GROWing pains?
Why is GROW at firesale prices?
Today I’m going to share a view on FTSE250 IT Molten Ventures - ticker GROW.
Molten Ventures plc is a United Kingdom-based venture capital firm investing in and developing disruptive, high-growth technology companies. The Company invests across various sectors, such as consumer technology, enterprise technology, hardware and deep tech, and digital health and wellness.
It has a £1,371m Gross Portfolio and £400m Assets under management via its VCT/EIS products. The fees charged to VCT/EIS investors pretty much covers the majority of costs of running GROW so rather than “2 and 20” (typical in VC you pay a 2% fee and 20% of the upside) instead you pay 0.1% and there’s a LTIP which costs 250% of salary for “exceptional” performance or much less or even zero during more difficult times.
Like now. GROW’s share price is down 74.76% over the past 2 years. NAV fell from 937p but the discount to NAV fell from a surplus to heavy discount.
NAV 780p (as at 31/3/23). Ask 258p. So a 66.9% discount.
Or is it? More on that later.
Liquidity/Support for its portfolio: Cash £23m Line of Credit £60m EIS/VCT co-invest funds ££M (all as at 31/3/23). In the past 12 months $1bn was raised by its portfolio companies. 90% of those raises were at or above the previous valuation (uprounds).
Is now the time to venture into Venture Capital?
I’ll begin first describing why I think VC will do well in the coming months and years. The evidence that a turn is already here and green shoots are GROWing.
This isn’t just a NAV discount story. It’s an earnings story too. And forecast earnings are growing. Investors Chronicle report aggregate forecast NTM EPS of 24.6p for Grow - one of the fasted upticks in the market.
This is a quote attributed to a recent Jefferies thought piece “a consensus emerging around the incredible once-in-a-generation opportunity afforded by investment trusts’ discounts.…… Even if the macro picture remains challenging (“higher for longer”) we may be getting closer to the point when some of the other factors dissipate. The UK stock market is cheap relative to other developed market comps and international investors are beginning to recognise that fact. An uptick in M&A driven by overseas investors could help to catalyse a reversal in the 8-year negative trend for FTSE250 tracking ETFs. 38% of that benchmark is made up of investment trusts. Were the regulatory environment to change too, it could release much more institutional capital into the CEF sector. That’s why the smart money is starting to get itchy fingers. Pools of capital are being raised to buy deeply discounted paper. Fear could quickly give way to FOMO if we have a good equity market backdrop this autumn. And when that happens, thinly traded names turn on a sixpence. Punters who were around in Q1/Q2 2009 will testify that it’s a case of blink and you miss it.”
Elsehere we are seeing a climbing deal count in Private Equity. In Public Markets too, after ARM’s highly successful float (and announcement of a secondary London listing and following a number of (highly) successful floats is it still fair to describe the markets as frozen?
History Rhymes?
With which crisis does the current crisis rhyme? Doesn’t 1994 stand out as similar to today? Now look at the trough to peak 3 year and 5 year recovery of stock market prices (albeit of the US market).
Normalcy returns far faster than people appreciate. This article from Jefferies sets out this table of past “end of the world” events and reasons why the world finds a way forward. Again and again.
Portfolio Performance:
Its portfolio companies are growing too. 79% grew revenues by over 25% in the past reported period.
Historically over a quarter of realisations have been at MOIC (multiple of invested capital) of 2X-4X and 43% at 5X or above. That’s an average of 35% a year (historically).
The diagram below from GROW shows the same progression. NAV grew from £61m to £301m between FY18 and FY22.
Everything described so far is a “Top down” approach of portfolio management, liquidity, and market appetite. But does something get lost in all this discussion? What about the components of that valuation. How are the actual companies doing? I’ve not sought to profile all of them - just 6. But take the time to read and watch the 6 videos - then think about the value from a “Bottom up” approach.
Top 5 Portfolio Prospects: (Figures in pence denote NAV per GROW share), ROIC Grow’s return to date.
Thought Machine: Tech for a Fintech (71.6p/share) (ROIC 3x)
Our team’s mission is bold: to create technology that can run the world’s banks according to the best designs and software practices of the modern age. In doing so, we will properly and permanently rid the world’s banks of the problems generated by poor technology running on legacy infrastructure.
Funding: Round D in 2022 100% uplift in valuation.
Update: Recently added Softbank as a Client.
CoachHub: Digitally Delivered Coaching (63.1p/share) (ROIC 3x)
CoachHub is the global leader in digital coaching. We enable behavioral change with world class coaching delivered through our state-of-the-art digital platform. Every day, we reinvent people development to support individual, collective and organizational transformation.
