “is no issue in investing in the UK. Any investment needs to be approved by the UK government in line with the National Security and Investment Act, which is the same for any M&A transaction in a qualifying sector”.

He adds: “We are looking at a UK FCA fund as our next launch, but this will have the same requirements as the current Jersey-based fund.” 
Away from the glamorous world of espionage, but staying with venture capital, O’Flanagan agrees there are other new types of funds emerging.

He reveals a first of its kind: a systematic venture capital fund that uses a system-based scoring approach to investment rather than relying on manager discretion.  

The fund, which is still in the testing phase, selects venture capital companies based on the information they provide to various questionnaires. The responses are verified and rated, and companies scoring above a certain amount are automatically entered into the fund. 

“The fund is now investing in 100 companies – which is very high for a VC fund – and it allocates the exact same amount into each company.

"The methodology behind the scoring is proprietary but it is based on verified information provided by the companies – and the ones with the highest scores are those that the managers believe give them the best chance of success.”

As with systematic hedge funds that have gone before, the idea is to remove as much human bias as possible from the selection process, relying instead on what the managers hope is a reliable and replicable approach that picks winners every time.

O’Flanagan believes that while the fund will wait for demonstrable performance before marketing to a wider investor audience, if successful, the likely appeal of such a systematic private equity fund will lie in its operational efficiency and lower fees. 

“The brilliant characteristic of this fund is that – if it works – it can be fully invested within six to 12 months, then they’re done and can move on to the next one,” he says. “This is because they don’t need to do the full due diligence that normal funds carry out to find investible companies, which takes times and incurs costs that are ultimately picked up by the investor.”

O’Flanagan adds: “[The systematic fund] is much faster because it cuts through all of that.”

Alternative investments

Elsewhere, the Channel Islands are experiencing a growth in new funds, thanks to the introduction of Guernsey’s fast-track application regime for overseas fund managers.

Introduced in 2020, the process allows an incoming manager to gain Guernsey Financial Services Commission consent along with the securing of its licence to conduct fund management into a single 10-day review period. 

Among those taking advantage of the regime is VinaCapital, a Vietnamese investment manager, which migrated its licence and registration from the Cayman Islands to Guernsey.  

While not referencing VinaCapital, Theo Brennand, Partner at Deloitte in Jersey, says he has seen an interest from investors for a Vietnamese fund. 

“I haven’t seen a specific request for an individual country fund in Asia. Typically, investors would be interested in Asian equities or perhaps in southeast Asian focused funds,” Brennand says.

He adds that the islands are also seeing an increase in infrastructure funds, typically driven by managers shifting from Luxembourg, where regulatory costs are higher due to the Alternative Investment Fund Managers Directive requirements.

“We have seen a few more infrastructure funds moving from Luxembourg to Jersey, which is clearly positive for the islands, and that’s predominantly driven by the fact that they don’t need that alternative fund manager protection,” Brennand says.

The Channel Islands continue to assert their position as a trusted financial centre not just for established funds, but for new and innovative offerings. However, whether these latest funds live up to their promise will only be known in time.

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