This fintech fund's 37% discount is hard to ignore

Investors are taking an incredibly conservative approach to their valuation of Augmentum Fintech (AUGM:101p), the first publicly listed fintech fund. 

Despite delivering an impressive 18.5 per cent internal rate of return (IRR) on invested capital since inception, making £78.5mn of realisations from five exits, or three times the capital invested, shares in Augmentum trade on a hefty 36.5 per cent discount to NAV of 158.9p. Moreover, the group managed to deliver modest NAV per share growth last year, too.

Having realised £42.8mn cash from the takeover of share trading service Interactive Investor, representing a multiple of 11 times capital invested, Augmentum has just more than doubled its money in less than two years on UK workplace pensions provider Cushon, realising £22.8mn after Nat West Group acquired that company last month. It means group cash reserves of £50mn (28.6p) account for 18 per cent of NAV of £277mn (158.9p) after adjusting for performance fees.

Effectively, net of cash on Augmentum’s balance sheet, investments worth 130p are in the price for only 72.4p, or 44 per cent below their carrying value. The magnitude of discount is even more anomalous once you consider that Augmentum’s top 10 investments accounted for £197mn, or 71 per cent of NAV at 31 March 2023. Half of the top 10 investments delivered positive capital uplifts in the financial year, including an 8.3 per cent stake in Volt that increased 153 per cent in value from £5.6mn to £14.2mn. There should be plenty more upside to come from multiple investee companies.

Backing a fintech winner

Volt is a provider of account-to-account payments connectivity for international merchants and payment service providers. An application of open banking, account-to-account payments – where funds are moved directly from one bank account to another rather than via payment rails – deliver benefits to both consumers and merchants. It helps merchants shorten their cash cycle, increase conversion and lower their costs.

Volt has a partnership with Worldline, the European leader in payments and transactional services, giving over 600 enterprise-level merchants globally access to Volt’s open payments infrastructure. It has also expanded into Brazil to integrate domestic instant payments network, Pix, and partners with global ecommerce platform, Shopify.

The progress Volt is making has not gone unnoticed as Volt has just completed a $50mn (£39.3mn) Series B funding round led by IVP, a Silicon Valley-based technology venture capital fund. It values Augmentum’s holding at £17.8mn, or almost four times capital invested, and is well above the £14.2mn carrying value in the 2023 accounts.

Moreover, Augmentum has made a further £5.3mn investment into Volt as part of the fundraising, implying that the holding now accounts for 8.4 per cent of NAV after performance fees.

Tide’s growth outpaces valuation compression

Augmentum also owns a valuable £35.7mn (20.4p) 5.1 per cent stake in Tide, an emerging force in the small and medium-sized enterprises (SME) challenger banking sector. Nine per cent of UK businesses now bank with Tide, hence why the UK business has turned profitable excluding growth investment. Tide is also entering overseas markets, launching in India at the end of 2022.

Income derived from these small-business owners propelled Tide’s revenue 74 per cent higher to £33.5mn in 2023, which more than mitigated the impact of multiple compression on the valuation of Augmentum’s holding. In fact, the stake was revalued upwards of 22 per cent to £35.7mn, or 170 per cent higher than cost. It’s justified, too, as Tide has made the astute acquisition of Funding Options, a leading UK marketplace for SMEs, to create one of the UK’s largest digital marketplaces for SME credit. Tide is Augmentum’s second largest holding, accounting for 12.9 per cent of NAV.

A diversified portfolio delivering winners

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 £8.4mn on an earnings multiple basis, or three times its £2.7mn investment, to account for three per cent of NAV.

The group’s 11.1 per cent stake in BullionVault, a physical gold and silver online marketplace for private investors which has more than 100,000 clients and $3.7bn of assets under management, has been revalued 15 per cent higher to £11.6mn based on a cash profit multiple. Augmentum received more than £0.5mn of annual dividends in both 2021 and 2022, too. It still looks modestly rated as the read through valuation implies an equity value of £104mn, or a multiple of 12.4 times BullionVault’s pre-tax profit in 2022 and 2.5 times its NAV.

Of course, Augmentum’s portfolio has not been immune to multiple compression and write-downs. Indeed, £31.2mn of valuation uplifts were offset by £27mn of writedowns, half of which was accounted for impairments on two investments: Gemini, a cryptocurrency trust company founded by the Winklevoss brothers; and Tesseract, a provider of crypto infrastructure to connect digital asset lenders and borrowers. The contagion spreading across the crypto industry following a series of high profile collapses explains these specific impairments.

Cashed up for new investments

Augmentum’s ability to deliver growth in more challenging markets shows the benefit of having a diversified portfolio which enables the group to compound gains on winning investments, as well as realising hefty gains on exit.

The investment team led by chief executive Tim Levene has an uncanny knack of cherry picking the right investments, as highlighted by the eye-catching 117 per cent average revenue growth reported by the group’s top-10 investments despite a more challenging macroeconomic environment. These investee companies also raised over $300mn of equity capital, so continue to attract investors, a reflection of their quality, even in a less benign marketplace for fundraising.

Bearing this in mind, Augmentum is sitting on £50mn of cash to deploy, having only invested £19.9mn (two new and eight follow-on investments) in a quiet first half as valuation expectations of founding teams and investors reconverged. Levene expects the second half of 2023 “to be more active as a larger number of better quality fintech companies come to the market for more capital.” It should be an exciting time to deploy early-stage capital.

So, having included the shares, at 102p, in my 2019 Bargain Shares Portfolio, and reiterated that advice, at 99p, at the end of last year (‘On the hunt for fintech bargains’, 24 November 2022), I strongly feel that the quality and growth prospects of Augmentum’s portfolio make the deep share price discount to NAV worth exploiting. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus £3.95 postage and packaging. Details of the content can be viewed on www.ypdbooks.com.

Promotion: Subject to stock availability, both books can be purchased for £25 plus £5.75 postage and packaging.