The ‘gamification’ of alts strategies is on the rise — and so are returns

The idea of gamification -- or the use of game-design elements in non-gaming contexts -- is not new. But the speed at which this trend is taking hold is unprecedented, and that has forced valuations for these investment themes into the stratosphere. Some investors are saying it's due to more adults dusting off their PlayStations and playing games from their youth more during the pandemic. Others are pointing to Gen Z and millennials having fully embraced gaming on their phones. Still, those focused on the larger picture are predicting a new wave of entertainment options that includes concerts and film with popular video game franchises as distributors of content especially as the new normal of quarantine continues. Either way, gamification is real and is set to impact education, sports, health/wellness and entertainment in addition to earning alternative investors substantial double-digit returns this year. The opportunities span private equity, venture capital and global long/short hedge funds. “The lockdown has massively accelerated peoples use of games and digital communities, and it’s not just a temporary thing,” said Luke Alvarez, founder and general partner of Hiro Capital in London. His firm’s first venture capital is expected to hit its €100 million (U.S.$112 million) close at the end of July and could quickly hit its hard cap at €150 million. At that point, Alvarez said he will need to decide if the fund will need to stop fundraising at that point and when a second fund may need to be put together. The limited partners are mix of U.K. and European family offices and some U.S. and European institutional investors and funds of funds, he added. Sky Ventures, the venture arm of Comcast. “We have invested in the Hiro Capital Fund to discover exactly the kinds of technology and talent Hiro have found with Flavourworks,” said James McClurg, director of start-up investments and partnerships at Sky. “As Europe’s largest entertainment company and with innovation at our core, we see an exciting potential in Flavourworks’ Touch Video technology as it brings game-like interactivity to premium content.” Hiro led the Series A funding round in Flavourworks, which was founded in London’s Silicon Roundabout in 2015 with a vision of bring interactive stories to filmed content for a global audience. Ian Livingstone, who is a co-founding partner at Hiro, was an early supporter of Flavourworks. Livingstone is known for his co-founding role at Games Workshop and bringing Dungeons & Dragons to Europe in the 1970s and the co-creator of the Fighting Fantasy gamebooks series. Also joining the Hiro team is Cherry Freeman, co-founder of LoveCrafts, an e-commerce brand that has led her to work with venture-backed companies such as Mimecast and New Voice Media. Alvarez, meanwhile, was co-founding CEO and president of Inspired Entertainment, a Nasdaq-listed mobile games and virtual sports technology company as well as a co-founding non-executive of The Cloud Network, the EU’s largest public access Wi-Fi operator. Today, Alvarez leads Hiro’s investment strategy and compliance and focuses on Hiro’s digital sports and games technology investments. Livingstone focuses on the studio and creative side of the investments. The fund aims to provide capital to 20 post-seed companies. Four investments have already been made companies. The investment thesis is simply that games, esports, and digital sports will be a central pillar of entertainment, economic and social life in the mid-21st century, according to the Hiro team. They say games have moved from a premium product to a premium service with the ability to reach a digital audience at the touch of a button. And the motivation for investing via venture capital is both global and local at Hiro. They say that many of the world’s leading sports leagues and sports tech innovators are in the European Union and U.K.-led and half of the top 30 mobile games worldwide are developed in the region. In the U.K. alone there are 2,500 games studios. Hiro quickly discovered, however, that only 2% of the studios receive any form of venture capital funding, and Europe’s total generalist VC investment back in 2018 was a mere 20% of that seen in the U.S. ($21 billion vs. $102 billion) with only a fraction going to games and sports tech. The numbers tell the Hiro story. According to Alvarez, there are more than three billion gamers globally, 600 million game stream fans and more than 500 million sports monitoring smart watches tracking health-minded peoples every move. The firm plans to announce two more venture capital funding deals in the next month. All 20 investments will likely be completed by early 2022 at the latest. “We see over 1,000 opportunities per year and target the top 1%,” Alvarez added. Over a six-year time frame, the team is targeting an annual IRR of 30%. The numbers are also compelling to Brian Oh, managing partner at New York-based Saiga Capital. He believes more money can be made on gaming investment strategies via public equities rather than private equity funds. The Saiga Capital Fund LP launched in early 2019 and is still sub-$10 million, but Oh saw investment gains of 35.7% last year. And for the year-to-date the strategy is up 24%. Hailing the fund as one of the first public equity fund’s focused on the global video/online gaming sector, the strategy is a concentrated, global long/short and low correlation portfolio. Saiga brings the experience of a team that has run capital at Bank of America Merrill Lynch and Tiger Asia Management. The investment universe is vast on the public equity side, with more than 100 stocks and $1.5 trillion in market cap. In order to invest in a company in the hedge fund, 30% of its revenues must be from gaming directly. The potential for the gamification investment strategy stretches well beyond the pandemic, according to Oh. He gives the example of an American teen who won a 2019 Fortnite championship with a $3 million prize. To put that in perspective when Tiger Woods won his first Masters Tournament, he netted only $2 million. And from Oh’s perspective, the global market shift in digital entertainment is only beginning. With the advent of 5G, gaming on mobile devices is set to grow exponentially and especially as the screen sizes become larger. Other trends include the growing cloud business being supported by Google and Amazon that will extend online gaming’s reach even further. Perhaps one of the most telling pieces to the economic story though is Amazon. Oh added, “Amazon has a game design studio. I don’t know how many people realize that.”

The ‘gamification’ of alts strategies is on the rise — and so are returns

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