Join Tom Waterhouse, Chief Investment Officer and Michael Donohue, Head of Distribution for an in-depth discussion covering:

A review of the fund's five-year track record and recent option deals
What our strategic investment in Racing and Sports means for investors
Current opportunities we’re seeing in the wagering industry.

This webinar was recorded on 5 September 2024.

Watch the full webinar here:

Timestamps

2:00 Five-year performance track record

5:00 Why the Fund focuses on the technology layer of the industry

6:54 The three pillars of the Fund strategy

13:25 Option deals investment process and case study

18:50 13F global equities strategy

24:50 Strategic investment in RAS Technology Holdings (ASX:RTH)

31:55 Summarising the Fund

33:40 How to invest

34:20 Why are the technology suppliers happy to sell an option in their business?

37:14 When does the FUM reach a point that it creates volume issues in your market?

38:42 What is the minimum investment?

40:40 Are you seeing any opportunities to invest in wagering syndicates?

Transcript

Michael Donohue: Hello everyone, and thank you for joining today's webinar about the opportunities we're seeing in the wagering industry. My name is Michael Donohue, I'm head of distribution here at Waterhouse VC. I'm joined by Tom Waterhouse, our chief investment officer. Hi, Tom.

Tom Waterhouse: Hi guys, nice to be on the webinar today.

Michael: We're going to aim for about 45 minutes for the webinar. The first half will be a short presentation by Tom, and then we'll leave some time at the end for some questions, hopefully plenty of time. For those new to the fund, I think the first half of the presentation will be interesting for you. You'll get an understanding of how we're seeing the industry, and also just the niche in the industry that we're focusing on, and how we're going about our strategy. And if you've been following the fund for a while, or you're an investor with us, the second part will be pretty valuable, I think, because we'll be talking a bit more about our latest deal, which is maybe the most significant deal and investment the fund has done to date. Before I hand over to Tom, just an important disclaimer. This presentation is general information only. Any past performance mentioned is not an indicator of future returns. It's for wholesale investors only, and only people outside of the US. And the last thing before we kick off, you'll see in the bottom right hand corner of your screen there is a little box that says chat. If you open that up, you can put your questions in at any time, please put them in all the way through the presentation. I'll start compiling them, and then when Tom's finished the presentation, I'll start reading them out to Tom and we'll get through as many questions as possible. Only your first name will be shown to the other attendees when you're asking questions, so please fire away.

Five-year performance track record

Michael: So, Tom, I've got the five-year track record up on the screen at the moment. We brought up that five-year anniversary last month, which is pretty exciting. I think the returns have been really good to date. We've compounded the fund at over 98 per cent per annum for five years now. I think that's all well and good, but if you're tuning in today, you're probably equally interested in, obviously, the historical performance, but perhaps more interested in what the next five years will look like. I think that's why we're all joining today. So I think it would be good to hear from you, Tom, just on the background on the industry, the niche that we're focusing on, and then the strategy that we're actually implementing to take advantage of the opportunities.

Tom Waterhouse: Great, thanks Michael, and good morning everyone. Look, I'll start off by just talking about the broader market, the gambling market. Obviously, everyone's been gambling since the beginning of time. It's a large industry, it's a trillion dollar industry, and the way you'd normally access and get a return out of that industry was to invest in the operators. So, in the likes of William Hill and Ladbrokes in the UK, or Tabcorp in Australia, or Caesars and MGM in the US. But over the last five or so years, it's become tougher and tougher for operators to make outsized returns, and that's been due to increases in regulation, taxation and advertising restrictions. So even in a huge opening market that's growing, like the US, which repealed PASPA in 2018, you've only seen one online operator there have one quarter of profitability since 2018, and that was FanDuel. They're spending huge amounts on advertising, a billion dollars plus a year per operator, and they've got huge teams and staff and so on. Yet to get an outsized return and beat the market has been very hard if you just focused on those operators.

As background, the family's been in the industry for a hundred plus years. As you probably know, I was an on-course bookie, ran the online betting business tomwaterhouse.com, and then was CEO of William Hill Australia's business. It was a really interesting business. We had a team of 500 people, 170 IT developers in Sydney, another 100 in the Philippines. And it really shifted, in that time that I was operating that business, from being all about marketing and differentiating on marketing, to differentiating on product, because it became tougher and tougher to have general mainstream marketing. The advertising landscape changed, TV transferred to digital, and operators started differentiating on product, really with the premise that if you can have a great product, customers will be attracted to sign up with you, and you'll be able to retain them longer. They'll be stickier, so you'll have a higher lifetime value, and then you'll have obviously more revenue that you can plough back into better user experience, acquiring more customers, and so on.