Funding: $800m Round C in 2022
Update: Expansion into APAC. I include a video of the sort of impact they’re making.
Aiven: Make Developers Lives Better (61.6p/share) (ROIC 19x)
We help organizations fuel the continuous innovation needed to create awesome, data-intensive applications by using the leading open source technologies.
Funding: $210m Round D in 2022 50% uplift in valuation.
Update: APAC expansion and building out more tools/capabilities for example MS Azure platform compatibility making this a “must have” for developers
Ledger: (47p/share) (ROIC 2.5x)
Ledger produces hardware wallets for crypto and related assets. They currently offer a range of products aimed at securing one’s crypto portfolio in an offline physical device preventing bad actors from digitally accessing crypto assets
Funding: $108m Round C in March 2023 at a 0% uplift in valuation.
Update: Did you know that you can store crypto on what looks like a USB stick? I didn’t! Ledger has sold 6 million devices since its inception in 2014. And that trend isn’t slowing down as the FTX debacle showed once again that your crypto assets could disappear overnight if you leave them on a crypto exchange. The company sold 1 million devices between June 2022 and February 2023.
Aircall: (38.3p/share) (ROIC 4.2X)
Aircall is a cloud-based call centre and telephony platform for businesses. The voice platform integrates with CRM and helpdesk tools to enhance engagement between businesses and their customers, enabling better customer support and sales engagement. Aircall can be set up in any business with internet access and APIs into over productivity and communication tools. The platform’s powerful analytics engine helps sales teams improve productivity, leaving a valuable and collaborative audit trail.
Funding: $120m Round B in Feb 2023
Update: Aircall recorded 70% YoY growth in revenue and a 107% YoY increase of large customers in the past year.The company has six global offices and over 700 employees. Aircall has been focused on expanding the product offering and has significantly improved the featurerichness, including new modules related to analytics, voice AI, and smart routing. This allows Aircall to keep growing with its current customers as well as deliver an improved customer experience. Aircall crossed the $100m ARR mark in 2022 while maintaining growth at scale, evidencing the large and untapped market in midmarket cloud-based telephony.
Top 4 holdings equal £2.43 vs a £2.58 buy price for GROW
Top 5 including Aircall takes you to £2.81 (so if you could divest the top 5 at the “book” value you’d have 23p in your pocket per GROW share). Plus you’d own £9.19/share of other companies
If you’ve watched the 5 videos, I’ll ask you - which one of the above do you think wouldn’t fetch their current valuation? Personally I am struggling how this stuff is for sale at nearly 80% off.
I want to include the 6th largest holding too = Revolut.
Revolut: (35.6*p/share) (ROIC 7.8x)
Revolut is a global financial services company that specialises in mobile banking, card payments, money remittance, and foreign exchange. Revolut continues to reach new heights as the consumer fintech app surpasses 28m customers globally, processing over 250m transactions per month. The company supports banking services in over 200 countries/regions across 29 currencies. Revolut announced profitability for 2021 posting £40m of operating profits for the period. Over 2022 they expanded into new locations across the Americas, Europe and Asia. Revolut is also looking to expand their business customer offering which has over 500k users
Funding: $800m Round in 2021 - *GROW hold it at a 40% discount (* so 59.3p/share without that discount)
Update: It’s been a difficult period for Revolut in which auditor BDO said it was unable to independently verify three-quarters of 2021 revenue, and its application for a UK bank licence is overdue but said to be imminent. In April, investment bank Schroders almost halved the valuation of its shareholding in Revolut, valuing the company at $15bn. Despite its challenges, Revolut says it has grown to 30 million customers worldwide. Its past year’s revenue tripled to £636.2m and net profit of £26.3m, reflecting a post-pandemic digital boom and growth in crypto trading (about 1/3 of revenue) while FX, weath and trading accounted for half of revenue.
Graphcore: (24.3*p/share) (ROIC 1.5x)
Graphcore is a machine intelligence semiconductor company, which develops Intelligent Processing Units (“IPUs”) that enable world-leading levels of AI computing. The IPU architecture enables AI researchers to undertake entirely new types of work, thereby helping to drive advances in machine intelligence.
Funding: Series E $222m Round in Dec 2020 - *GROW reduced its valuation by 67% (* so it was 72.9p/share previously)
Update: If you’d never heard of NVidia, boy, you’ve certainly heard about it this year.
AI is the new buzz word and all hail the magnificent seven. But did you know Graphcore has a competing technology?
Graphcore was covered in this article yesterday Nvidia has a stranglehold on AI companies as the chip shortage begins to bite. This rival CEO is eager to offer an alternative.
