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November 05, 2015

Benedicte Gravrand ( thought of you and forwarded this article to you:

Opalesque Exclusive: New alternative fund wagers on disrupted industries

Alex Vaskevitch
Alex Vaskevitch
Benedicte Gravrand, Opalesque Geneva for New Managers:

As technology becomes more innovative and sophisticated by the day, we adapt to it faster than we used to, say, a century ago. However, some companies find it hard to do so, as embracing new technology would mean a change of business model. But attachment to a model that has been successful, pressure from shareholders and from debtors will encourage resistance against the unrelenting flow of innovation, which in the end might prove fatal.

What if, for example, the CEO of Blockbusters, a former provider of home movie and video game rental services, had decided to buy Netflix 10 years ago? He didn’t. And so, pressurised by competition from the new video streaming service providers, Blockbusters filed for bankruptcy in 2010. The company and its remaining stores were bought by Dish Network, which then closed down the stores gradually. Dish only kept and integrated Blockbusters’ last attempt at modernisation, "Blockbusters on Demand", a video streaming service. We don’t really miss Blockbusters, which now seems antiquated – even though initially it was innovative.

For other such examples, see what Google is doing to the media directories industry, what Amazon is to traditional retailers, what digital photography has done to Kodak, and how tablet manufacturers are affecting the paper industry. Talking of which, if you compare the barriers to entry for those who want to start a paper manufacturer, or a car manufacturing plant, to the barriers to entry for those who want to build a new electronic device or a new digital platform, they are much lower in the latter camp. Competition comes from an industry that is easier for entrepreneurs to access.

This toppling of industries and the dawn of the digital era present an opportunity for investors. As Warren Buffett apparently said, "I’ve always said the easier thing to do is figure out who loses. And what you really should have done in 1905 or so, when you saw what was going to happen with the auto, is you should have gone short horses."

Focus on disruptions
Alva Capital, a new investment firm created last year and based in London, focuses on this very phenomenon. "Ongoing convergence of technology is driving change at an accelerated pace while disrupting industries and challenging traditional business models. We incorporate our view on these disruptions and changes into every investment we make," the company website says.

Their investment strategy is to access a wide range of high value credit opportunities based on deep fundamental research approach. The focus is on high conviction investments. The aim is to generate equity-like returns while taking credit-like risk. Risk is viewed as the probability of potential loss and the magnitude of loss, with particular attention to potential extraordinary events outside the historical evidence. Alpha and beta are not of particular concern.

The team of five started running separate managed accounts last year. They are planning to formally launch their brand-new Cayman-domiciled fund, which might be called a private equity/hedge fund hybrid, in early 2016. Early investors will benefit from a lower management fee.

There are two eminent members on the advisory board, with room for a third one: David Vaskevith, former CTO of Microsoft and founder of Mylio, a start-up that enables users to store, share and backup their photos online; and Dan Moskovitz, president of D.M. Operations Management, a consulting firm, and long-time advisor to the chairman of Coca Cola.

"Alva Capital is a very different breed of investment firm, where we focus our efforts on credit opportunities arisen from disruptions," Alex Vaskevitch, Alva’s CIO, told Opalesque. "These disruptions can come from, (a) technology, (b) regulation, and (c) cultural change. Highly leveraged operators are less able to invest in the change needed to move their business models in an increasingly fast paced business environment, and many lack the leadership with the commensurate foresight and courage."

The rise of digital revolution provides a new wisdom that is accessible to everyone, he explains. This wisdom has already created massive changes. Governments have fallen under the Arab Spring, for examples. Whole industries and organisations are disappearing. It is a revolution that will impact the human race as much as the Renaissance did, if not more. But this one is more intellectual in nature. It is creating a new type of wealth, not one expressed by the amount of cash or assets one possesses, but by the access to digital services that replace the old, more expensive analogue products.

"This is the reason," he adds, "why technology is actually reducing the value of GDP as a measure of economic prosperity." Think of the hundreds of photographs you are taking these days for much less than with an old-school camera.

Alva Capital, Vaskevitch says, aims to support future-oriented entrepreneurship, and help to get rid of those who block changes; "We initially aim to do this by placing trades and investment in the credit markets, targeting highly levered business operating in a sector that is susceptible to immediate disruption."

Alva has created a proprietary model called the Alva Disruptive Forces model (which is similar to Porter’s Five Forces), and this model is used as a basis for the asset allocation strategy. "We have adopted some of Clayton Christensen’s basic ideas from The Innovator’s Dilemma and have developed our own academic framework which we build upon," he adds.

"What makes us different is not our analytical capabilities, it’s a combination of our view on the world, and the type of things we will be asking and looking at, which is not classical financial analysis," he notes. "We will be focusing on deep industry knowledge and on corporate governance and decision making within one company or organisation. These will be key to understanding if corporate decision makers will be sticking their head into the sand, just like an ostrich, while thinking that no one can see them. We will be looking for proactive management within organisations that are open to changeless, courageous decisions and fundamental understanding of things to come."

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