ADDX fractionalises venture debt fund by Temasek unit, UOB joint venture

PRIVATE market exchange ADDX on Wednesday (Dec 7) said it has fractionalised a venture debt fund.

Known as Innoven Sea Fund I, it is a vehicle by Innoven Capital, which is a joint venture between Temasek’s wholly-owned subsidiary Seviora Holdings and UOB.

This move cuts the minimum subscription size for individual accredited investors to US$20,000 from US$5 million, according to the company. 

ADDX said it uses blockchain and smart contract technology to automate manual processes throughout the life cycle of the investment, which makes the fund available in fractional units at scale and enables secondary trading by investors on the ADDX exchange. 

The Innoven Sea Fund I provides venture debt funding to high-growth startups and technology companies across South-east Asia. 

The fund is anchored by a US$50 million commitment from Seviora and UOB, and provides investors a combination of fixed income and equity return with annual cash distributions.

Venture debt is a form of debt financing for companies that are still dependent on venture capital funding to grow. Loans sizes can run up to 30 per cent of an equity round or cash in bank. Loans are made out based on factors such as the strength of the startup’s shareholders, the quality of its management team and the company’s competitive advantage. 

ADDX noted that venture debt is “less dilutive” for startup founders than equity financing, and allows companies to extend their cash runways and secure more time to achieve growth milestones. 

For investors, venture debt is a fixed income investment with a lower risk-return profile as compared to venture equity capital. However, venture debt is accompanied by regular distributions, which is attractive to many investors in the current risk-off environment, ADDX said. 

The private market exchange also said venture debt deals typically come with equity warrants, giving venture debt funds the option to purchase equity at a future date should the startup continue to grow. 

These warrants are a source of “upside potential”, ADDX said, which provides venture debt a higher risk-reward profile than pure fixed income investments.

Choo Oi Yee, chief executive of ADDX, said Innoven’s loss rate of under 1 per cent after US$218 million in loans made out can be attributed to its ability to be “highly selective in deploying capital”. The fund manager is evaluating deals with a cumulative value of close to US$150 million, she added. 

She also said venture debt is poised to grow. Venture debt deals constitute less than 5 per cent of venture capital funding in South-east Asia, versus 25 per cent in the US where the ecosystem is “more mature”. 

“This strongly suggests there is room for expansion, as venture debt funds raise more capital from investors and deploy that capital in a region where the prospects for tech startups remain bullish in the medium to long term, despite the uncertainty we’ve seen in the capital markets this year.”

Paul Ong, partner at Innoven Capital South-east Asia, said the macroeconomic climate and interest rate hikes that have impacted company valuations have led to cautious deployment of capital from equity investors. 

“Companies have shifted their focus to decreasing their burn rate and building cash reserves in anticipation of a potential near-term period in which equity capital may be more difficult to obtain. In this current environment, the demand for venture debt has increased significantly,” he added.