Q&A: Wellington Management's Michael Carmen

Q: Why are companies putting off IPOs to raise larger private funding rounds?

A: When I was investing 20 years ago, it was common to see a $200-400 million IPO. Those companies were still pretty small, and the failure rate was higher – they didn't all go out of business, but they did less well in the public markets. Once you're public, it's much harder to think strategically. The companies we invest in can open new markets, introduce new products, have failures, break things – everything they need to do to build a strong foundation. They do still plan to go public, but at a more patient and slower pace, so that by the time they reach that point they can build more confidence in their business.

Q: What role does Wellington play in the development of these companies?

A: The companies that we're investing in have largely been de-risked. They have $100 million or more in annual revenue, so it's not a question of whether they're going to survive. It's more about the magnitude of the opportunity, and because of our role in the ecosystem, we understand what it takes to be a strong public company. We help a company on the journey from private to public, over the next one to three years. What are the metrics of the business? What's the right way to think about the positioning of this company? What does it need to do to be successful in the eyes of public investors? We can play the trusted advisor role – that's how we differ from early-stage VCs that are in business development mode.

Q: How important is technology in your portfolio?

A: The sectors we focus on are technology, consumer, healthcare - including biotech - and financial services. These days technology, for us, usually means enterprise software, but what sector today is not deploying technology? When you look at our companies in healthcare, all of them are deploying technology, whether it's for healthcare services, patient management, or medical technology. We've seen cases in logistics and even agriculture, where you would never even think about technology, but it's transforming those industries too.

Q: How does Asia fit into the late-stage investment opportunity?

A: Our four biggest opportunities geographically are the US, China, India, and Southeast Asia. China, obviously, is the largest of those opportunities and probably will remain so for a long time to come. India is the most intriguing. It's still reasonably small when you think about the size of the market – the e-commerce market of South Korea today is still larger than that of India, even though India has 25 times as many people as South Korea. But the potential is huge as the middle class continues to grow. Southeast Asia is a little more disparate, because it consists of a lot of countries, and it's not as large an opportunity longer-term as India and China. But it's still a substantial opportunity, with hundreds of millions of people that are creating their own middle class.

Q: What sets Asian companies apart from your investees in other geographies?

A: There are a lot of similarities between late-stage investments in all these geographies when we look under the hood of companies. We might see a model that started in the US and was ported to China, Southeast Asia, or India, or one that started in China and was exported to India. The one area that we really need to recognize is that there are some very different players investing in these markets. Some large public companies are making very large investments, so as you go around the region you need to know who is invested in which set of competitors, because the underlying partners can play a big role in who the winners and losers are. While that's mattered to a certain extent in the US, it matters a lot more in these Asian geographies.

Q: To what extent do valuations pose a problem in late-stage investing?

A: The first half of 2018 was the busiest we have seen for private activity in a decade, and the valuation environment has proved challenging, with high-profile companies raising capital at what we believe to be unsustainable multiples with little room for error. We have tried to remain patient and disciplined when making new investments, and we have a long pipeline of companies that may raise an additional round of financing prior to going public. We think late-stage companies can benefit from working with a large, experienced institutional investor with deep expertise and contacts across industries. We have the necessary capital, the experience working on deals, and the infrastructure to navigate complex deals and ongoing valuation and maintenance.

Q: What is the attraction of this type of investing for your LPs?

A: One, they're getting access to the next generation of potentially good public companies. Two, relative to other parts of the VC market, the j-curve is very muted, because these companies are having liquidity events at a much earlier part of the cycle. The funds we're running are seven-year funds, and we're not investing in concepts, we are investing in companies with a decent amount of revenue. That's not a guarantee of success, but the success or failure rate of companies at this part of the cycle should be much stronger relative to earlier parts of the cycle.

Q: How do you see the competitive landscape in the late-stage VC environment?

A: There's always been a lot of capital in this market. Back in 2014 the hedge funds were much more prevalent, and they've since pulled back. Sovereign wealth funds have been present consistently, though mostly on the margins, as well as a lot of strategic investors. And now we're starting to see some of the mega-funds come into the market. There's always a lot of dry powder out there, and we're going to win deals and lose deals. Sometimes we'll lose a deal because the price is too high, and other times we'll pass on deals because the fundamentals aren't there. But we want to focus on reaching these companies earlier than others are reaching them and continuing to add value so that the message to entrepreneurs and VCs is that Wellington is a great source of capital. I think that will be more important to our success than who is competing with us at any given moment.

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• Topics
• Growth
• Technology
• Healthcare
• Greater China
• South Asia
• Southeast Asia
• TMT
• Growth capital
• Venture