The quarter was an extension of the same themes we have seen all year, as the top positions moved incrementally higher, with the fund ending the quarter up 12.5% year to date. The significant event unfolding in 3Q17 and into 4Q17 was the full realization of our position in the Vietnam Azalea Fund (VAF), after the sale of its top and last remaining portfolio position. Below is our analysis of the investment in VAF since inception, however is a very illustrative example of how returns sometimes take a decade to finally evolve. We were struck by a recent statement from Jeff Bezos, who said “he had learned that overnight successes seem to take about 10 years on average,” which seems to be the case with many of our portfolio investments. We have found that 10 years often represents the full cycle in allowing many of the best investments to pan out, noting the ones that aren’t working tend to flail in a much quicker fashion.
Other top holdings also made significant strides in 3Q17:
Lighter Capital reached record monthly revenue of over $1M for the first time in August, also breaking in to profitability. The company additionally closed on a financing with Silicon Valley Bank during the quarter, providing them with adequate capital for the foreseeable future. Yields on the underlying portfolio remain very good, at +20%, with originations continuing to increase, as the company has now funded over 200 companies comprising over 300 loans (many companies coming back for second and even third financings).
Porch has done an excellent job operationally over the course of 2017, after battling a tough 2016 in getting the business model right, doubling revenue in 3Q17 year over year. The company has also determined a much more cost-effective path to customer acquisition, through distribution partners including Lowe’s and Walmart, in addition to several very strategic acquisitions of small companies with proprietary access to home owners. Porch now processes jobs for over 200,000 contractors and over 3 million homeowners, continuing to accelerate. Lowe’s remains a strong strategic partner, adding more capital earlier this year, along with capital also taken in from Bridge Bank and Orix Growth. The current plan is for the company to raise a final Series C financing round in 2018 to drive to profitability, with the current target of 2020 for an IPO. If the company continues at its current growth rate and the capital markets remain relatively tame, we believe this is a realistic goal over the next 36 months.
Sunlink posted a record third quarter on the top line, however lower margins than forecasted, as the company continues to battle the forces of solar market variability. The company also successfully completed a financing with Multiplier Capital at the end of 3Q17, refinancing their mezzanine debt and bringing on more capital to finance the business. Some regulatory issues arose in September and have continued to hamper the market and Sunlink in 4Q17, as it looks like some 4Q17 revenue will push in to 2018. However, overall we continue to see the company garnering significant traction with its new tracker product, setting up for a promising 2018. The company also continues to evaluate consolidation opportunities, as the solar industry is generally ripe for such combinations in achieving efficiencies of scale amidst continued regulatory change.
As for other events unfolding in 4Q17, we saw a solid uptick in the value of another portfolio holding, Remitly. The company raised $115M at a significant valuation In October 2017, from a strategic partner seeking to expand their own payments business (PayU, a subsidiary of $100B South Africa based technology conglomerate Naspers). Remitly’s closest competitor, Xoom was bought by PayPal in 2015 for $1.2B (ticker – XOOM), with a recent article highlighting the Xoom business as a significant growth driver of PayPal. Remitly is not far behind Xoom on the size and growth of their business, as we suspect this recent strategic investment sets up Remitly to be a public company at some point in the next 24-36 months.
Between Lighter Capital, Porch and Remitly, we appear to have found our way in to three of the fast growing venture backed companies in Seattle. We believe these three positions alone could produce a significant return for the portfolio over the next three years, leading us to suggest adding capital to the fund at year end (and throughout next year). We would like to find a way to invest more in these three companies and have evaluated various methods in doing so (largely buying from other shareholders, however also participating in upcoming company financing events). New capital in to the fund would go toward further building and fostering our positions in our best performing companies.
Vietnam Azalea Fund Analysis
As noted in the VAF letter referenced below, the net IRR of the fund to all investors was 7% over the fund’s full 10 year life. Echelon Partners return ended up a bit higher, closer to a 9% IRR, as we added to our original position, buying another LPs interest in 2010 at a 30% discount (opportunistically taking advantage of the selloff post the 2008 global financial crisis). This return compares favorably to nearly any index during the same time frame, including the S&P 500, which has been up roughly 7.5% annually over the last ten years (total return), and the MSCI World which was up about 2.3% annually during the same time frame. Moreover, our position in VAF significantly outperformed the Ho Chi Min Index, which was down (1.1%) annually during the same investment horizon; VAF on a net basis outperformed its own benchmark by approximately 8% annually!
Our cash-on-cash return on this investment was approximately 2.2X, as we invested $4.2M in the fund during the initial investment period (including our purchase of the other LP interest), receiving approximately $9.1M in cash back over the past two years. Over half the cash we received back was on the final distribution, as the best performing and largest investment in the fund was the last to be realized in 4Q17 of this year.
We would also encourage you to read the final letter on the Vietnam Azalea Fund, found here, as Portfolio Manager and General Partner Chris Freund does an excellent job articulating what worked and what didn’t in the VAF portfolio.
As always, please do not hesitate to reach out if you have any questions, and we welcome your calls to discuss this investment or other opportunities at Echelon.
Robert J. Martin | Echelon Capital LLC
firstname.lastname@example.org | 206.489.0400