Why the Fund focuses on the technology layer of the industry

Tom: I saw with William Hill firsthand that to get a new product into William Hill, it was normally built by an external third party, and it was very hard to get into the William Hill ecosystem. We had hundreds of products from third parties trying to get into the William Hill ecosystem, and we were prioritising. There'd be a fight internally with the team members and executives over which one we'd prioritise, and we'd usually release maybe three or four new products a quarter. And I realised that once you're in the ecosystem of a William Hill or a Sportsbet or a Caesars or MGM, you're actually very sticky, because you're in the ecosystem. It's taken a long time to get there, and those third parties that supply a service, whether it be odds, or providing the betting engine, or the mobile application, or some other tool, once they're in the ecosystem, it's quite hard to get them out of the ecosystem. And they get a percentage, normally, of gross revenue, so they're somewhat protected from the taxes. To give an example, if you watch the NRL, those odds are normally provided by a third party data provider. If you're watching the NBA, it's provided by, let's say, Sportradar or Genius Sports. If you're watching horse racing, the odds are supplied by Racing and Sports, or BetMakers, or maybe in the UK a company called SIS, and so on. A lot of the data, the technology, the product, is third party supplied.

William Hill sold their business in 2018 to The Stars Group, and as part of that sale, I no longer was CEO, I no longer had a job doing that role, and I had a two-year non-compete. I thought, well, what am I going to do? I can't be a bookie, and that's basically the only thing that I'd ever done. But I love the industry, and I know the industry, and I wanted to stay in the industry. And I thought, well, I think there's an edge in understanding these suppliers.

The three pillars of the Fund strategy

Tom: Because if you're an analyst at one of the big banks, you can probably analyse the P&L of a Tabcorp or an Entain or a Bet365, and they're quite similar. You've got turnover, gross win, product fees, taxes and so on, then you've got technology costs, headcount costs, marketing costs, and then you've got your profit and a whole bunch of other costs. But they're similar lines of the P&L, and whether a company should be trading at eight times earnings, or 10 times, or 15 times earnings, an analyst at one of the banks can probably analyse that far better than I can. But a technology provider to one of those big companies, they're not mainstream known. And if one company is supplying esports data, like the odds for an esports tournament, is that product going to grow, and can that provider go from having one contract with Ladbrokes to having 50 contracts around the world? Well, that is very hard to know, because normally the big betting companies don't talk about those third party suppliers in their annual reports, or when they're giving investor presentations. The external market sort of looks at these large betting companies and goes, well, they must provide all the technology and all the odds and everything, end to end, but that is not the case. So I thought we had an edge in understanding that there are these suppliers in the technology layer, and which suppliers have the best chance of getting into the ecosystem of these betting companies. So I asked our best engineer at William Hill, who was working at Quantium at the time, and had been developing gambling product for 10 years in the space, and was a genius. I said, look, I think there's an edge in looking at gambling product and the technology layer in the sector, I'm going to form this fund, will you come on board? And he came on board himself, and some very, very skilled members he'd worked with, and we started Waterhouse VC five years ago, really going, we're going to invest in the technology layer of the gambling sector. So that's the background of why we focus on that area, and what led to the fund. We've got three pillars to the fund.

The first pillar really came about, and it's got all our return historically, and I believe we'll get our outperformance going forward, the first pillar came about through our first deal. The deal was, we saw a company that supplied racing data, and they supplied William Hill, and they also supplied the racing industry with racing data, and they had a platform. They used to be a betting company, and they transitioned to being a B2B supplier, so we knew the business quite well. We invested $600,000 in the business, and then, as part of putting some equity in, we negotiated to get an option to buy 19.9 per cent of the company at the agreed price at that date, for three years. And that business grew. Obviously, the US opened up, there were very low interest rates, there was a boom around online betting, and that business grew very, very quickly, both through increased revenue, but also because there was a lot of excitement about that part of the market. And our options suddenly became very valuable. I hadn't done anything with finance or commerce since 20 years before at university, so I didn't have a great grasp on the value of our options, but with this deal that came off for us, we suddenly saw the value of what options could bring. So we decided that we would change the fund, and really focus, rather than making equity investments, on going around the world and trying to find great technology companies that generated some revenue, that had one or two contracts, maybe in Eastern Europe or maybe somewhere in Asia, that we thought we could help expand into Australia, UK, US and so on. But rather than putting a large equity stake in them, we would negotiate to buy an option in those businesses. So our typical deal is, we buy an option to acquire, if they're listed, 19.9 per cent, if they're non-listed, 20 per cent of the company, at an agreed price today, and that option has a three-year period.

