Waterhouse VC: Dual Strategy Delivers

Every month, industry investors Waterhouse VC publish an article that spotlights different aspects of the ecosystem. This month, Tom Waterhouse explore Waterhouse VC’s dual investing strategy.

Over the 12 months to 31 December 2024, the Waterhouse VC Fund produced a gross return of 28%. While this was an exceptional year for our portfolio, the real story lies not in what happened, but in what didn't happen. Our core portfolio of options in early-stage wagering technology businesses saw no exits in 2024 - historically the source of our substantial outperformance. Yet the fund still produced an outstanding return, thanks to our equities portfolio, validating our multi-strategy approach.

Investors learning about Waterhouse VC for the first time are often intrigued to hear we run an equities portfolio within the fund. This structure emerged from our unique approach to venture capital: we negotiate options in early-stage businesses, for the right to invest at a predetermined valuation in the future. Rather than committing cash for equity upfront, ours is a capital-light approach (the total value of all options held in the fund is worth less than 1% of the net asset value). When we’re not deploying cash to purchase or exercise these options, we ensure our investors' capital remains productive through a defensive equities strategy.

We’ll discuss both the implementation of the equities strategy, as well as the benefits of this approach to venture capital, later in this newsletter.

Performance Summary

*Inception date 19/08/2019. Performance as at 31/12/2024, shown before all fees and expenses and assumes the reinvestment of all distributions on July 1. We make every endeavour to ensure results are accurate. The results are indicative only and subject to subsequent year end external financial review. Past performance is not a reliable indicator of future performance.

The fund's 28% return in 2024 came from three primary sources: approximately 0.5% from interest income on cash holdings, 2.5% from dividends from our equities portfolio, and 25% from unrealised capital gains on the equities (Note: These figures are subject to year-end audit). In our options portfolio, 2024 was effectively neutral, with the mark-to-market decline in our RAS Technology Holdings stake (the listed equity held in connection with our option agreement) being roughly offset by distributions from our investments in betting syndicates.

Structure Matters

Waterhouse VC invests in listed global equities according to a strict methodology. We monitor a select group of the world's top investment managers - the likes of my Bridgewater and Pershing Square. When these investors take meaningful positions, allocating more than 1% of their portfolios, we pay attention. Not every investment they make meets our criteria - we focus on businesses trading below 20x earnings, with strong growth, that maintain conservative balance sheets.

Academic research validates this approach - many studies have shown that following the disclosed positions of top investors in systematic strategies can outperform the S&P 500 index over time. Further, screening for manager conviction and value factors in their holdings improves performance.

This structure creates a portfolio where downside risk is essentially capped at the performance of our defensive equities portfolio - a diversified collection of value stocks held by the world's top investment managers, currently trading at sizable discount to the index.

This approach has proven particularly valuable in today's market environment. The S&P 500, often considered a default "market portfolio," has evolved into something far different from its original purpose, with extreme concentration in the technology sector. By contrast, our systematic strategy achieves better diversification while maintaining strong fundamentals, providing returns while we wait for our options to mature.

Where we do have an edge is in wagering technology, and here's where our structure becomes powerful. Through options that represent less than 1% of our portfolio at cost, we access the upside potential of venture capital without taking on the same level of risk. We only deploy meaningful capital once opportunities are de-risked and clearly in-the-money. In essence, our investors gain the downside protection of a defensive value portfolio alongside the upside potential when our options mature favourably.

Portfolio Progress

During 2024, we saw encouraging progress from stakes in two professional betting syndicates. Project Tennis, led by data scientist and sports analyst Tom Dry, has developed proprietary models for tennis betting with an industry-leading win rate of over 5% on turnover. Since our initial investment in early 2023, the venture has scaled considerably. In 2024, Project Tennis returned an approximate 15% distribution yield against our $2 million carrying value.

This success has encouraged us to evaluate similar opportunities such as Project Marston, a professional betting syndicate focused on live dealer online blackjack. The backdrop for this investment is compelling: the live casino industry is one of the fastest-growing segments of online gambling with 24% annual growth. Since finalising our option deal in April 2024, we have exercised our option, with Project Marston profitable and expected to pay its first dividend in 2025.

In August, we made an equity investment in connection with an option deal with RAS Technology Holdings (ASX:RTH). Known in the industry as "Racing and Sports" through its B2C brand, the company's primary focus is as a B2B provider of racing data and technology solutions. Their comprehensive racing database spans 33 jurisdictions globally, and they've demonstrated consistent revenue growth since listing in 2021. While our equity stake has seen some mark-to-market decline, we remain confident in the long-term potential of both the business and our option agreement.

2024 marked a transformative year in our deal sourcing capabilities. Deal flow increased substantially across all channels - inbound enquiries, outbound sourcing, and referrals - driven by the compounding effect of our growing network. As our portfolio companies succeed and our investor base expands, we're seeing an acceleration in opportunities. More importantly, the quality of these opportunities has risen, with a fivefold increase in deals progressing to technical due diligence. As a fund, we strive to be the partner of choice for founders in the wagering sector seeking capital and strategic support.

The investment team delivered a record year of seven deals added to the portfolio, setting us up for future potential outperformance.

This deal flow momentum is self-reinforcing. As we add stronger companies to our portfolio, we attract more sophisticated industry investors. As our technical team evaluates more businesses, we develop better insights into emerging trends. With each successful case study, we receive more inbound from entrepreneurs seeking partnership with Waterhouse VC. Each new portfolio company expands our network and strengthens our ability to add value, making us an increasingly attractive partner for the next generation of wagering technology companies.

The Next Frontier

Among our most exciting opportunities is our work to identify the "Shopify for crypto gambling." To understand this opportunity, consider some historical context: before the TAB era in New South Wales (just one jurisdiction in the global wagering market), there were 6,000 SP bookies and 400 bookmakers at Randwick Racecourse every Saturday. Today's Australian market has consolidated to around 150 online bookmakers, constrained by high taxes and regulatory friction. We believe the crypto space, with minimal taxation, friction, or barriers to entry, could see a proliferation of operators provided they have the right platform provider.

The success of crypto operators like Shuffle and Stake have created a blueprint. While building such businesses requires enormous engineering talent and time investment, we see a massive opportunity in serving the long tail of entrepreneurs looking to enter this space. By offering a true "Shopify experience" - where operators can rapidly launch a branded platform with integrated payment rails and data feeds - the leading platform provider in this emerging market can capture significant value.

We discussed this investment opportunity, as well as the broader crypto casino industry, in a recent webinar with Ishan Haque from Shuffle.

Looking Ahead

Given our growing opportunity set and the inherent capacity constraints of our strategy, we have made the decision to close the fund to new external investors at A$200 million in assets under management. This ensures we can maintain our selective approach to opportunities while delivering the returns our investors have come to expect.

As we enter 2025, our position has never been stronger. Our strategy provides stability through our equities portfolio and upside potential through our options. Our deal flow has never been better, our ability to evaluate opportunities never sharper, and our network never more valuable. The wagering industry continues to evolve, naturally creating new opportunities for innovative products and value realisation in our portfolio companies.

We wish to thank you all for your ongoing support. We remain grateful for your partnership and look forward to compounding your capital for many years to come.