Vickers to start internal review after exposure to Envy fraud scandal
Chairman says investment is less than 3.5% of the two funds affected; he and his partners had also personally invested into the receivables of Envy Global Trading
Singapore
SINGAPORE founded venture capital firm Vickers Venture Partners has started an internal review of its processes, after two of its funds invested in entities linked to one of the biggest financial fraud cases here.
The review, which aims to garner any lessons to be learnt as the case unfolds, will be chaired by an independent board director, Dr Finian Tan, founder and chairman of Vickers Venture Partners told The Business Times (BT).
"Although any impact (on fund performance) would be small, a failure if proven to be due to fraud would be the worst type to have. You always ask yourself if and how it could have been avoided," he said.
The alleged fraud centres around Ng Yu Zhi, a former managing director of trading companies Envy Global Trading and inactive Envy Asset Management.
Ng has been charged with cheating and fraud in the scheme that purportedly raised at least S$1 billion from investors.
He was arrested in February and charged with a range of suspected crimes from faking the purchase and sale of nickel to falsifying transfers from Citibank and account statements that showed millions in funds.
The rationale behind Vickers' investment, Dr Tan told BT, was part of a diversified risk and liquidity management strategy for its funds. He added that the size of the investment was "small" - less than the firm's average cheque size, and less than 3.5 per cent of the two funds.
As such, it was in line with diversification and risk management policies, Dr Tan remarked, adding that the investment was "clearly not a core strategy".
"Despite this, every aspect of our process is important. Hence Vickers is conducting an internal review to ensure that any lessons learnt are captured. We will of course also comply with any recommendations that the Monetary Authority of Singapore (MAS) might have," said Dr Tan, the firm's chairman who made his name as the first institutional investor in Chinese search engine Baidu while he was a partner and head of DFJ ePlanet in Asia.
Dr Tan and his partners at Vickers had also personally invested into the receivables of Envy Global Trading as part of their own portfolio diversification strategy, which he said was more than what the funds put in. He added that the due diligence process did not raise any red flags.
Vickers Venture Partners has US$998.6 million (S$1.33 billion) of assets under management, including co-investments, which it manages from seven offices globally, namely Singapore, Shanghai, Hong Kong, Palo Alto, San Francisco, New York and London.
Vickers said it has received about US$245 million in commitments for its sixth fund so far, which is targeted at US$500 million. It also raised a SPAC (special purpose acquisition company) of US$138 million on Nasdaq in January.
Vickers's portfolio companies in Fund VI include Eavor, which is building a closed-loop geothermal system to harness energy from land. There is also Emergex Vaccines, an Oxford based company that is focused on developing T-cell vaccines for SARS and Covid-19.
The firm is now looking to reap gains from exits in several of its earlier portfolio companies. Some of the cards in its pocket include Hillstone Networks, an enterprise network security solutions company which in 2019 listed on the Shanghai Stock Exchange's sci-tech innovation board (STAR Market) with a market cap of 8.1 billion yuan (US$1.1 billion). There is also Jing-Jin Electric (JJE), an EV company that has filed for an initial public offering on the same board.
Would the Envy case dull the shine on Vickers' track record? Dr Tan said: "The funds are doing well," adding that he has "less concerns about performance, even in a complete write-off situation for the Envy exposure".
Vickers' portfolio investments in some 60 companies have a net multiple of 2.2 times, on a pro forma basis. It expects to reach a final net multiple of 4.8 times on average, across all five funds.
The average write-off rate for Vickers is approximately 30 per cent, said Dr Tan, adding that this is about half the average failure rate of the industry. The fund's write-off rate "will not be affected much" by the Envy exposure, he said.
Of course, failures could still impact a venture fund's performance, he clarified. But this would have a "significantly smaller impact" as compared to 'home run' investments - those that bring in outsized returns for a fund.
"It is the home run rate and return that defines a venture fund... In any investment, the most that funds can lose is the capital on the investment itself. On the other hand, funds can gain up to tens or even hundreds of times the investment from a home run. Home runs are what venture capital is all about."
How did the misstep happen then? Dr Tan replied that he should not comment on Envy specifically since it is an ongoing investigation, but said this about frauds in general: "In the movie Ocean's 11, the con was to break into the most secure casino in the world. The fraudsters constructed a fake backdrop to show to the victim and would create other backdrops depending on what due diligence questions are asked, in order to deceive."
He acknowledged that the movie is "exaggerated", but pointed out that there are many real world examples of elaborate fraud schemes too, such as Enron, Wirecard and Bernie Madoff.
"Professionals, especially those in the business of risks, are often the target because they can bring credibility if they buy into the con," he said, adding that these professionals can then "unwittingly be used as multipliers".
"It's an unfair relationship because one party is doing a bona fide due diligence check while the other can lie, forge, impersonate and do anything they need to do to deceive.
"However, knowing what I know now, I believe it's possible to reduce the probability of such deception succeeding. We do need to constantly keep ahead of the fraudsters though, since checklists that are static will eventually be circumvented."
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