Waterhouse VC has been built on the conviction that wagering technology is a crucial yet frequently ignored aspect of the investment landscape. Despite the sector's growth and size, it has not received adequate attention from traditional venture capital. In the six years since our founding, this trend has only intensified, affirming our focus on the essential components of the global gambling ecosystem.
The fund combines the expertise of the Waterhouse family with a curated network of professionals in the wagering industry. This collective knowledge helps us identify, assess, and support our portfolio companies.
As we reflect on our accomplishments in 2025, we recognize that they were made possible by the trust of our investors and partners. We are grateful for their ongoing support and are eager to continue growing their capital throughout 2026 and beyond.
Waterhouse VC Fund closed 2025 with a gross return of 12.6%, achieving this despite facing a notable 7.7% headwind due to currency fluctuations. The appreciation of the Australian dollar against the US dollar adversely affected the reported value of our US-based holdings, which form the entirety of our equities strategy, when converted back into AUD.
The fund was established on August 19, 2019, and as of December 31, 2025, returns are reported before all fees and expenses, assuming the reinvestment of distributions on July 1 each year. While our efforts aim for accuracy, results are indicative and subject to external financial review. It is important to remember that past performance does not guarantee future results.
In 2025, our investment returns were mainly driven by our equities portfolio, supplemented by some dividends from portfolio companies. Although we did not exercise any option deals during the year, we began 2026 with 11 active deals, presenting a significant opportunity pipeline for the fund.
Throughout 2025, our investment team remained highly active, reviewing over 450 unique businesses. This rigorous screening allowed 66 companies to advance to due diligence, culminating in six new option deals. Two key themes emerged in 2025, which are expected to shape our focus in 2026.
Firstly, prediction markets have transformed from niche gambling products to recognized financial instruments. The increasing interest from hedge funds in hiring dedicated prediction market traders suggests this sector could evolve into a mainstream asset class, an idea we explored in our November 2024 and February 2025 newsletters. This shift seems to foster a growing expectation, particularly among younger users, that betting opportunities should extend to a range of topics beyond sports, bringing wagering closer to cultural events and daily occurrences. We are keeping a close eye on this development and remain engaged with startups and syndicates working on the necessary infrastructure, liquidity, and distribution for this new ecosystem.
Secondly, the application of Artificial Intelligence within wagering is rapidly gaining importance, becoming essential for operator technology stacks. While we observed a notable increase in AI-driven companies in 2025, we maintain a selective investment approach. For us, the criteria is straightforward: does the product address a costly problem and provide measurable commercial outcomes? We see considerable potential in areas such as personalization and social gamification, which can enhance user engagement and experience.
A prime example of innovation in our portfolio is Voxbet, which has extended its option for the launch of "Pass The Bet." This new feature facilitates collaborative parlay building and sharing among users, catering to the rising trend of social betting and simplifying the bet-building process. Given that parlays yield higher margins for operators than traditional bets, this feature is strategically important.
The disparity between gaming margins for US bookmakers shows how significantly parlays outperform single bets. Major players, such as FanDuel, support this trend with similar social features. Voxbet differentiates itself through its "plug-and-play" capacity, enabling its sophisticated functionalities for any operator without necessitating extensive infrastructure changes. We believe this positions Voxbet for substantial growth as operators focus on enhancing user engagement and profit margins.
Another notable performer in our portfolio is a business within the live dealer casino sector, which has experienced rapid scaling across various platforms and markets. Our investment in this company has returned 19 times our initial, modest investment in the form of dividends, and it is poised to contribute significantly to the fund as it grows.
To manage capital reserves between option exercises, we implement a systematic global equities strategy based on a strict methodology, avoiding discretionary stock picking. We closely analyze a select group of top investment managers, such as Bridgewater and Pershing Square, watching for significant positions where they allocate more than 1% of their portfolios. Although not every investment aligns with our criteria, we seek companies trading below 20 times earnings, with robust growth and conservative financial structures.
A notable feature of our strategy in 2025 was its industrial distribution compared to broader benchmarks. As of December 31, 2025, our equity strategy's allocation to the Information Technology sector was approximately 9%, compared to the S&P 500, which heavily leans on a few mega-cap tech firms, accounting for 32% of its index. Our portfolio has successfully tracked these indices without overexposure to any specific industry, creating a strong foundation amidst sector volatility.
Data from the November 15, 2025, rebalance supports this view, with our strategy being illustrated on an equal-weighted basis in contrast to the market-cap weighted S&P 500.
We believe our methodology provides a nuanced alternative to traditional index investing. Standard indices and stock screeners tend to rely on descriptive attributes—statistical measures like industry classifications. While these figures reflect past performance, they do not predict future results. Our approach emphasizes predictive attributes. By tracking the conviction of elite managers, we identify characteristics that may predict a stock's future success. Instead of selecting stocks based on historical performance, we strategically position ourselves where future growth is likely to occur.
Looking ahead, as we near our soft close target, we are increasingly focusing on opportunities closer to home. Although our reach has global dimensions, our strongest advantages lie within our network, as demonstrated by our successful exits like BetMakers and Saintly.
As our team grows, we are shifting from purely external opportunity identification to actively constructing our proprietary pipeline by engaging with businesses at their outset—a stage where Waterhouse VC can have the most substantial impact. This ensures we concentrate on opportunities that have historically yielded the highest returns.
In the coming year, we will emphasize executing high-leverage opportunities within our existing portfolio, particularly with Racing and Sports (RAS). We also remain attentive to the evolving regulatory landscape in New Zealand, especially concerning the regulation of online gaming and casino licenses, which could present substantial opportunities for providers that facilitate compliant market entry.
Lastly, we will continue to address the issue of "turnover leakage" to illegal offshore operators, a topic previously discussed in our July and September 2025 newsletters. In Australia, it is estimated that 14% of racing wagering flows to the grey market. However, racing represents just a fraction of a broader issue, with restrictive domestic regulations on online casino gaming and live in-play sports betting contributing to significant liquidity loss offshore. Recent estimates suggest Australians are losing around $3.9 billion annually to unlicensed overseas platforms, a figure projected to reach $5 billion by 2029 according to Responsible Wagering Australia.
Innovative integrity technology solutions are essential to recapture this lost liquidity. The year ahead will focus on tackling larger problems while enhancing our proximity to the operators that shape the global wagering ecosystem.
