This month’s discussion focuses on the Alternative Growth investments managed by WestCap. WestCap has managed assets on behalf of WealthCo investors since 2021. In this edition, we continue our discussion with Liz Prince, West Coast Investor Relations & Fundraising Lead at WestCap.

Earlier this year, you introduced a position in AppDirect. AppDirect is a leading B2B marketplace platform for purchasing, selling, distributing, and managing recurring digital services (e.g., cloud software).

Why did you choose to invest in AppDirect? What made it so attractive?

The investment in AppDirect was attractive due to several macro trends and the rise in infrastructure needed to support more technology providers, along with factors like revenue quality, countercyclical demand dynamics, technology and product defensibility, and the M&A opportunity with AppDirect Capital. Below, I’d like to detail our investment thesis behind each of these categories. Additionally, we were compelled by the opportunistic entry we secured—a 40% discount to their last primary equity raise—thanks to their interest in having WestCap on the cap table due to the multiple ways we can help them operationally. We achieved this discount through a mix of primary capital, secondary, and warrants.

WestCap invested in AppDirect based on the following investment thesis:

Beneficiary of Macro Trends: The rise of cloud software, 5G, and other technology advances has increased pressure on legacy telecom players to invest heavily in their infrastructure, adapt their distribution models, and expand their product catalogs. AppDirect is uniquely positioned to serve the $1.3T TelCo Services and $4.3T Cloud Communications IT markets by providing a technology platform that enables these providers to modernize their offerings and expand their distribution footprint.

Quality of Revenue: The majority of AppDirect’s revenue comes from mission-critical services that are recurring in nature. Specifically, AppDirect is contractually obligated to a portion of its revenues in perpetuity, providing a high degree of revenue visibility and supporting high levels of net dollar retention (120%+).

Countercyclical Demand Dynamics: Demand for these services is largely insulated from broader IT spending pullbacks that might occur in recessionary periods, given the criticality of the software and services purchased via AppDirect’s platform (e.g., telecommunications, business software, energy, etc.).

Technology and Product Defensibility: Recognized by both Gartner and Forrester, the platform offers a premier full-stack commerce and marketplace platform. The sophistication of AppDirect’s “Monetization” platform attracts merchants looking to develop their own marketplace solutions to expand their digital commerce footprint but who lack the technical resources to build these solutions themselves. AppDirect’s “Procurement” platform provides a tailor-made sales enablement and business management software solution for channel partners and IT resellers who historically have not had access to advanced technology solutions that fit their needs.

Emerging Opportunity with AppDirect Capital: Through its “AppDirect Capital” (ADC) program, AppDirect has engineered a unique and compelling customer acquisition model yielding high returns on investment. Through ADC, AppDirect provides upfront capital to merchant partners in exchange for a portion or all of their perpetual recurring cash flows.

How does AppDirect fit within the overall portfolio?

We believe AppDirect represents a uniquely positioned asset given its market-leading product offering, which has high-quality revenue and sustained defensibility embedded in the distribution contracts AppDirect holds.

AppDirect is a strong addition to our InfraTech investments. WestCap’s expertise in marketplaces and marketplace infrastructure positioned us well to evaluate the AppDirect opportunity (as both a B2B marketplace and marketplace infrastructure) and to support the company as it scales.

AppDirect also provides a new distribution channel for some of WestCap’s other portfolio companies, as they can list their own products and services on AppDirect’s marketplace. To date, WestCap has already introduced AppDirect to Bishop Fox and Hunt Club, two of our portfolio companies, and we plan to continue with many more.

How actively involved is the WestCap team with AppDirect?

WestCap is actively involved with AppDirect through implementing a smart scaling plan to help the company across multiple workstreams:

Corporate Development: WestCap is supporting AppDirect in sourcing, underwriting, and executing strategic acquisitions to expand the company’s geographic footprint and product offerings.

Capital Markets: WestCap is providing support to AppDirect in preparing for an IPO, executing the AppDirect Capital strategic roadmap, and brokering strategic capital market introductions. We are also assisting with financial and board reporting as the company prepares for the public markets.

Product and GTM: WestCap provides hands-on support in conducting customer and product research, refining brand strategy, and developing go-to-market motions into new sectors.

Talent and Org Design: WestCap is working with AppDirect to optimize its organizational effectiveness and talent acquisition.

Technology and Data: WestCap is collaborating with AppDirect to identify and implement new strategic engineering, data, and cybersecurity initiatives.

What are your expectations for the AppDirect investment going forward?

