David Kirk, the chair of listed ‘expansion stage’ information technology investment company Bailador Technology Investments, former CEO of Fairfax Media, McKinsey consultant and Executive Chairman for a portfolio company of private equity fund manager, Pacific Equity Partners – and legendary All Blacks rugby captain – gave a compelling talk at the Private Portfolio Managers lunch on March 23 in Sydney.

He began by noting that five of the seven largest companies in the world were information technology companies and the technology sector is now the biggest sector in the S&P 500 Index, representing 21 per cent of market capitalization, followed by 15 per cent for financials, 10 per cent for industrials and 7 per cent for energy stocks.

He described how the first successful tech companies in Australia attacked the “low-hanging fruit” of classified advertising in newspapers, harnessing the power of much more effective electronic search compared to scanning printed classifieds.

“These first successful business models were business-to-consumer models, which are expensive to build, since you need to build a brand, but not complicated technology,” Kirk said. “But they were attacking inefficient real-world markets and big pools of profit that were protected behind monopolistic walls.”

He said that when he joined Fairfax in late 2005, he realised that the company had already lost the race to get a piece of the new search-oriented classified advertising internet companies, such as Seek.com, Carsales.com and Realestate.com.

He negotiated to buy the NZ-based Trade Me auction and classified advertising site, which is a cross between eBay and Seek, Realestate.co.au and Carsales, for A$650 million.
“I was pilloried by brokers and the industry for paying that much,” he told the PPM clients at lunch. But Fairfax sold Trade Me five years later for $1.2 billion after taking out $300 million in cash dividends along the way – a resounding success of an investment.

Kirk said that after he left Fairfax in December 2008, he worked with Pacific Equity Partners and added a better understanding of the private equity market to his understanding and experience of business management.

He had noticed, while still running Fairfax, that a little NZ company, Xero, with which he was acquainted and invested in personally, floated successfully based on the growing importance of cloud computing for Software-as-a-Service (SaaS) businesses.

“I came to the conclusion that cloud computing would change the fundamental economics of growth in the software world and would open up huge market opportunities for software-as-a-service in the business-to-business space,” he said.

Kirk said it was difficult for investors in Australia to get exposure to technology companies , which prompted the establishment of Bailador, first as a fund and then as an LIC to give the managers “permanent capital” to invest for the long term.

After leaving Fairfax he partnered with Paul Wilson, co-founder of Bailador and they decided to raise money to invest in a range of information technology businesses, particularly SaaS and marketplace companies.

The firm’s first raising of about $20 million was from 33 high-net-worth individuals and the team made its first investment in 2010. “It was a new investment thesis in Australia and our investors basically gave us the money because they trusted us,” Kirk said.

After four years, they came to a crossroads. Having invested most of their available money, they had to decide whether or not to raise another private fund, but in order to do so they probably would have needed to sell one of their better-performing investments in order to demonstrate a profitable track record.

“It was obvious to us that it would have been wrong to cash out our investors in their best investment for only about three times their money,” Kirk said. “We decided we needed permanent capital so we decided to list the fund. We also thought that in future a lot of SMSFs and family offices would be interested in investing, plus smaller-cap fund managers looking to diversify. At that stage we had $37 million worth of invested capital and we raised another $25 million in cash at the float.”

The listed fund currently has about $142 million under management and has 10 portfolio investments. The number of investment professionals at the firm has grown from two to six since listing. In the year to 31 December 2016, the investee companies generated $125 million in revenue, which was up 37 per cent on the previous year. About 60 per cent of the revenue came from international markets.
“We feel good about what we’re doing,” Kirk said. “We have some great companies and are getting closer to exits which will return money to investors.”

He believes the firm has room for “one or two” more investments with its current capital base. For its exits Bailador prefers trade sales but is very open to IPOs. If it does an IPO it wants to put up a business with $100 million or more of “predictable” revenue, trending towards profitability in the first year of listing if not already there, and priced fairly for the market. Bailador would like to remain invested with such investments after taking its costs off the table but would respond to other investors needs at the time of a float.

“It’s a joy to work with businesses that have great tailwinds,” Kirk said.

Note: Private Portfolio Managers has invested in Bailador on behalf of its clients.

1. The technology sector in the All Ordinaries by contrast represents 1.2% of market capitalisation.