Case study of Aura Venture Fund II
Early-stage venture capital firm Aura is raising funds for its second pooled venture capital fund – the Aura Venture Fund II – available to wholesale investors. The director of Aura Group, Tristan Terry, responded to some questions about the launch from Industry Moves.
What goes into launching a new product for Aura Group?
All new products at Aura Group are assessed and reviewed intimately from a number of angles to ensure that they are consistent with our investment strategy, can be adequately resourced and managed, can be distributed to our target limited-partner base, and do not create any risks or governance issues within our business.
If a proposed fund satisfies all the questions asked of it during the initial internal reviews, it will move from the ideation phase to creation, which is characterised by the establishment of the legal structure. Much time is also spent creating the fund’s offer documents, which limited partners will review when making their investment decision. During this process, the team spends a lot of time refining the fund’s investment strategy and discussing how the fund will function operationally – its sources of deal flow, how opportunities will be assessed, the investment process itself, portfolio management and investor reporting.
Why did you decide to launch now?
We had planned to launch the fund just before COVID broke out but pulled it until we felt we had a better feel for how investors were thinking about their allocations and what the landscape was doing from an investment angle. Once we were comfortable with these items, we were pretty keen to get our fund into the market to capitalise on what we thought were pretty good investment conditions.
Why did you decide on the Early Stage Venture Capital Limited Partnership (ESVCLP) structure? Was that a difficult structure to put together?
We decided to set up an ESVCLP so we could provide our limited partners with the extremely favourable tax structure. Eliminating capital gains tax and passing through a 10 per cent offset on funds invested, in our view, is certainly a compelling proposition. Additionally, the ESVCLP program did not really limit our investment universe by size, because we typically invest at seed and Series A; nor did it limit us by industry, as mining and real estate were not really our thing.
We have seen a few high-quality lending (financing) companies that we potentially would have pursued had they not been ineligible but we feel this is a small price to pay to access the other benefits.
I would not call the setup of the structure difficult but it is certainly a rigorous process to become unconditionally registered. It forces you to consider every element of the fund’s investment strategy, origination, resourcing, operations, risk management, etc. – which is positive for all involved. Aura had experience establishing an ESVCLP back in 2017, so we were largely prepared for the program’s requirements.
How did you research market opportunities?
We are ‘sector agnostic’, which means we are free to invest across a range of sectors. We will invest into themes we have determined are of particular interest to us, such as e-commerce enablement, sustainability, data and connectivity, etc. We will conduct deep dives into these areas and collect as much information as we can to help us form strong views on what factors we think are critical to success and which participants possess the necessary characteristics. This includes trying to understand the size of a market, growth rates, competitive landscape, regulatory risks, business and revenue models, unit economics, management team, etc. We will then spend time contacting and meeting with various companies to introduce Aura so we are on their radar when they are next in market raising capital. This is our outbound origination strategy. We also receive many deals directly from founders, investors, other VCs, etc., that we assess in a similar manner. These are inbound deals.
Are there many similar funds in the Australian market?
Yes, there are certainly other ESVCLPs in the market that have a similar investment strategy to ours and an appetite for high-quality Australian companies at seed and Series A. Over the years, we have been lucky enough to work with lots of great funds and like to think we have created strong relationships with a few in particular, with whom we regularly co-invest. Having said this, we do think it is important to have a point of difference as a General Partner and investor so that when competitive opportunities are on the table, we can stand out from the crowd.
For Aura, that point of difference is provided through the group’s presence in South-east Asia, which enables us to help portfolio companies plan and execute their expansions into that region. We have an office and investment-management team in Singapore, along with partners in Thailand, Vietnam, the Philippines and Indonesia. They can provide deep strategic assistance and make valuable introductions to expanding Australian companies. In addition to this, Aura seeks to implement a genuine ‘founders-first’ approach, where we strive to foster constructive relationships with founders and provide mentoring, advisory and hands-on assistance when it is required.
What challenges did you face and how were they overcome?
No real challenges.
How did you decide on service providers?
We have worked with a number of service providers over the years and have built a good working relationship with One Investment Group and Unity Fund Services, which provide the fund with custody, registry and administration services. Aura’s operations team provides the link from these service providers to the fund’s limited partners. PwC audits the fund annually. Regarding the investment process, we work with well-known law firms to complete transactions and conduct legal due diligence when required.
Can you explain the fee structure?
The fee structure is the standard 2 per cent per annum. management fee, paid monthly, and a performance fee of 20 per cent over the 8 per cent internal rate of return hurdle. Performance fees are paid only once a limited partner has received their capital back and the hurdle in cash.