We believe that AppDirect is poised to benefit from several macro trends impacting the IT industry, the most important of which is the increasing reliance on “channel” partners and intermediaries. As such, we expect to see high-quality organic growth in AppDirect’s topline. We also anticipate AppDirect expanding its business through strategic acquisitions. The company is currently in conversation with several potential targets. AppDirect will be at a viable scale to exit into the public markets via an IPO or become an attractive target for a strategic acquisition. As WestCap holds the right of first refusal on shares offered by current shareholders, the team believes we are well positioned to increase our exposure over time.

One of the earlier investments made by the fund was iCapital. iCapital is the world’s largest alternative investments marketplace, facilitating access for accredited investors by connecting product manufacturers with wealth managers and financial advisors.

Why did you choose to invest in iCapital? What made it so attractive?

WestCap had maintained a longstanding relationship with the leadership team at iCapital and had intimate familiarity with the market it serves, owing to our partnership’s lineage in operating and investing in category-leading financial services and technology businesses. Our thesis on iCapital is grounded in both macro and idiosyncratic factors, including:

Increased Allocation to Alternatives: WestCap developed conviction early on that industry trends are driving all-time high demand for alternatives, widening the whitespace for software and distribution service providers. The global size of the high-net-worth individual (“HNWI”) investable wealth pool is expected to reach $102T by 2025. Current allocations to alternatives across distribution channels vary from ~3%-5%, with recommended target allocations of ~22% in HNWI portfolios.

Scale, Network Effects, & Barriers to Entry: iCapital’s clients include 13 of the top 15 largest wealth management firms in the U.S. and 14 of the top 15 largest alternative asset management firms. Of this group, 6 of the largest GPs and 6 of the largest wealth managers are investors in iCapital. This inventory coverage and equity consortium drive significant barriers for new entrants.

Quality of Revenue & Intrinsically Hedged Business Model: iCapital earns recurring fees charged on the subscription amount and transactional revenue for products originated or purchased through the platform. iCapital’s management fees display strong dollar retention profiles with intrinsic expansion opportunities (driven by repeat issuance, annual allocation targets, subscription life, and drawdown of the assets). The illiquidity profile of both product types, particularly that of closed-end assets, implies that fund managers are less likely to liquidate assets in cyclical market downturns, meaning the “useful life” of the assets increases (and thus iCapital’s subscription revenue) in times of market stress. This creates a natural hedge to revenue, making iCapital more resilient to downturns.

Pro Forma Opportunity: The acquisition of SIMON furthers iCapital’s positioning as the largest multi-asset class platform for financial advisors (per platform assets). The combination of both is intended to create a centralized, comprehensive suite for financial advisors to learn, access, transact, and report on all alternative products, with significant network effects that provide a durable competitive advantage.

How does iCapital fit within the overall portfolio?

As core infrastructure for private markets, iCapital exemplifies WestCap’s B2B marketplace's theme. iCapital was among our earliest FinTech investments, and we have continued to support the business throughout its lifecycle over the years, having committed follow-on capital across approximately seven different events, especially as the company has consistently delivered against its forecasts. iCapital is currently one of our largest investments across WestCap’s funds.

How actively involved has the WestCap team been with iCapital?

WestCap has been very actively involved with iCapital since our initial investment. We have supported the business in the following areas:

· Corporate Development: Strategy, M&A, International GTM Strategy. Collaborating with iCapital on geographical and product expansion efforts, most notably in Asia, and executing its inorganic strategy.

· Product Design: Assisting iCapital in prioritizing its roadmap; CōLab has supported the company with UX designs.

How has iCapital performed so far? What are your expectations for the investment going forward?

iCapital has consistently exceeded its forecasts. As of 1Q’24, iCapital has $185B of assets on its platform, achieved record monthly subscriptions for structured products at $7.1B, and recorded 44k monthly active users among financial professionals, resulting in a record high quarterly revenue of $125M in 1Q’24, up 23% YoY. The business is expected to achieve revenue of $500M for the full year 2024, up 24% YoY. It is also seeing:

· The diversification and resilience benefits of a more exhaustive suite of alternative product coverage (through its acquisitions of SIMON and Axio).

· Signs of a recovering macroeconomic environment into 2024, with record subscription and revenue growth.

· Continued expansion through strategic M&A as iCapital maintains its steady growth trajectory.

These are both great stories. There’s one more investment story I’d like you to share. Can your share why you choose to invest in FLYR? What made it so attractive?

