This tech fund might interest family offices – if returns are anything to go by

Technology is disrupting the global economy at increasing speed, undermining traditional ways of working and boosting tech-driven newcomers.

Apple’s decision to invest $500 million on creating its first series of computer games and $15 million spent on each of the latest tech-driven episodes of Game of Thrones shows where money is in motion.

The Digital Leaders Fund based in Germany is one of a new breed of boutique managers which has started to seek backing from family offices in a bid to turn disruption to their advantage.

Digital Leaders is also prepared to consider selling some of its own equity to an institution, where this is strategically helpful. Backers can expect insights into the digital revolution by way of return

Since inception in March 2018, the fund has generated a return of 23.4%, against 12.6% from its benchmark, the MSCI World index. It is a top-five performer in the Morningstar large cap-growth sector over twelve months.

To date, the fund has been marketed in Germany, where it is administered by Universal Investment, but it is keen to win international backing from institutions and family offices.

It takes time for a new firm to win business: so far Digital Leaders manages €21 millon. If family offices, or any other institution, offers a sufficiently large mandate Digital Leaders can manage the money on a standalone basis.

Digital Leaders is also prepared to consider selling some of its own equity to an institution, where this is strategically helpful. Backers can expect insights into the digital revolution by way of return.

Over the years, groups like the Cayzers and Schroders have backed asset management businesses, to take advantage of their advice, as well as their long-term prospects.

Digital Leaders’ co-founders have each been disruptors. Baki Irmak sought to develop Deutsche Bank’s marketing strategy, as its global head of digital prior to 2017.

In 2000, Stefan Waldhauser founded and developed a software company called WeWebU Software, and its digital desktop organiser MobileWorkdesk.

“It won business from companies like HSBC and Google,” says Waldhauser. “We spread the word through the Open Source network, which is a great way to get relationships with developers. But we didn’t have the infrastructure to service the account, so we had to sell the business.”

Content manager Alfresco bought the business for an undisclosed sum in 2013, and it has just been bought, in its turn, by private equity firm Thomas H. Lee Partners.

Waldhauser readily admits he is a free spirit. Rather than getting involved in another software company, he sought a career in the stock market: “I managed our family money, and I still do that. Then I set up a small trading portfolio con Wikifolio in June 2016. It’s only small, but it’s given me a good track record.”  

Since inception, the return his High-Tech Stock Picking portfolio has more than doubled.

Irmak and Waldhauser believe the digital revolution will become more powerful than commonly believed, condemning companies that don’t embrace technology to an “existential struggle”.  

It divides its universe into three categories, seeking companies that deploy digital platforms, algorithms, big data and open source technology to fight their corner.

The first category comprises businesses that lead the transformation of their sector, such as Disney and VW.   

Waldhauser is impressed with Disney’s streaming initiative: “Its content has the quality it needs.” On VW: “The current Audi electric car is not so good. But the next will be: they have a good platform.”  

He is less confident about Tesla: “It will not manage to stay independent.”  He concedes he looks further ahead than most to judge prospects for a platform.

A second category of opportunities involves digital business leaders, whose digital platforms promise to transform their sectors. They would include companies like Facebook, PayPal and Match Group.

The third category comprises digital enablers, who supply the tools companies need to survive and thrive. Digital Leaders’ current naps include Twilio (a communications platform) mongoDB (an app database) and Arista (computer networking).

Digital Leaders likes to invest when companies have emerged from their phase as visionaries, and poised to see a rapid improvement in their cash flow through a land grab.

Earnings multiples do not help evaluate companies, when cash flow has yet to turn into profits.  So Digital Leaders prefers to rate companies by looking at gross margins a “Rule of 40” ratio where growth rates and free cash-flow margins total at least 40%.

For the record, Waldhauser isn’t convinced the Uber and Lyft IPOs will pass the test. He thinks investors might do better with Pluralsight, a teaching platform for technology students, which listed last May.