How to mitigate the risks of venture capital

Getting into angel investment can be scary. You could lose everything – even if you do it right. So how do you best mitigate the risk?

Angels had plenty of advice for the crowd attending Angel Rising earlier this month at New York University Abu Dhabi.

“As an angel investor, you are going in with your eyes open that you could lose the money,” says Vikas Shah, a visiting professor of entrepreneurship at the MIT Sloan School of Management.

“That’s your maximum risk here, plus reputational risk and all of those things. But you are looking at that business and it’s the gut feel you have. Question two, can that team execute? If it makes sense and that team can execute, that’s the bulk of my risk mitigated.”

Saud Al Nowais, a commercial counsellor for the UAE to the United States, suggests investing through angel networks and firms such as VentureSouq, which will hold your hand through the process.

“Seek out universities which are doing stuff like that. Identify super angels. Identify principals at large VC firms. Identify sectors with potential growth,” he adds.

For companies on the hunt for an angel investor, someone with a background in the same industry can certainly help you. “You will find what you need is an angel investor with a real background. So for example in medtech, biotech or pharma,” says Mr Shah.

But those with no knowledge are valuable too.

“Sometimes you just want someone who believes in it and will put in money without asking all the questions because they believe in the founder, so similar to friends and family,” says Sharif El Badawi, a partner in 500 Startups, a venture capital accelerator. “It’s funny but it is actually an important point. We need angels to just be angels sometimes.”

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

The Sand Castle

Director: Matty Brown

Stars: Nadine Labaki, Ziad Bakri, Zain Al Rafeea, Riman Al Rafeea

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