PRINT THIS PAGE Institutional Investor Profile: David Hunter, Managing Director, NESTA Investments01/08/2007. Source: AltAssets. 
David Hunter on investing in early stage venture capital partnerships in the UK, on NESTA's regional focus and on how his team plans to help the early stage venture capital segment grow.  NESTA (The National Endowment for Science, Technology and the Arts) is an endowment fund that was started up seven years ago to promote innovation in the British economy.
In short, NESTA aims to use its endowed funds of over £300m to transform the UK's capacity for innovation. The organisation does this in three main ways: by working to build a more pervasive culture of innovation in the country; by providing innovators with access to early stage capital; and by driving forward research into innovation, with a view to influencing policy. This profile focuses on the investment business, particularly the fund investment side, which is a relatively new area for NESTA.
David Hunter joined NESTA in 2006. The qualified accountant oversees all aspects of the organisation's investment activity and heads a team of ten investment professionals. Previously, Hunter was an adviser for Partnerships UK, where he was in charge of the equity investment business relating to commercialisation of public assets and IP. Prior to that, he was managing director of the Investment Management Group at 3i.
How much capital do you invest per year?
'Our team has about £10m a year to invest. We expect to do about three fund investments per year, and invest between £1m and £3m per fund. We also invest directly in early stage businesses.'
What type of investments do you look for?
'We aim to find successful commercial models of investment in the early stage or seed area - that is for both when we invest directly into a company and when we invest in a fund. For fund investments, it is our objective to play a role in setting up the fund. We always look to be a cornerstone investor.
An example of an investment opportunity we would be keen to invest in either through a fund or directly is a university spin-out that has already had about £250,000 of funding from a grant or an angel investor to get it going and to prove its concepts. It will then need about a £1m to get it into a position where a typical venture capitalist might be interested. We would help the company employ professional management and get it to the stage where its products are almost ready to go to market. NESTA would typically invest between £250,000 and £500,000 of the £1m needed and get other investors on board.'
Why did you decide to start investing in venture funds in addition to your direct investments?
'Historically, we have had a portfolio of about 40 direct investments. The fund investment programme was set up when I joined in 2006. The two main reasons for setting up the programme were that we hoped funds focusing their activities on a particular region or industry sector would help us cover the entire UK market, and we were keen to encourage new early stage players to come to market.
We look for UK-focused early stage venture funds that can offer something that adds to our in-house experience. NESTA is based in London and sometimes it can be quite difficult to cover the entire UK venture market from the capital. We have a number of funds in the pipeline and have already made our first commitment. We are a cornerstone investor in UMIP, a £50m investment fund focused exclusively on the University of Manchester. The fund is an innovative partnership structure in which the university and MTI Ventures work together to provide spin-out companies from Manchester with early stage equity funding.'
How many players are there in your space?
'Our research has shown that currently there are about a dozen players in this market. As I said earlier on, it is part of our mandate to attract other fund managers to operate in this area and we are going to do that by sponsoring vehicles that are or have the potential to be commercially successful. We open our networks to interesting new fund managers to help them establish their fund. New players could be experienced venture investors that have not operated in our area before or entirely new groups. Unlike the rest of the private equity industry, our end is an area that has not seen much competition. There is plenty of space for new people. When we do first-time funds we do, of course, look in much detail at the background and track record of the individuals.'
Are there enough investors interested in young, UK early stage-focuses funds?
'Only about two to three years ago, we could not have set up a similar fund investment programme; it would have been very difficult to raise a fund in this area. Recently we have observed that investors are much more interested in our segment, making it possible for new funds to set up. The seed/early stage segment profits from the increased interest in private equity investment and from investors worrying about return expectations in the mid to large-size buy-out segment.'
How do you conduct your due diligence?
'Our due diligence process is similar to anyone else's, I think. We have an investment committee and we discuss our proposals with them and the committee then recommends our proposals to the board.
We focus during our due diligence process very much on the track record of the investment team and an analysis of the market segment in which they are operating. We also want to understand how they source deals, how their due diligence process works and how they manage their portfolio companies.'
What do you think about the venture market in Europe in general?
'It still has not recovered from the dotcom boom and bust. Clearly in the run-up to the millennium this whole area was overheated, with a lot of money being managed by people who lacked the necessary experience and, as a consequence, a lot of money was lost. This is where European venture got its bad reputation from and now it is all about rebuilding the reputation and a track record. The returns and the outlook are positive again and the European venture market is growing. It will take a while, but eventually investors will regain their confidence in the market.'
Copyright © 2007 AltAssets
|