Why we think we have the ability to do that well is that we understand the space very well. The tech team's been building in the same industry for the last 10 years, very knowledgeable about how good the code and technology is. We have great insight into what the operators are looking for, what the trends are in the industry, where the growth is. So when we do an option deal, we already have great insight that, oh, that product is probably needed in North America, or that product is needed in Australia. We have a tech team that is able to understand how hard it will be for that operator to integrate it, because if it's going to be two years of development work, they've got a huge priority list. And also, because we've been doing it for so long, if the company needs to get funded, having us on the register with an option deal, they've often found it easy to get funded and expand if they needed to. We also have great insights into who they could go and speak to about expanding their team and ramping up the team. So we bring benefits. Obviously, we buy the option, but we bring great benefits from being part of these businesses, and really help them with the blueprint of where they can take their business, from having one contract, two contracts, and so on. To give an example of what we do, we look at many different businesses, for instance, platform businesses. So if Michael wants to become a bookie, he might do michael.com, and he goes, well, I don't know how to build the tech, and I don't really know how to have odds on everything under the sun, but I think bookmaking is a growing area and I want to expand. And so we like finding businesses that can provide platforms, trading services, data feeds.

Option deals investment process and case study

Tom: We get approached all the time by businesses. We probably speak to 20 businesses a week, probably follow up with between two and five, and may not even do an option deal in every 100. So we're looking at lots and lots of businesses. We go to all of the gambling conferences around the world, so this year we've been from South America, North America, Europe, UK, Asia, Australia. Basically, wherever there's a gaming conference, we go. We're normally speaking at the conference, and then we speed date for three days, 15 minute meetings, meeting business after business after business. If we think they've got something unique, then we follow up. Many calls, go and meet their business, the tech team comes in, analyses their tech, and we see if we can come to an agreement on an option deal.

An interesting deal, and it just shows the value of our team, is that we were approached by a business that had done a token sale in 2018, and they'd developed some tech, and they'd run out of money to pay their developers in Vietnam. They emailed in and said, look, we need some money, we need help capital raising, do you want to invest? We go, look, we don't invest, but if your technology is good, we may look at an option deal. I passed it on to our CTO. He looked at the tech, and he said, look, for us to develop that tech in Australia would take two years and $12 million of Australian development cost. It's actually a really good piece of tech. For me, I see these businesses all the time, and I would have had no idea whether the tech was great or not great. I was probably wrongly dismissive of it, because I didn't quite understand the token sale, and it was in Vietnam, but I went, okay, well, he thinks the tech is worth something. We went in and negotiated to get an option in that business, to buy 20 per cent of it at a million dollar US valuation. Then, off the back of that, they were able to raise 2 million at a $4.9 million valuation within a month of us doing the option deal. And then, and we said, look, these are possible people that would want a great piece of tech that's been developed, once they got the money in, they were able to sell that business within five months for $23 million. So our ability to understand what's needed, why it's needed, and whether it's good technology or not, is very powerful. That's a good case study. We do lots of options, and we've only had five come off in five years, so it's not like it's happening all the time, but that's how we use the team, and the ability of the team to analyse whether something is good or not.

In terms of the options, they're high risk, in the sense that if that business doesn't get funded, it doesn't go anywhere, it has to close its doors, and that's why it's needed. Or if we look at a business with one contract in Eastern Europe and not enough money to pay their developers to expand, they're high risk if you're looking at them from an equity point of view. And when we value buying the options, it's hard to get the option value very high. So the most we've ever paid for an option is $30,000, and generally it's a lot less than that, to buy these options. But if we get them right, there's a significant payoff, and as I said, we've had several come off over the years. We've basically got all our return through this first pillar of the strategy, optioning up tech businesses and trying to help them grow. We take no active role, but we try to say, this is the blueprint of how you expand. And when they come off, they're obviously very lucrative. We're a fixed unit trust in Australia, so every time we have a dividend or a gain, we have to distribute the gains. And we've had several years of great returns, so we distributed $40 million last year, $7 million last month to investors, and I think the year before that it was four or five million dollars back to our investors. We can't hold the gains, we give them back to our investors at the end of each financial year. At the beginning, they were like, great, this is fantastic, you're probably a one hit wonder. But they've seen that we and our team, all we do is spend all our time trying to find option deals, and we love the industry and know the industry. I'd be doing it for fun. I love looking at these businesses. So our investors said, well, look, actually, we want to keep putting the money back in. Not all of them, but the majority of them. We want to keep putting the money back into the fund, keep finding option deals, and hopefully getting us great returns. And so we were then sitting, a few years ago, on quite a bit of cash, because we don't need a huge amount to get the option, and if we're going to convert the option, they're generally in the money. We don't go into any B2C, we don't go into any operators. The reason why we sold that option in that tech platform is that they sold it to a person that was going to go down the B2C path. So we sometimes don't even convert the options, we sell the option. And we don't have a huge need for the cash, because the options we're normally negotiating are not huge amounts. So what do we do with the people's cash that's in the fund?

