David Talbot spoke at the London South East-Red Cloud Securities Global Mining Special. Watch the full video here.
In many respects I think it will be a great place to be in around 2-3 years. I think a lot of the weaker start-ups will be on their way out - this happens relatively quickly when rates are a little higher and there is less cash chasing every new idea. Anyone with dry powder to invest when capital is more scarce is likely to have access to some really good ideas at a fair price - this hasn't been the case recently. All investors have been competing to invest in the next Amazon, Tesla etc and in the process have bid funding rounds up to eye watering amounts. Revolut was valued around the same as Natwest or about 70% of the market cap of Lloyd's bank (which made multiples of Revolut's turnover in profit, let alone it's own turnover). When everything is rising it feels great, but I believe this will be a lot more subdued at best, along with some falls. It's never healthy when businesses that shouldn't really make it are allowed to continue due to an over abundance of capital, they need to be put out of their misery. I think we will see a lot more of this generally and likely some that are in the Grow portfolio although I have no idea which.
I actually think the FTSE - Energy, Banks, Insurance, maybe travel (jury out on that one for me especially with Airlines so reliant on business class corporate travel which will likely never get back to where it was) etc will do quite well over the course of the next couple of years, along with anything making real cash returns. I think technology that is doing that will also do well. Nothing I disagree with on the macro front, but I don't believe that will lead to an increased share price here. It's damaging when three major constituents float, go up a lot and then come crashing down - it causes a loss of faith. The only thing that restores that is a really big win - i.e. profitability and something that goes on to great things post float. I haven't been impressed with some of the new investments here that I have heard about. You know my view on Allplants and to an extent the drone delivery. All great ideas, but unlikely to become global household names etc.
Last round adjustments is neither here nor there to me. Without further detail it's a little meaningless. In all honesty it is possibly done with the intention of providing a small buffer or smoothing if required or just to be a bit more prudent. Either way I don't think it is likely to be significant. Now if you said we held values at prior round value for example with Revolut as we weren't willing to invest at new level that's different. But I don't believe this adjustment will be of that magnitude.
At this point in the market cycle I wouldn't have any leverage whatsoever. Best time to leverage is after a really big crash, bigger the better. I would consider a small amount of leverage then. At present there is still a decent likelihood of further declines (generally not Grow specific). That's just me.
Not sure I agree. I think we will be lucky if it's £8. I think things like Ui Path and Cazoo will fall more, along with the rest of non-profit making technology. The valuation was suggesting everything we touched would turn to gold - that isn't the model, a lot of what we touch will go to zero - that's the VC model, especially with technology, even later stage. I like Graphcore as a company but it was valued at $2.8bn, it has yet to turnover $100m as far as I am aware. That's at least 28 times revenue, likely more. I think we will realise some of the investments made won't amount to much (not graphcore, that will, it's just a tad overvalued at present). Cazoo will likely end up getting bought for much less than it floated at - for me the jury is out on purchasing a car in this way - I want to see it, alongside others, drive it, walk away if I don't like it. Allplants - not a chance - just don't see it. I don't see how this is even considered to be technology. It has no more technology (but lacks the shops and range of Cook). Ui Path - just look at the price Blue Prism sold at - a fraction of what Ui Path is currently valued at, let alone how high it went at one point. Not sure about Trustpilot. It needs to prove it can actually turn a decent profit - it has been around for a while now and should have reached scale to be able to turn a profit, time will tell. Time will tell on the Grow valuation as well. I don't buy the hidden value piece really - just don't see it. If it's hidden it is very well hidden at the moment. It's possible something like Graphcore gets really big and makes super profits - now that could drive return - but it's a gamble. Frozen Vegan ready meals however won't be the next ARM or Amazon.
I don't think a change in the pace of rate rises down will change the valuation piece - valuations got ahead of themselves - this is in part about realisation. Investors have now realised. A lot also made investments on the margin, particularly in the US. That alone exacerbates any market falls. A lot of senior individuals who got their IPOs away at big valuations are sitting pretty regardless of market falls.
I have configured by portfolio with a reasonable yield - this is my portfolio for the next 30 years I hope. Enough yield to keep me through to retirement, but some growth in there.
I forgot the best example of speculative froth - THG - now £1.20 a share, compare to a peak of £7. So it isn't just US shares. It's just more 'technology' floats in the US as they are (were) able to extract even more absurd valuations upon float.
In my view I think we are in the middle of a reset of valuations in the USA, which is spilling over into the UK. Given our technology focus this will spill over significantly for GROW. A lot of our portfolio doesn’t make a net profit – in fact most of our portfolio doesn’t. So investing is all about perception and expectation of future profits – maybe, one day. These profits are less valuable as rates rise.
Some valuations had become so stretched for growth companies. The only logical explanations were ultra-low interest rates (driving investors into riskier assets), and the complacency that comes with a long bull market. Along with a lot of speculative money, and new (less experienced) buyers coming into the market, who haven't experienced a prolonged bear market before. Many think that all you have to do is "buy the dip" - which worked well for a while. It doesn’t appear to be working any more. The market is erasing a lot of speculative froth, and over-valuation, which also drags down almost everything in its wake. Fundamentals are strong, but valuation is in question for many companies. I think there is going to be (and already is) a much lower appetite anything speculative, along with lower valuations. We have all seen significant evidence that a lot of recent floats were probably over-valued (Ui Path, Cazoo, Deliveroo etc.). These have suffered significant falls post their peak. The only thing likely to reverse this is a rapid attainment of actual positive cash generation and profits, rather than spending capital raised.
