Valkin family office targets venture debt plays

Venture debt is emerging as a strong alternative for mid-sized companies that require steady capital infusion to expand operations and fuel growth. For companies aiming to minimise equity dilution compared to traditional venture capital deals, a debt transaction is particularly appealing.

This is the space in which Singapore-based single family office Valkin Group operates.

“We look for businesses that have an established track record and revenue above USD 1 million – with USD 2-20 million being the preferred revenue zone – and invest in companies that have been in operation for over two years,” Vishal H Kewalramani, Valkin Group’s owner, told AsianInvestor.

Companies based in developed markets are what the family office focuses on, Kewalramani highlighted, saying the availability of a “strong legal framework and an open banking system” are mandatory requirements for making investments.

Open banking is crucial for venture-debt firms as it offers access to extensive financial data, enabling more informed lending decisions and streamlining the loan process for faster approvals.

Valkin specialises in US- or Europe-based companies that import goods from Asia. Its focus is on providing growth capital, particularly for inventory, and enhancing the efficiency of supply chains, according to Kewalramani.

“Our cheque size is less than $5 million,” he said.

The SFO made around fifteen investments in 2023 and is looking to make around 200 investments over the next few years through its main portfolio company, Ocean, which is focused on global trade.

DUE DILIGENCE

While venture debt can be potentially lucrative, it also comes with a unique set of risks. The Valkin Group has around a 90% rejection rate as it assesses company risk, even though a typical due diligence process takes roughly only a week.

“A debt level exceeding 20% of revenue is considered concerning by us,” Kewalramani said. “We also evaluate the company's ability to sustain its operations and repay debt based on its runway, profitability, and burn rate,” he added.

The team also analyses unit economics, focusing on profit margins. Companies with margins above 30% are prioritised. The track record of the founders and management team are also an important criterion.

As a general guideline, Kewalramani added. “We are prudent and selective with what we invest in, and this is not impacted by economic cycles, unlike private equity investors.”

SLOW AND STEADY

Valuing and monitoring private companies in venture-debt investing is more nuanced than evaluating listed companies with market prices.

It requires forecasting, industry expertise, and consideration of various factors beyond financial metrics to make informed decisions and effectively manage risks, according to Valkin. Company fundamentals are also important.

The firm focuses on industries characterised by stable and enduring demand, such as e-commerce retail, technology hardware, fashion and clothing, consumer household goods, apparel and accessories, home decor, among others.

Stability and consistent growth are preferred over hypergrowth.

“For me, hyper-growth is if businesses can double in size every year. We are not looking for 10x growth like VCs. Slow and steady – 100% a year is a big number for us,” Kewalramani said.

The family office is also focusing on sustainable and responsible investments.

“We established a pool of $50 to $100 million specifically for sustainable businesses, such as those owned by women or operating within the circular economy,” Kewalramani said. “These businesses receive preferential rates as part of our commitment to supporting sustainability.”

CONTINUOUS MONITORING

A typical duration of debt investment by venture debt funds is anywhere between three and five years. Companies usually outgrow venture debt due to increasing scale and financing needs, prompting them to seek cheaper capital alternatives.

Until that scale is reached, continuous monitoring of the business is crucial for debt investors. Valkin leverages technology for such ongoing monitoring.

Using modern technology developed by a portfolio company as a tool, the firm plugs into the accounting software of investee companies to assess if more capital can be given, if the companies want to scale.

How much money the company progressively “burns” to acquire a client is also an important parameter the family office tracks to help with further-investment decisions.

“We use a smart underwriting tool that analyses the banking data of companies and cross-references it with their profit and loss accounts and with their balance sheet,” Kewalramani explained.

This approach is critical and moves the Singapore-based entity beyond simply accumulating data.

By integrating with companies' e-commerce channels and accounting data, and cross-referencing with bank statements and cash flow, a more accurate picture of the business's health can be obtained on an ongoing basis.

“The bottom line is that we are fundamental focused, value and impact investors. We try to marry financial returns with impact investing, especially in global trade,” Kewalramani said.

“The family has invested in one flagship portfolio company in particular, focusing on supply chain and [it] is planning an IPO in 2026."