13F global equities strategy

Tom: That led to pillar two of the strategy. We thought, well, do we put it in, I don't know, bonds, gold, term deposits, or just sit it there in cash? And all of those didn't quite fit with where we wanted to go. The family has the majority of the fund, and we had deployed, for the last 10 years, a strategy that we thought our investors would probably have an appetite for. We were not quite sure at the beginning, but we thought that this would be a good pathway for us to go down while we're holding their cash. And what we have done as a family for 10 years is followed the 13F filings of leading funds around the world. For anyone that doesn't know what a 13F filing is, they came out of the global financial crisis. Any fund with over $100 million of US equities has to release a 13F filing every quarter, which outlines all the equities that they held, what proportion they held, what they've bought and sold, and so on. As you've probably heard Warren Buffett say many times, it's very hard for any fund to beat the index, and he'd be happy to bet, I think, that any fund is not going to beat the index. With that in mind, I was like, well, why not just put it in the index? But there are several funds that have beaten the index over the last 30 year period that are long only. So they're not buying and selling and hedging their positions, they're long only. So we as a family followed the 13F filings for the last 10 years, and went to our investors a few years ago and said, look, we'd like to follow the 13F filings of the leading funds that are long only around the world. There are 16 funds that have outperformed the S&P over the last 30 years. We'd like to follow their 13F filings and their positions, and apply a few proprietary factors to those 13F filings.

So we have two analysts here, separately doing it, where they go through, once a quarter, the 13F filings of those 16 best performing funds. It has to be over 1 per cent positioning in those funds, so the funds are the likes of Berkshire, Bridgewater, Third Point, Apollo, Tiger and so on. They go through their filings, and any position that's over 1 per cent of their fund, it has to be trading under 20 times PE, growing revenue greater than 20 per cent year on year on average over the last five years, and have very little debt. So we want to be in ultra conservative, low PE, but still high growth businesses that aren't impacted by increasing interest rates, by having very little debt. So we applied those factors, went to our largest investors and said, look, this is what we want to do with the cash that we're holding. We're not going to actively manage an equity portfolio for you. We don't think we're smarter than the market. We think these funds are smarter than the market, and we want to pick their most conservative positions that are still high growth, and we want to park the money here while we spend 99.99 per cent of the time focusing on option deals. The investors said, well, that sounds a very conservative, good strategy, let's go for it, and let's see how you go.

And so we've followed that strategy. Since we started it, we've outperformed the S&P by 11.8 per cent, and we've done it with a Sharpe ratio of 1.09. The average PE ratio of our companies is 13 times, and the S&P is trading at like 23 times. Our median growth rate is 27 per cent, and the S&P's median growth rate is 18 per cent. So we're in much lower PE ratio companies, still high growth, and only companies that are owned by those leading funds in the world. We basically just want to park money in this strategy and perform in line with, and hopefully slightly better than, the market, the S&P, but so that if there's a downturn in the market, we outperform. So we want to be in a very conservative group of stocks and park the money there. And the reason being is that we believe that pillar one, finding options, gives us all our alpha, gives us our outsized return. We just want to be parked, and we don't want to be parked in cash. We believe that the 13F strategy is a good strategy that we'd be happy to park passive money in anyway, and we park it in that strategy while we spend all our time focusing on the option deals. That strategy has performed very well for us. We think that, worst case scenario, we're a boring but good performing US equity strategy that's going to be hard to beat against other US equity strategies. Maybe we never find any option deals anymore, but we're going to be hard to beat against US equity strategies, because we keep finding, hopefully keep finding, option deals that give us that outperformance. The fund, in terms of its net asset value, its NAV, is made up 98 per cent of the 13F positions, and that's why we have monthly liquidity, so you can come in and out of the fund each month. The reason being is because all the funds are in those equity positions. All of the options sit at cost in our fund, so we don't pay huge amounts for those options, and they sit at sub 2 per cent of the fund. So we sit in US equities, and that gives us the liquidity, and the options sit at cost in the fund, but if any of those options come off, they give us our outperformance and return, and that's where we spend all our time. So that's the second pillar of our fund, a boring, steady, sturdy US equity strategy, while we focus on the area where we have the expertise.

