Private market exchange ADDX has fractionalised a venture debt fund by Innoven Capital, a joint venture between a Temasek Holdings subsidiary and United Overseas Bank (UOB).
ADDX’s move brings the minimum subscription size for individual accredited investors down to US$20,000 from US$5 million previously. Innoven is a joint venture between Temasek’s wholly-owned subsidiary Seviora Holdings and UOB.
The Innoven SEA Fund I provides venture debt funding to high-growth startups and technology companies across Southeast Asia. The fund is anchored by a US$50 million commitment from Seviora and UOB, and it provides investors a combination of fixed income and equity return, with annual cash distributions.
Venture debt is a form of debt financing for companies that are still dependent on venture capital funding to grow. Loan sizes can go up to 30% of an equity round or cash in bank, and loans are made out based on factors such as the strength of the start-up’s shareholders, the quality of its management team and the firm’s competitive advantage.
For start-up founders, venture debt is less dilutive than equity financing, allowing companies to extend their cash runways and secure more time to achieve growth milestones.
For investors, venture debt is a fixed income investment with a lower risk-return profile as compared to venture equity capital.
Venture debt is, however, accompanied by regular distributions, which is attractive to many investors in the current risk-off environment.
In addition, venture debt deals typically come with equity warrants, which give venture debt funds the option to purchase equity at a future date, should the startup continue to grow. These warrants are a source of upside potential, giving venture debt a higher risk-reward profile than pure fixed income investments.
Choo Oi-Yee, CEO of ADDX, says venture debt as an investment class is poised to grow. “In the US, where the ecosystem is more mature, venture debt deals make up around 25% of venture capital funding. In Southeast Asia, that figure is less than 5%.”
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According to Choo, this “strongly suggests” there is room for expansion. “Venture debt funds raise more capital from investors and deploy that capital in a region where the prospects for tech startups remain bullish in the medium- to long-term, despite the uncertainty we’ve seen in the capital markets this year.”
As an asset class, private debt is on the rise, with assets under management (AUM) forecast to increase from US$1.2 trillion in 2021 to US$2.7 trillion in 2026.
Choo adds: “As blockchain technology lowers the barriers to entry for individual investors — by as much as 250 times, as in this case — we take the view that a significant share of the projected growth in private debt will come in the form of new, mass affluent investors getting access for the very first time.”
Paul Ong, partner of Innoven Capital Southeast Asia, says: “The macroeconomic climate and interest rate hikes that have impacted company valuations have led to cautious deployment of capital from equity investors. Companies have shifted their focus to decreasing their burn rate and building cash reserves in anticipation of a potential near-term period in which equity capital may be more difficult to obtain. In this current environment, the demand for venture debt has increased significantly.”
ADDX currently serves individual accredited investors from 39 countries spanning Asia Pacific, Europe and the Americas (except the US). ADDX also serves wealth managers and corporate investors through its institutional service ADDX Advantage.
Asset classes available on ADDX include private equity, hedge funds, venture capital, private credit, real estate, debt and structured products.
To date, ADDX has listed more than 50 deals on its platform, involving blue-chip names such as Hamilton Lane, Partners Group, Investcorp, Singtel, UOB, CGS-CIMB, as well as Temasek-owned entities Mapletree, Azalea, SeaTown and Fullerton Fund Management.
The full-service capital market platform has raised a total of US$140 million in funding since its inception in 2017, including US$50 million in its Series A round in January 2021 and US$58 million in the first tranche of its Pre-Series B round in May 2022.
Its shareholders include the Singapore Exchange (SGX), the Stock Exchange of Thailand (SET), Temasek subsidiary Heliconia Capital, the Development Bank of Japan (DBJ), UOB, Hamilton Lane, Tokai Tokyo Financial Holdings and Hanwha Asset Management.
