Venture

Allocation To European Private Companies Will Grow, Says LocalGlobe Founder Saul Klein

Unprecedented amounts of capital were invested globally as well as in Europe in the first quarter of 2021, per Crunchbase data. 

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As such, I thought it would be valuable to sit down (via Zoom) with LocalGlobe founder Saul Klein, a serial founder and prior executive at Skype, and a seasoned investor in Europe, to get his point of view.

Saul Klein of LocalGlobe

Klein, who chatted with me from his office in London, previously co-founded Seedcamp with Reshma Sohoni in 2007 and was a partner at Index Ventures from 2007 to 2015.

“Everyone has discovered that Europe is not a frontier market. It’s an emerging market and might be a real market,” said Klein.

Klein predicts that Europe will continue to increase its size of the pie. In 2010, there were eight unicorns in Europe. Currently, per Crunchbase data, there are 92 unicorns on the continent, half of which have joined the board just since the beginning of 2020. 

LocalGlobe recently closed on two funds, a seed fund XI of $150 million and its second latitude fund of $220 million, to further invest in breakout companies.

Equity in private companies

“If we think there’s a lot of capital in the private markets today, we haven’t seen anything,” said Klein.

“Companies are staying private longer, and will continue to do so because there’s so much money still available in the private markets,” said Klein who predicts this “is only going to grow.”

He cites a Morgan Stanley report that found “every 1 percent shift in asset allocation from public to private equities represents about $390 billion in assets. For context, the commitment to U.S. buyouts and venture capital were approximately $315 billion in 2019.”

Klein points out that “a 1 percent shift is the entire U.S. venture industry. So that’s not a question of if, but when.”

Growth capital in Europe is from outside

Leading U.S. venture investors have set up offices in London in recent years, including Sequoia Capital, Lightspeed Venture Partners and Bessemer Venture Partners

There are strong ties between European and U.S. venture capital. Accel has been active in Europe for more than 20 years and has a current private company portfolio of 87 companies. By contrast, Sequoia, Lightspeed and Bessemer have fewer than 20 private European portfolio companies each.  

We have also seen the reverse. For example, Geneva-based Index Ventures set up a U.S. office in 2011. 

Still, European late-stage or crossover investors are still not coming to the party, with some exceptions, according to Klein. Those include Baillie Gifford, M&G (which created a more than $7 billion private markets fund), Schroders, Legal & General and Railpen.

For Europe, most of the scale-up capital is international, but it’s not just the U.S., Klein said. He cites growth investors from around the globe, like U.S.-based firms Durable, Coatue and Fidelity, Canada-based Ontario Teachers Pension Plan, Singaporean firms GIC and Temasek, China-based Tencent, Tokyo-based SoftBank and Mubadala from the United Arab Emirates. 

“If you’re a founder, or if you’re a VC, it doesn’t really matter if the growth rounds are being led by Tiger or Temasek,” he said. “But what it does mean is that when these companies are successful, and they have liquidity events, the beneficiaries are not U.K. savers, they’re not U.K. pension funds, they’re not U.K. insurance companies.” 

That means, he said, “the people who really benefit are not going to be the broader economy — it’s just going to be the founders, the VCs, the bankers, the lawyers.”

For example, if a company like Cazoo goes public, “it doesn’t matter if they’re going public in London or New York, because the beneficiaries are not going to be U.K. savers,” he said.

Much of the allocation has gone to U.K. equities. Klein noted that when you look at the FTSE Index, it has stayed flat over two decades. That contrasts with the Nasdaq and the New York Stock Exchange, which have seen the biggest gains accrue to growth technology stocks. 

“A lot of the challenge that we still have here is around educating,” said Klein. Investors in the U.K. are not educated on valuing intangible assets like software, he said. 

Often investors there ask questions like, “ ‘How can this be valuable? They don’t have factories, they don’t have stores, they don’t have inventory, they don’t have machinery. These aren’t real businesses,’ ” he said.

LocalGlobe

Klein and his father Robin Klein founded LocalGlobe in the early 2000s. Since 2015, the firm has reinvented itself, with close to $1 billion in funds raised since that date. The firm now has six general partners and a further nine investment professionals from associate to partner along with other operational team members. 

It also has an office and events space called Phoenix Court, in one of London’s poorest areas in Somers Town in the borough of Camden. The firm is active in its community: It works with the local council in Camden and partners with the local primary school and local high schools to provide support to students.

The span for LocalGlobe’s investments covers a wide area, with many cities a four-hour train ride from its location, which is close to both Kings Cross and Euston stations and connects the firm to centres like Oxford, Cambridge and Manchester in the U.K. as well as Paris, Amsterdam and Brussels. 

LocalGlobe will also invest outside of that radius, but believes early-stage investing requires a high-touch experience that’s helped by physical proximity. The firm has invested in microprocessor Graphcore in Bristol, biotechnology company Oxford Nanopore in Oxford, account payables company Libeo in Paris and London-based car insurance provider Zego

“In 10 to 20 years time you’re going to get a whole new different type of investor,” Klein said. “And the commonality will be a growth mindset, an ability to understand how to value intangibles, including, by the way, founders, which is the ultimate intangible.”

 

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Illustration: Dom Guzman

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