Strategic investment in RAS Technology Holdings (ASX:RTH)

Tom: And then the third pillar of the fund is a recent pillar, which is our deal with Racing and Sports. Obviously, my background is in racing, and I'm very interested in the data suppliers of the racing industry. I've known Gary Crispe and Stephen Crispe for a long period of time, and held them in very high regard, because they've been doing it for well over 25 years, supplying great data to the racing industry, to participants in the wagering industry, and to bookmakers. So we'd been having long discussions back and forward, and I think it's a really interesting business from an equity position. But we have our strategy of option deals and US equities, and our largest position in US equities is sub 5 per cent of the fund, so we're ultra diversified in the US equities, and we don't pay huge amounts for the option deals. If we suddenly start introducing buying big equity stakes, well, then that changes the dynamics. It becomes more risky. And so, even though we liked a business like Racing and Sports, it wasn't really in our remit to go and make a large equity investment. Talking with Stephen and Gary, and Tim Olive, their CFO, it was, look, we want to be part of this business, we think it's very interesting, but what's a way that we can have an equity stake in the business, but also, if we can create opportunities and see ways for you to grow, that we can have an option long term? We came to an agreement which I think we're very pleased with, and I think they are also very pleased with, where we made an investment. We bought 2.5 per cent of Racing and Sports just a few weeks back, and we have an option to acquire another 2.5 per cent for three years, and then a further option, based on revenue milestones, to buy another 10 per cent.

For us, it's really exciting, and there are three reasons why we really think it's an interesting business. Obviously, with all of these things, you've got to execute, and it's one thing to have hopes that they're going to be great, but the proof is in the pudding of executing and doing it. But the thing that I like about it is that, with pillar one, our option deals, we have been very good at identifying companies that can potentially grow, obviously, because we've had quite a few come off. We've been good at seeing them raise capital off the back of us having an option deal. We've been good at helping them with, this is great tech talent to find, or this is a great team to find, and so on, expanding their capability, and helping with introductions, this is the person you should speak to, or this is how you go about it, the blueprint of how to expand. But the area that we have struggled with in pillar one is that we haven't been able to fast track their ability to get into the product pipeline of the large bookmakers, because the large bookmakers have so many competing priorities, and even though it might be a great piece of tech, it's still a long process. So we love the opportunity with Racing and Sports. A very switched on team, a team that's shown their capability and been doing it a long period of time. Secondly, they've got an expanding data services, platform services, mobile app and managed trading services business. That area is expanding, and they are keen for us to present deals that we have looked at, option deals that we have looked at, for them to be able to distribute. So that solves an issue for us in pillar one. We're finding these companies, and they're finding distribution. They're very keen for us to help them find deal flow, and we're very keen to find deal flow for them, because we want those businesses to get as far and wide a distribution as possible.

And then we were really excited by Racing and Sports' deal with Stake. Stake is one of the fastest growing betting companies in the world, and it's just amazing what those founders have been able to do, to take on the incumbents and really be such huge operators. They're young, they're dynamic, great user experience, innovative marketing. And Racing and Sports has got a deal to provide racing data for them. Racing is such an amazing product, because it's built for betting. It's high margin, it's high frequency, and it's a really, really great product. The issue is that it hasn't been able to get distribution with these new up and coming operators, the likes of Stake, and we think that there is a significant pipeline that would be interested in Racing and Sports' product, and interested in racing. We think it's very exciting for the racing industry, but we also think it's very exciting for a company like Racing and Sports. And the third area, and again, I have no idea if Racing and Sports will go down this path or not, but an area that we think is a great opportunity, is that when you look at the people that make the money in the industry at the moment, you have the suppliers, because they're getting a percentage of the gross revenue, and that's the area we focus on in pillar one. There are the new up and coming operators, they're called, let's say, crypto bookies, but they're far more than that. They're offering a different, unique user experience and acquiring customers in a different way, and obviously they're making huge money and growing significantly. And the third area is professional betting syndicates. It's very hard, as the listeners here would appreciate, to win betting, because you've got margin against you, and the bookies have that margin edge on their side. But there are groups around the world that can win betting on all different markets, and those businesses find it very, very hard to sell, and to sell at large multiples. Racing and Sports is a very unique business, in that it has amazing data capability. Gary Crispe has run a proprietary database for a long, long period of time, and we believe that there's the ability for Racing and Sports to look at those businesses, and if they can run those businesses or assist those businesses in some way, there are plenty of businesses that are syndicates that are trading at very low multiples and need assistance in growing, and they have the capability. Whether Racing and Sports even wants to look down that path, we're just interested, because they have the capability if they were able to look. And it's nice to be involved and have an option deal and an equity stake in a business that's in an area that we know, and think has great growth prospects, and a very capable management team.