We were excited about FLYR as we spent time in the travel tech space and recognized that the travel sector is hamstrung by its underlying operational systems, which largely still run on technology originally created in the 1980s. Airlines and travel companies are facing unprecedented pressures to undergo an overhaul, as the gulf between their digital experiences and those of other industries widens. Since legacy players have not successfully addressed these needs, companies are ready for new solutions. This led us to FLYR, a company tackling these obstacles head-on to usher in a brighter future for travelers by helping airlines and other travel companies upgrade their legacy commercial technologies with modern, AI-based offerings that facilitate superior customer experiences and, consequently, improved business outcomes.

WestCap invested in FLYR based on the following investment thesis:

Expanded Market Opportunity and Platform Positioning: FLYR’s platform has evolved from its core Cirrus product, which focused on revenue management, to a platform powering all commercial decisions for a transportation company, underpinned by FLYR’s deep learning analytics platform. We believe the evolution of FLYR’s product suite is expanding its addressable market by deepening its wallet share penetration. While revenue optimization represents approximately $0.25 per passenger of revenue opportunity, the current suite positions FLYR to capture more than $1 per passenger at full adoption. Forecasting and pricing are now just a fraction of the TAM, facilitated by the acquisitions of Newshore (booking engine) and Pribas (reservation ‘system of record’) in 2022. The prevalent incumbents, Amadeus and Sabre, are both archaic and have entrenched revenue streams to defend, inhibiting their ability to innovate and be customer-centric in their product development.

Land and Expand Model: Once FLYR is integrated as a point solution for RM, Offer/Order, or Customer Experience, there are opportunities to expand FLYR’s software across other supplier functions. FLYR’s platform sales have been enabled by M&A, whereby the acquired companies bolster FLYR’s core product suite, covering additional services in an airline’s commercial stack, potentially driving annual contract value (ACV) expansion and stickiness.

Network Effects and Operating Leverage: WestCap believes that as FLYR scales both the number of airlines and its penetration of the user base within each airline, the software should become increasingly valuable from both a supplier-specific perspective (e.g., synergy across pricing team, network planning, marketing, and executive use cases) and a data integration perspective (e.g., increasingly efficient ingestion by integrating with all types of airline data and third-party providers).

Compelling Founder and Executive Leadership: WestCap regards Alex Mans as a serial entrepreneur and a driven technical founder. We believe FLYR’s commercial traction to date has been driven since Alex’s promotion to CEO in 1Q’20 (formerly CTO), and from WestCap’s diligence, he is credited by his customers, team, and Board with driving the inflective growth the company is currently experiencing. WestCap’s conviction in Alex has strengthened since the time of the initial investment, as his capabilities as a leader have proven out through his ability to scale the organization by attracting top talent, closing sales opportunities, and executing on inorganic growth. Chief among the initial risks identified at the time of WestCap’s initial underwrite was the key person exposure around Alex, who was central to a number of functions and single-handedly driving significant commercial traction for the organization at the time. Subsequent to the investment, WestCap has co-led with Alex the buildout of the C-Suite to create leverage for Alex.

How does FLYR fit within the overall portfolio?

WestCap initially invested in FLYR in 2021 and recently doubled down by leading its Series D round. This is one of our key investments in the ExTech sector, another high-conviction vertical for WestCap given our partnership’s operational pedigree. Compared to iCapital, FLYR represents a different archetype of a portfolio company—it is a B2B SaaS business model with subscription revenue, as opposed to the marketplace, take-rate-based commercial approach of iCapital discussed earlier.

How actively involved has the WestCap team been with FLYR?

· Corporate Development: WestCap assists with FLYR’s M&A, strategic research, and capital markets efforts.

· Brand & Marketing: CōLab is engaged in vision exercises for FLYR and assisting in the development of marketing collateral.

· Talent: WestCap is currently supporting FLYR with a CTO search and has already led the buildout of its existing executive leadership team, including CFO, COO, CRO, CCO, CHRO, and CMO.

· Financial Excellence: WestCap is engaged to help FLYR with its financial systems and FP&A excellence.

How has FLYR performed so far? What are your expectations for the investment going forward?

FLYR has achieved tremendous growth by signing major accounts. The company is expected to achieve $68M in revenue for 2024, more than tripling its 2023 revenue of $18M. FLYR is currently servicing key airlines such as Riyadh Air, Avianca, Air New Zealand, and JetBlue. The team is also focusing on converting its substantial billion-dollar pipeline into contracts.

Last word

WestCap has been instrumental in bolstering the C-suite for FLYR to complement Alex Mans, CEO, and bring additional skill sets to position the business for future success. Furthermore, FLYR has delivered on an ambitious product roadmap and matured its suite to expand beyond revenue management into a commercial operating system for travel and transportation, through both organic and inorganic means. As a result, we have seen tremendous growth in the business from a financial perspective.

Part Two: 2024 Q3 Market Insights – WealthCo/WestCap