Bloomberg also speaks to the struggle Graphcore has had competing against the NVidia behemoth.
So why is Graphcore worth less than 1/1000 of Nvidia?
Well it was “only” 1/300 but GROW wrote off 2/3 of its investment because Microsoft pulled out of a deal. In fact this reduction was the biggest single loss for GROW's NAV in the y/e 31/3/23. It was a $78.4m write down from $115.6m to $37.2m.
On a prior $2.8bn valuation for the whole of Graphcore, it’s now worth >$0.9bn now.
Yet, when NVidia has tripled this year due to excitement with AI does it make sense that an alternative is worth less? AI is a growing market so can Graphcore find niches? Can Graphcore’s IPUs compete with NVidia’s GPUs. By all accounts, yes, but NVidia’s advantange lies in its plug and play CUDA software. Can Graphcore produce something similar?
At what point does Graphcore's 144 patents and capabilities in supercomputer AI semiconductor chips become snapped up by someone? NVidia can't sell to China, leaving the Chinese with few options, including Graphcore. Hmmm.
Couple of other things I found interesting. Even after the write down, this is at a 1.5X ROIC in GROW’s books. So the loss is kind of less of a gain, actually.
Also I can see it fighting hard to compete, on UK govt contracts (rightly so) as well as partnerships and competing services. For example providing high-end chips for Data Centres.
Will the UK Government support Graphcore - even for its own £100 programme?
So when you read there was a -16% drop in NAV in GROW for FY23 there's a lot of detail which leaves room for optimism. Sometimes even in GROW's "worst" holdings.
Would 144 patents for AI/super computer chips ever be worth zero? NVidia went from $100bn to $1.07tn market cap in the past 4 years. Has the market got it right that Graphcore is worth 1,118 times less than NVidia today?! ($0.9bn vs $1007bn)
GROW Valuation:
NAV 780p (as at 31/3/23). Ask 258p. So a 66.9% discount.
Or is it?
Why is NAV actually 1200p? That would put GROW on an (astonishing) 78.5% discount.
If you view page 14 of GROW’s presentation deck the discount applied to fair value is 35% so 708/0.65 = 1200. This is part of the conservative valuation placed on the portfolio. I don’t think the market appreciate this.
97% of its portfolio have downside protection too. That means, in plain English, that in the event of a portfolio company going busy GROW are ahead of other investors to get its money back - in the event of liquidation/bankruptcy.
I deep dived into just the top 6 as well as #10, and found much substance both commercially and technologically why the 364.3p worth of book value value more than justifies the current share price - in my opinion. I asked at the outset - Why is GROW at firesale prices? The answer only makes sense from a “Top Down” approach to rejecting growth, thinking to risk-free returns from bonds or bank savings, and aversion to anything on the basis that some catastrophic severe depression is about to hit the entire portfolio. Remember much of the portfolio are selling digital services globally and not specifically to the UK. The world economy is forecast to grow 2.7% in 2023. But even considering the UK, the much talked about recession hasn’t happened and in fact the economy feels far more robust - and the vaunted “soft landing” appears to be what we are living through, for now. The pain of inflation, the pain of interest rates is tolerable, and that pain will diminish as the policy takes effect leaving room for easing. For example, today the Times reports mortgages of below 5% are now available again.
But approaching GROW from the bottom up as I have attempted in this article, I struggle to see the downside from today’s share price. Least from what I see. Try three different valuation approaches in your mind “Are the top 5 worth 100% of their book?” or is each one of these worth at least “21.5% of their book value, or “Can a bit over a 1/5 of the holdings by valuation make back at least their book value”.
History is on my side too. For example even through the financial crisis 2007 to 2009 median IRR for PE was 9%. 2009 had the strongest median returns of any year either immediately prior to or after the period. According to Bain & Co top quartile returns rose to almost 50% in 2009, underlining the strength of the deals made that year
A final thought. If the 1200p per share NAV portfolio can grow at the same rate as it did in the past i.e. 35% between now and 2028 you’ll own a share worth 5705p. (assuming compounded returns).
Assuming something growing like that is at least at 0% discount in 2028, then that’s a future 5705p versus a 258p ask today. So a 20X MOIC over the next 5 years. To illustrate that, £50k invested in GROW today could make you a millionaire in 2028.
My posts are written for my benefit, to set out my investment rationale. I state facts and source them where possible. I also use words like “infer” and “think” which means it’s a (reasoned) opinion based on a fact. Investment requires filling in the gaps with inferences and thinking about the facts to form forecasts. I hope you enjoy what I write and find it useful in forming your own investment rationale.