Summarising the Fund

Tom: So just to summarise, because I know there's a stack of questions and I've probably talked way too long. The first pillar is that we find options in suppliers to gambling companies, so tech suppliers to gambling companies. We option them up, and find businesses that we think have great ability to expand. While we're doing that, the capital base is in US equities, and we think conservative US equities that are owned by the leading long only funds in the world. And then the third pillar is a strategic equity stake in the business Racing and Sports, which is an area that we know very well, and we think that we are complementary to them, and they are highly complementary to us. And that is Waterhouse VC. We only run one fund. I hope I'm doing this for the next 20 years. I love doing it. The family is the largest investor in the strategy, in the fund, and it's an area that we know well. I just believe that, basically, if we keep our head down and keep finding option deals over the next 20 years, we're going to perform well. If we suddenly can't find option deals, then we're a very stock standard, conservative, boring US equities fund. And I always say to investors, we've got monthly liquidity. If you're not seeing the constant deal flow of option deals coming through, well, you can probably find an equity strategy somewhere else, or do it yourself. And that's the fund in a nutshell.

How to invest

Michael: Great, thank you Tom. So just to quickly sum up before we go to questions, the fund is currently open to wholesale investors. We have monthly unit pricing, so that you can come in and out on a monthly basis. And if you'd like to make an investment in the fund, or just learn more, or have a call with us, just contact me. My details are on the next slide, and I can give you a copy of the information memorandum and the application form. So we'll move on to questions. We've had a few come through in the chat box, and also a few come through beforehand. I might just start on a couple around the option deals, Tom.

Tom: Yep.

Why are the technology suppliers happy to sell an option in their business?

Michael: There was a good one earlier from Ben, it's a very good question. Can you explain further why the technology suppliers are happy to sell you options to buy a large proportion of their business at such a cheap price? They only receive 30k or less in cash, so how do they benefit?

Tom: Yes, a good question. The reason being is that the option strike price, in three years' time, we don't negotiate hard on. We basically say, well, what do you think is a reasonable value in three years? So let's say they're worth a million dollars in their mind now. They might say, well, look, I'd be happy to get to being worth 10 million or 20 million in three years. As long as we agree the strike price is a 10 million or 20 million valuation, and we think it could be much bigger than that, then there's value for us in the option. And they're like, we're only worth a million now, it would be amazing if we get to being worth 20 million in three years. So yes, we're only paying a small amount for the option, but there's so much risk and other things that come into play for them, going from being a $1 million company to a $20 million plus company, and we only have value in our option if they go to being a $40 million or whatever plus company. And for them, I know with tomwaterhouse.com, I knew the area was growing, I knew that online betting was the future, but I had no blueprint. I was an on-course bookie. I had no blueprint of how to go from being an on-course bookie to being a large corporate bookmaker, and I always say that, look, we paid to learn, in a sense. But if I'd had someone that had gone, oh, well, actually, I've done this for the last 10 years in the UK, and this is the blueprint of how you acquire customers, onboard customers, retain customers, how you operate the platform, the suppliers you get, the deals, all of this insight. We don't take active management, but we do provide insight and credibility, and we do a lot of work. If we're going to go and do a deal with an esports data supplier, we don't just go and do the deal with the first one we've looked at. We go and see them all. We'll see esports data suppliers in Eastern Europe, in Prague, or in France, or in the UK. We speak to them all, we speak to who they're supplying, who they supply to, what are their service levels, what is their uptime, how good are they to deal with. We get a deep understanding. So for us to do an option deal, as I said, we do 20 calls a week and we probably don't do an option deal with any of them. We're doing a lot of work before we even do an option deal. So yes, it sounds like it's not expensive if it's $30,000 or less, but it's a great outcome if it comes off, for us, and a great outcome for them if it comes off, and that's the benefit I believe we bring. I hope I summarised it well enough.

When does the FUM reach a point that it creates volume issues in your market?

Michael: There's another question around the option deals that came in during the week, from Dan. At which point does your FUM get to a point where you see volume issues in your market? I don't think there's any sort of limit on the strategy of implementing the 13F portion of the fund, but there's certainly a limit at some point, Tom, around where we can do enough option deals to add alpha to the fund. Do you want to comment on that?

Tom: Yeah, no, it's a very good question, and we think about it a lot, because obviously the family is the largest investor in the strategy. We're around $75 million of FUM at the moment. We're planning to close to external investors at 200 million, and the reason being is exactly that point, that if we just leave it open forever, it basically becomes a 13F equity strategy. For us to have, hopefully, significant outperformance of the market, we need to focus on the option deals, and the option deals being significant enough that they give us that outperformance. Our sweet spot is doing option deals with companies that are sub 100 million. A company that's already a billion dollars, they've already got all of the team, and know the people in the industry, or whatever. We really focus on the smaller end. They can be listed or unlisted. But we see that, yes, we'll close to external investors at 200 million, and we think that the strategy basically blends into a 13F strategy once you're over a billion dollars in funds under management.

What is the minimum investment?

