The listed technology sector has been a major casualty this year – the Nasdaq 100 is shed 28 per cent of its value. The de-rating not only reflects market and economic uncertainty that has led to higher investor risk aversion, but also the upward shift in government bonds yields which has subdued valuation multiples in what is a highly interest rate sensitive sector.
Within major public market valuation shifts there has been a flight to quality as investors regroup around businesses displaying strong fundamentals and side-step those whose high-burn, growth-at-all-cost, strategies are incompatible with current conditions, notes chief executive of Augmentum Fintech (AUGM:99p), the first publicly-listed fintech fund. The same patterns are reflected in private markets with high-quality companies continuing to attract capital, albeit at more palatable valuations.
Patterns of investment have changed, too, as more companies have been raising capital with existing investors to extend their runways rather than embrace the challenges of the external market. There has also been a shift towards early-stage investment activity, reflecting the acceleration of innovation in times of uncertainty and the cooling of later stage and pre-IPO valuation multiples. As a result, Levene notes that the forward pipeline of compelling investment prospects in the fintech sector remains resilient, a positive for deal flow given the fund has £57.1mn (30.3p a share) of available cash to invest.
Like other fintech funds, shares in Augmentum have suffered in the technology market rout, falling from 159.5p at the start of 2022 to 99p, in the process wiping out all the paper gains since I included the shares, at 102p, in my 2019 Bargain Shares Portfolio. In the circumstances, it may surprise many investors that the fund’s net asset value (NAV) per share held steady, at 155p, in the latest interim results to 30 September 2022.
That’s not to say that the portfolio has been immune from the shift in the market environment as Augmentum booked a negative investment return of £7.5mn on its 14 smallest investments, lowering their combined valuation to £54.5mn. Although the top-10 investments posted a small positive return, valuing them at £179mn, Augmentum wrote down the valuations on five holdings by £7mn, the losses offset by £7mn net gains on the other five holdings. That still meant a total negative investment return of £7.4mn, but this was more than offset by almost £9mn of foreign exchange gains on valuations as sterling depreciated in value: 40 per cent of the portfolio by value is either not denominated in sterling or those companies have overseas operations.
The key question for investors is whether the risk-reward is now skewed to a recovery in Augmentum’s share price. I believe it is for several reasons, not least that when you strip out cash of £57.1mn (30.3p) from the company’s market capitalisation of £188mn (99p), then a portfolio with a carrying valuation of £234mn (124p) is effectively in the price for £131mn (69.5p), less than half its latest valuation. The shares are in deep bargain basement territory with a huge ‘margin of safety’ embedded into the current price.
Moreover, the deep share price discount to the underlying valuation of Augmentum’s portfolio of investments fails to reflect the investment manager’s impressive track record. The group has delivered an internal rate of return (IRR) of 19.3 per cent on invested capital since IPO, and delivered some thumping gains including the exit earlier this year from share trading service Interactive Investor, which was acquired by Abrdn (ABDN). The transaction returned £42.8mn of cash to Augmentum in May 2022, hence the burgeoning cash pile, and delivered an 85 per cent IRR and 11 times gross money-on-money multiple.
It’s worth noting that Augmentum’s valuations are based on sound principles. For instance, the group’s top-10 holdings increased their revenue by 100 per cent in the first nine months of 2022 and are cash generative or have an average of 22 months cash runway, so are well funded. They are valued on an average revenue multiple of 4.2 times revenue to enterprise valuation, materially below the valuation multiples used by high growth listed fintech peers. Importantly, key holdings are delivering strong growth and are benefiting from structural drivers to maintain the momentum.
For instance, Grover, the Berlin-headquartered technology rentals platform, has expanded from its core home market and has been operating in the US for over a year with growth well ahead of forecast. A pioneer in technology rental subscriptions in Europe, a region in which the company has more than 1mn registered users, the business is benefiting from the secular shift in the way that consumers are using and accessing technology. Griver has also strengthened its business-to-business offering (now accounting for 15 per cent of the overall business) and launched an online hardware asset management platform. Importantly, the company is well funded, having completed a Series C funding round in April this year, raising a total of $330m (£272mn) in debt and equity, and lifting its valuation to more than $1bn and valuing Augmentum’s 6.4 per cent stake at £43.7mn, or 5.5 times the group’s total investment to date.
Tide, an emerging force in the small- and medium-sized enterprises challenger banking sector, is another good example of the way fintech platforms are disrupting inefficient incumbents that are held back by legacy IT, bloated cost bases and restrictive regulations. One in 12 UK businesses now bank with Tide; income derived from these 350,000 small-business owners has driven Tide’s revenue up 60 per cent year on year to the point the business has now turned profitable in the UK, excluding growth investment. Augmentum’s 5.4 per stake has been valued at £27.8mn, or more than double its £13.2mn investment to date.
Other notable winners in the portfolio include Intellis, a Swiss-based algorithmic quantitative hedge fund operating in the foreign exchange market. Augmentum’s 23.8 per cent stake has been valued at £8.9mn on an earnings multiple basis, or more than three times its £2.7mn investment. The group’s 11.1 per cent stake in BullionVault, a physical gold and silver online marketplace for private investors which has 100,000 clients and $3.8bn of assets under management, looks modestly valued at £8.7mn, implying an equity valuation of £78mn, or only 10 times pre-tax profits reported for the 2021 financial year.
Interestingly, Levene highlights consolidation as an important dynamic in the fintech market as valuations have corrected, adding that “notable momentum is building from strategic partners, particular incumbent banks.” The group’s portfolio companies look well placed to capitalise, thus offering potential liquidity events for Augmentum to make further realisations. Buy.
Finally, I will now be on annual leave until the New Year.
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