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Why this sector can crush the market

The founder of San Francisco-based Cota Capital, Babak Poushanchi, says the best days for enterprise-facing software businesses are yet to come, despite the spectacular returns they have delivered to investors over 2020.
Tom Richardson
AFR
 • 
Nov 12, 2020

The founder of San Francisco-based Cota Capital, Babak Poushanchi, says the best days for enterprise-facing software businesses are yet to come, despite the spectacular returns they have delivered to investors over 2020.

 

The investor's Cota Growth Fund has already returned 66.7 per cent in 2020 and typically invests in listed US tech businesses valued about $US10 billion ($14.27 billion) or less.

  

Babak Poushanchi's top investment idea will be revealed at the Sohn Hearts and Minds Investment Leaders Conference on Friday.  

 

In total, Cota Capital has about $US875 million under management across three funds investing in early-stage-venture or late-stage-growth private businesses, alongside businesses listed in the US.

 

Mr Poushanchi's top investment idea will be revealed at the Sohn Hearts and Minds Investment Leaders Conference on Friday.

 

Global investment industry heavyweights and thought leaders set to speak at the virtual conference headlined by Pershing's Bill Ackman include Ark Invest's Cathie Wood, and New York University professor of business Scott Galloway.

 

The Australian managers include Qiao Ma of Cooper Investors, Robert Luciano of VGI Partners, Will Curtayne of Milford Asset Management and Jun Bei Liu of Tribeca Investment Partners.

 

According to Mr Poushanchi, the US' leading enterprise software firms offer high recurring revenues, low customer attrition rates and high gross margins, which enable them to reinvest much of their sales back into marketing, research and development to produce strong organic growth.

 

Enterprise tech in pole position

"So you're getting the mission-critical stickiness of the utilities sector early in these very large and growing thematic areas where these companies have many years of outsized growth left," Mr Poushanchi says of the firm's approach to identifying investment opportunities.

 

"And for us in a generally lower growth, lower inflation, lower rate world, true areas of secular growth at scale are becoming harder to find and there is more of a scarcity premium put on these types of businesses with these kind of runways in front of them."

 

During COVID-19, consumer-facing tech or software businesses such as Zoom and Netflix increased their customer numbers at a rapid rate because of the sudden escalation in demand.

 

However, Mr Poushanchi says demand for the services of enterprise tech firms should grow, irrespective of lockdowns.

 

"The reason we're very drawn to this big thematic is we feel this is a several-decade, several-trillion-dollar transformation we're in the very early stages of still.

 

"Generally speaking, within enterprises across a lot of industries – whether you're talking about financial services, or energy, or healthcare, or manufacturing businesses – the amount these companies are spending on their enterprise technologies is going to roughly double over the next decade," he says.

 

"This has created an incredible opportunity for all these technology and software providers to enable these organisations to sort of move to the next version of themselves and we find that to be very exciting."

 

He believes a large percentage of the growing expenditure by C-suite executives across every industry will shift from legacy technologies to modern cloud-based technologies delivered and utilised over the internet.

 

"You're going to have this tremendous tailwind driving executives at all of these firms to become more tech-centric, more software-centric, more data-centric.

 

"It has to do with the way they conduct their business with other business partners. It has to do with offering tech-enabled solutions to their customers. It has to do with offering tech-enabled ways of working for their employee base."

 

The founder says he sees Cota as a partner to all its venture capital part-owned businesses and attributes the firm's market-thumping performance since being founded in 2015 to a unique style, culture, operating framework and investment approach.

 

Cota employs a full-time research team surrounded by operating and venture capital partners, who bring long careers and deep domain expertise across the sectors it specialises in.

 

"So there are people with a technical computer science development background who are users of these technologies and folks who come from the finance side of things," Mr Poushanchi says of the full-time team.

 

"And we have hired out of the venture ecosystem and the later-stage private equity and hedge fund universe, with tech specialisation.

 

"So it's sort of a marriage of an investment framework and innovation cycle to have the right technical expertise."

 

 

 

This article was originally posted on The Australian Financial Review here.

Licensed by Copyright Agency. You must not copy this work without permission.


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