Michael: We've got a couple of questions on the minimum investment. We had one earlier in the week from David, what is the minimum investment amount, and then one earlier on the webinar from Luke, why is the minimum investment 500,000? I can probably take that one. The reason is that we're an unregistered investment scheme, so there are some rules here in Oz around what you can do there. The rules are around sophisticated and wholesale investors. One way you can meet that test is by putting in $500,000. The other way you can enter the fund is just by qualifying as a wholesale investor. So you've got to get a letter from your accountant or your financial advisor, and with that letter, you can make an application to the fund.

Tom: Yeah, and if they're putting in less than the minimum, it's worthwhile looking up those wholesale investor requirements, like what the assets you need to have and income you need to have are, and so on.

Michael: One just came in from John. What's the watermark that you use? So, in terms of a high water mark, in terms of whether you take performance fees and management fees.

Tom: Yeah. So, in terms of once you've hit that high water mark of performance, there are no performance fees until you're over that watermark again. So if we have some amazing return, well, that's fantastic, but you're not getting fees again until we get over that return. Investors have to have made money for us to be back over that water mark again. It's a great incentive for us, and I assume all funds are the same, but it's a great incentive for us. We've got to keep getting good returns if we're expecting to get performance fees.

Are you seeing any opportunities to invest in wagering syndicates?

Michael: There's a question from John, hi Tom, thanks for your presentation, could you please provide an update on the professional tennis betting syndicate, thank you. And then there's also another one from Liam, are you seeing any opportunities to invest with sports or racing wagering syndicates?

Tom: It's very interesting. So as I touched on earlier, it's really hard to win betting. You might be able to, I don't know, if South Sydney's playing the Roosters, you might be able to have a really good gauge on who's going to win that match. You might follow both teams really well, understand who plays better in certain weather, when they put certain players out, niggling injuries, whatever. You might say, well, look, the bookies have just underestimated how well one side's going, they've priced it incorrectly, and I'm betting. And that is a strategy, and you can be a winning punter with that strategy. The issue is that it's very hard to know that detailed information for hundreds of games and events and betting opportunities. And so, if you bet regularly, and you don't have that insight and detail of what the true odds should be, the bookies have margin against you. It's not that the bookies know what the true odds should be. They're working off supply and demand, weight of money, and also building margin into both sides. So they've got a margin against you. It is possible to beat it, but it's very hard to beat it if you don't have more intel and knowledge of the data and what the true odds should be than the bookies. There are a few groups around the world that have built data models and have large teams of people around the world betting on horse racing, boat racing, bicycle racing, all sports, financial markets, and so on. And they win large, large amounts of money, and they are betting into, well, it's a trillion dollar market, they're betting into a trillion dollar market, and they have the ability to assess what the true odds or true probability is more often than the market can. But most people come to us and say they can win betting, and we normally think that they've had just a period of positive variance, they're deluded, or they're just like con artists, in a sense. It's basically very, very hard to win.

But we came across a young guy who was ultra amazing to speak with, and had such insights, and had been very successful for quite a few years betting with the bookies. And I'd heard that he was very, very hard to beat. I met him and thought, well, gosh, he sounds ultra intelligent, very interesting. And our team spoke to him in more detail and said, well, give me an understanding of what you do. It's not really our strong area of expertise, but we have several of our investors that are in this space and know the industry, and we got them to speak to him, and they said he's ultra switched on. He said, look, I used to work for Tony Bloom, who owns Brighton football club and got an award from the King earlier this year, and is probably the leading soccer bettor in the world. He said, I used to work for him. I called Tony, and I said, look, is this guy good? He said, yeah, he's excellent, a very, very switched on young man, and he's very talented. And so we did an option deal to be able to acquire 10 per cent of his betting syndicate at a 5 million pound valuation. He has had amazing success. He's tripled turnover and gross win every year for the last three years, and we were able to convert our option at less than one times earnings in that business. For our investors, it's been a great, great outcome, and it made us realise that these syndicates are quite complementary to each other. That's why we thought there may be an opportunity, and again, I don't know what Racing and Sports will do, obviously they have a million opportunities on the go, but we think there's an opportunity. And we've done two other option deals with professional betting syndicates, structured in a way that's very advantageous for our unit holders, but hopefully also for them as well. They trade at much lower multiples than other players in the industry, and have a unique edge, and are very interesting. So we've done two other deals in the space. One is actually a racing professional betting syndicate, and one is in the gaming space. It's an area that isn't really looked at by other funds in the sector, but is an area that we have growing expertise in, and we definitely think that there are more growth opportunities.

How does the option deal pipeline compare to previous years?

Michael: We've got a question from Damian. How does the number of promising option deals that are coming to maturity in this financial year compare to previous years?

