Could you talk through your current ventures at Tekkorp Digital and Tekkorp Capital?
I had the luck and pleasure of building a business called NYX Gaming Group over a 15-year period, which culminated in a sale to Scientific Games back in January 2018. Fast forward to January 2019 and I fully integrated the company within Scientific Games, then set up my own investment vehicle, the view being how do we deploy capital into this expanding sports betting and online gaming market, with a particular focus on the dynamics of what’s been happening here in the US. That’s been a fascinating experience. Along the way, we also saw the big arbitrage between the private-based investment type opportunities versus public investment opportunities.
To help capture that and bridge the gap, we launched a special purpose acquisition company (SPAC) called Tekkorp Digital Acquisition Corp, and we raised $250m in trusts. We’re actively in the market now talking to private companies about going public. Our focus there is on the $1-2bn price valuation range; we’ve been actively investing, also through Tekkorp Capital, which is my private vehicle. We’ve made a number of investments there, more on the growth equity side of things. It’s just been incredible to look at how many entrepreneurs are coming into the market with great ideas, looking to solve problems we have here in the US.
When we spoke for the CEO Special of Gambling Insider, you told us any firms you’re looking to invest in must have a nexus with the US market. Can you expand on the type of profile of company you’re looking at?
The nexus to the US is particularly relevant to our public vehicle, the SPAC. The thinking there is there are a large number of fast-growing and highly innovative gaming operators and suppliers in the global market. Not all of those would make sense in terms of going public in the US. What the US market is looking for is you might have great economics and a great business, great team, but why is it relevant to me? Why should I, as a US investor, think about investing in your business? So we are looking specifically for companies that meet those growth metrics: great management, great technology and great intellectual property.
But they must also have a really clear reason as to why they would need to be public on a US exchange. And typically that relates to actually running operations here in the US. The good news is the US market is probably the most attractive emerging market in the world for sports betting and online gaming operators.
So we don’t have much of a challenge in finding that nexus but it’s important to ask that it logically makes sense; we’re listed on NASDAQ, so our investors will be looking for what the US story is.
Would you say that is a profile all US investors look for? And how different is the profile of a firm US investors are looking at compared to the rest of the world?
Looking at just the companies themselves, we’re seeing two different types of businesses really here in the US. We’re seeing home-grown opportunities, where entrepreneurial businesses or great technology companies that have been around the space are really looking to tap into the online sports betting market. Either through the supply of data, analytics or core software, perhaps even the operations side. But we’re also seeing a lot of the more mature European operators look to expand into the US market and bring their technology, operations, skill set and experience into the market. So we’re seeing a range of different types of businesses. The ones that perhaps don’t make sense are, for example, if you are focusing on the African sub-continent. You’re not as relevant to the US market as perhaps a European business that has set up operations in 10 states here in the US. By and large, most internationally scaled operators will have some form of presence here in the US and we’re finding some strong narratives behind their US expansion.
Given Tekkorp Digital is a SPAC, we also previously spoke about the benefits of a SPAC versus an IPO. Is it fair to say a SPAC is ideal for a fast-growing technological company, whereas an IPO is perhaps something better suited for more legacy firms?
There’s an interesting quirk in the listing process. If you’re a private company and you want to go public in the US, you’ve got three real direct routes: you can do an IPO, a direct listing or you can merge into a SPAC. The main difference in the IPO and SPAC is that in an IPO, you can only talk about past revenue performance. You can’t describe future revenue performance. We find most investors are really focused on what the future growth rate is like, particularly in an environment where interest rates are almost at zero. Investors are really looking for high-quality businesses with a rapid growth rate and great trajectory. So the SPAC process allows companies to merge into the SPAC vehicle and describe in very clear terms what their growth trajectory looks like. And we’re seeing projections go out three to five years. Investors get a good sense as to how the business is developing, where it is today and where it will go in the future.
So we find that component allows investors to make more informed decisions. The second component to a SPAC is typically quite often you’ll have a pipe investment go alongside, where you bring additional investors in. That could be another $100-$500m. Those investors have qualified the target as well, gone and kicked the tyres, come to terms with the valuation and they have effectively underwritten that valuation. That gives a secondary indication to public investors that this business has the quality they’re looking for. So we find the SPAC structure allows investors to make more informed decisions and get more comfort with what the future prospects of that company are. And ultimately that’s all investing is: identifying the future growth rate of a company as it grows, not what it’s done in the past.
Don't just expect plenty of growth in the US. In Davey's view, there will be plenty of change among market leaders in the years to come. You can find his full interview on gamblinginsider.com/gi-huddle/