OVERVIEW
• Applied Real Intelligence (“A.R.I.”): A venture debt investment manager focused on providing financing solutions to innovative, high-growth startups in recession-resistant sectors and underserved regions in North America.
• Strategy Overview: Floating-rate, senior secured 1st lien term loans, combined with equity warrants to revenue-generating companies. Loans range from $3mm to $30mm with equity warrant coverage of 5-20%.
• Fund Structure: 5-year closed-end Exempt Reporting Advisor (ERA), 100% owned by the management company.
FUND HIGHLIGHTS
• Superior Risk-Adjusted Returns: 15-20%+ annual gross return target, comprised of 12-15% annual cash return via contractual fees and interest payments on senior secured debt and 3-5%+ annual return via equity exposure.
• Security of Capital: Senior secured debt provides control of capital structure, enhances protection of capital, maximizes recovery value, and optimizes compounding of realized returns through market cycles.
• Strong Portfolio Diversifier: Low correlation to other asset classes due to unique debt investments made to sponsor-backed North American companies within industries identified by A.R.I. to be fast-growing and recession-resistant.
FIRM BACKGROUND
Applied Real Intelligence LLC was initially conceptualized by its Founder and Managing General Partner, Zack Ellison, CFA, CAIA, in mid-2018 and is premised upon the following beliefs:
• Forward-looking returns in traditional asset classes, such as public stocks, public bonds, and real estate, will be insufficient to meet the needs of many investors.
• Venture debt offers an opportunity for generating excess risk-adjusted return (i.e., ‘alpha’) within the fixed income markets given the strategy has produced very strong historical risk-adjusted returns, is underserved, and offers tremendous growth potential.
• Alpha is best generated through active investing that relies on applying real (i.e., human) intelligence. Effectively applied real intelligence leads to superior investment outcomes – through better ideas, relationships, and execution capabilities – than can be produced through passive investing and overreliance on automation, algorithms, machine learning, and artificial intelligence.
• Investment ‘edge’ can only be produced and sustained through the combination of a strong underlying business (i.e., infrastructure and operating capabilities) and a highly capable investment team relying on sound strategy and consistently efficient processes. The combination of a sturdy operating business and strong investment strategy facilitates the optimization of ideas, connectivity, execution, and ultimately performance.
• By creating access to minimally-dilutive capital for underrepresented regions (such as Texas, Florida, and Illinois), sectors (including energy, agriculture, manufacturing, supply chain, and real estate), and founders who have been historically underserved, A.R.I. will supercharge broader economic growth.
• A.R.I. offers an actionable opportunity – not being met by others – to offer a best-in-class venture debt fund to provide investors with sustainable alpha, protection of capital, and portfolio diversification while also promoting the social good by increasing access to growth capital.
VENTURE DEBT OVERVIEW
Venture debt includes debt products provided to companies that have already received institutional funding, typically in excess of $15 million over multiple financing rounds, from venture capital firms.
Venture debt is most often provided in the form of short duration, secured (1st or 2nd lien) term loans, with an original maturity of less than four years, that are combined with equity warrants. This mix provides the lender with capital protection, current income, and unlimited potential return given the right to participate in the equity upside of the borrower.
Venture debt complements, and rarely substitutes for, funding provided by equity investors. Loans are customarily made three to nine months following a Series B or Series C equity financing round and confer benefits to both the underlying borrower and the borrower’s equity investors (i.e. the VC firms that have previously funded the borrower), principally by offering a minimally-dilutive and cheaper alternative to equity financing. Therefore, the founding teams and their early investors don’t get diluted out of their positions.
Venture debt is typically utilized once a company has reached a growth or expansion stage and has the revenue and internally generated cash flow to support the fees, interest, and principal repayments associated with debt. By the time a company is eligible for a venture loan they have already raised three to six rounds of equity funding (e.g., Pre-Seed, Seed, Series A, Series B, Series C, etc.).
Venture debt is utilized for: (1) Growth associated with product development or new product offerings, and expansion into new geographies or market segments; (2) Optimizing the timing and valuation of the next equity financing round by extending the resources and timeframe of the borrower, enabling key valuation milestones to be met (known as “runway extension” or “bridging”); (3) Equipment leasing; (4) Working capital. Venture debt is rarely used to facilitate mergers or acquisitions.
FOCUS SECTORS
• Financial Technology
• Energy Technology
• Real Estate & Property Technology
• Agriculture Technology
• Healthcare Hardware & Services
• Manufacturing & Robotics
• Supply Chain & Logistics
• Defense
• Telecommunications
• Software
A.R.I.’S MISSION
• Great Risk-Adjusted Returns: Provide the Fund’s investors with unique access to “innovation” as an asset class through A.R.I.’s venture debt strategy, superior risk-adjusted returns, security of capital, and strong portfolio diversification benefits.
• Societal Impact: Democratize access to capital for underserved founders in overlooked regions and sectors to drive innovation and economic growth.