Tom: Yeah, it's really interesting, in that at the beginning, I'm like, well, were we just a one hit wonder with doing that one deal? Are we going to be able to get other option deals? And our first few option deals we did after that first good deal, we were like, oh, let's just do some option deals, because we've got to get a track record of doing them, and they were more like us saying, would you do an option deal with us, rather than us being very, very selective. What we've found now is that we've got a great rhythm of getting inbound, we've got a great rhythm of going outbound to companies that we see that are very exciting. We've obviously expanded the team greatly internally here, and we've got a rhythm of going to all of these conferences and speaking at them, where we're known in the space, and we meet so many of them. And also, because we've had success in the sector, they're often coming to us a lot more now, and we write a monthly newsletter that goes into most of the leading gambling publications. So we feel that we've got great deal flow, and our option deals are coming through far more regularly now, and I think at far better quality than they have ever been. I don't know, Michael, you probably have the exact figure of what we've done in the last few months, but it's definitely a very different capacity to what it was.

Michael: Yeah, I think we're at six new deals added to the portfolio this calendar year, so maybe it's five or six. So it's a pretty good pace of adding potential upside to the portfolio, I think.

Tom: Agree.

Do you see growth opportunities in Asia?

Michael: Thanks. From James, do you see growth opportunities for investment in Asia, especially India, Vietnam and Korea?

Tom: Look, we don't view it in that way, in the sense that we basically go, we want to find amazing tech solutions that solve an issue, and if they provide that, then we'll be able to get distribution in multiple markets. But what we do look at is if there's an issue in a market that is unlike another market. So, for instance, the majority of states in the US don't allow iGaming online, and Australia, the largest gambling market per capita in the world, allows sports betting pre-match online and horse racing online, but doesn't allow in-play sports betting or any gaming online. So those two markets are quite unique, because they don't allow things that are allowed in other markets. So if we see a product that's specifically solving a solution for users and bookmakers in those markets, it's got a unique product fit. India is a good example. There's a large proportion of the population that loves cricket, and there are lots of different types of fantasy, different games that have got large databases. So we might look for something specific because it solves an issue, but we don't go, look, oh, this geography, let's say America, has opened up, let's focus only on products in America. Because if you have a great, let's say, voice betting solution, well, yes, you can expand it in America, but it's going to be also popular in Brazil, Australia, the UK and so on. So really, it's product first. Does it solve a problem, and which markets does it solve a problem in, rather than, this market's so big, let's find the solution for the market. It's normally product led first, is how we look at it.

Michael: Yeah, it's sort of the benefit of focusing on the tech layer, right? Because if there is a market opening up, like Brazil is going to open up, then they can get exposure to that market without being all in on a particular licence there. So you get the exposure without as much risk, I think.

Where do you see AI making a major impact?

Michael: We'll finish on one more question, a question from Mark. Are there any particular areas in gaming and wagering where you see AI making a major impact, such as virtual gaming or data analytics?

Tom: Yeah, look, definitely, it's really interesting, and we see it. I should just say, more broadly, the benefit of the strategy that we run is that we don't have to guess the future. We just have to see a lot of stuff and go, actually, that's amazing, that would work here, and then try and negotiate an option deal on it. So we don't have to invent the future. We just have to make sure we're constantly in the deal flow of what's happening in the future, which is much easier than trying to predict where it's all going. But AI and automation, I think in every industry, is just changing the game. I'll just give an example in professional betting, and it's not my area of expertise, but we've done several deals in the space and know several of the key players in the industry. It all used to be about, well, getting the data, obviously, was one thing, but then modelling. Who made sure they kept the data in the most pristine measure, updated the model, had the model actually working great? What seems to have changed is that the actual modelling and computing of it all is far more automated now, and easy for upstarts to replicate. What's really important now is finding unique data that is hard to obtain, and looking at games or sports in a different way than they're normally cut up for the consumer. Racing, for instance, is all about, let's provide as much data as possible to the industry and participants so they can make the most informed judgement, and they can do the form and all this sort of stuff. There used to be a great edge in just taking that data that everyone could get, and then modelling it really well. Now it seems that, through tools and AI, you can model it all. It's finding the data that isn't cut up for public consumption for everyone to use, and finding a way to look at it and view it that isn't just something you can put into your AI model, and so on. There are probably far better examples. It's much easier to give an example when you're right in the weeds of something than when you're at 30,000 feet looking on. But for us, again, we're taking that 30,000 foot view of all these businesses, and just trying to find the person that's doing the latest innovative thing that is going to be adopted. But I would have thought it's going to be a game changer, and obviously a huge opportunity for those people that are adapting and providing something you need.

Michael: Great, thank you Tom. We'll look to wrap it up there. We're coming up to about 55 minutes, so I think we'd better let everyone go on with their busy days. If you have asked a question and we haven't had time to answer it, we'll come back to everyone individually, and then obviously look to hold a few more webinars over the coming months. But otherwise, thanks for your time, Tom, and thank you everyone for joining.