It’s likely we will also see people pull money out of the market when they see big falls. That could put some funds under pressure. Even though a share is 20-30% off its peak, doesn't mean it will necessarily rebound to that level any time soon. A lot of shares became over-valued during the rally after vaccines were launched. This rise went up too far. This is now reversing.
Valuation is key in this market. I think we are now out of a speculative period where sensible valuation metrics were thrown out with the bathwater. Just my take.
General market conditions - this is a smaller company, heavy reliance on China for supply of goods to sell. Markets fell back and something like this (relatively small share turnover) will always suffer when the market is under pressure. Great business with an improving track record. I won't be selling anytime soon. Dunelm had a great set of results and B&M looking good, so there should be some good read through.
They know what is coming down the pipeline - yes in terms of operationally and with the company to an extent. Do they know how fast rates will rise, how big a pullback in technology shares there will be, if there will be a war in the Ukraine - I would argue they don't know any better than a well read man on the street. It's not possible to predict these things and all could have an impact. This (to me and in my opinion) is a good company, but the overall profitability is heavily dependant upon performance fees and hence market performance. I believe this is likely to be somewhat more subdued this year, potentially even negative in the technology space. The share price where it is reflects this.
Just my personal take - I don't see any reason to rush back in. I don't see any immediate or near-term catalyst for a big increase in the share price. There is lot of risk around - potential rate increases (virtually a given), high likelihood of a war in the Ukraine etc. Technology (particularly non profit making, earlier stage etc) seems to have suffered from a cyclical shift in terms of expected future value. Likely due to the fact that values became detached from reality. No rush. Think about long term objectives etc.
If I am honest (not necessarily correctly) I don't believe this will bounce back for a good while - certainly I think we could be many years from the former highs. I think this could now dip down to £7, potentially further on any significant market fall. It's about having an open mind and thinking what could realistically happen. There are a number of companies in our core portfolio where valuation is significantly down - Cazoo, Ui Path, Trustpilot, Revolut has to be regardless of last round valuation. This will impact NAV itself and the sentiment is likely to impact potential discount / premium to NAV. The mood music has changed significantly. I think there has to be the potential of May 2022 showing a reversal in NAV progress that has a negative impact rather than a positive.
My concern is exactly that - we haven't even had a stronger general market drop. I think this will come. It won't be as strong as some expect. The main reason for this is that the Nasdaq appears to be able to fall with multiples of the broader market. What is of concern is the impact this has on investors who use margin - in the US particularly. Best stocks for me so far today IMB, Unilever, Beazley and BT. All very cash generative I guess, and likely to be able to pass on costs to customers. Rates on Cyber insurance are through the roof, whilst risk management in this area has improved significantly. I think, for the next couple of years, with inflation going nowhere, cash will be king. People will look for a tangible real in your pocket return. Green policies, demand, potential war - inflation isn't going anywhere and I think, whilst we won't see 7% rates or anything like that, we could easily see a return to 2-3% which could result in significant difficulties for a lot of people.
possibly. Who knows - Difficult to predict how far down we could go. I am sure buyers of Cazoo didn't expect the share price to be a third of the peak, Ui Path too. My real 'up in the air' not sure how I feel is about some of the current investments. It's going to be really important to make sure we don't overpay - always a danger when others are chasing too - which was the case. I was very encouraged to see that we didn't do the last round (at the $33bn valuation) for Revolut. Sensible heads.
I think we could well go sub £8 here. All it will take is a pullback in the US. At present I am struggling to this of any catalyst for upwards movement. Non-profit/ negative cashflow making technology (regardless of GP margin) has been hit hard. I think this is two fold - realisation that even a modest increase in rates will hurt market sentiment and that these modest increases are unlikely to resolve inflation anytime soon. Our valuations will reflect where the market is on those valuations, not what our previous policy was. Let's see where we end up. My guess is that we have suffered both on the listed side, which all can see, and also on the non listed side as some of that 'froth' dissipates. I think at best we will tread water for the remainder of this year, possibly finish5-20% down from where we are. Just my view. Why don't I sell everything - nothing I want to invest in at present and long term it's good to have something like this in the portfolio. I think there has been a healthy dose of realism on a lot of valuations (you all know my view on Cazoo). Some of those valuations that we initially benefited from were bordering on absurd.
Plus with bonus per accounts CEO was 885k. That's a tad under £900k and a shareholding worth around £150k. In addition to that he has been in a senior role for many years earning similar amounts and is 58 years old. I could understand it if it was his first CEO role etc, was a lot younger. Either way he is likely to have significant investment holdings and his shareholding here looks low to me given prior roles, earnings and likely investment portfolio. I have no idea on personal circumstances but it still looks very low overall. I get Chapman wanting to de-risk as he was heavy into Grow given size of holding.
There is a strong possibility that does not include any 'carry'. Private Equity Partners actual salary and any cash bonus normally makes up a very small proportion of overall remuneration. Even if the CEO is on £400k, £70k isn't a lot of money and I am convinced that doesn't include carry. 'Carry' could be one reason why the directors actual shareholdings are low - i.e. they already have interests in some of the portfolio companies themselves, but overall the holdings are low. I'm not a CEO and earn less than a CEO but those shareholdings are not big at all. Some Investment Houses require their fund managers to invest primarily in the funds then run. A lot of private investors will have larger holdings than £70k. Chapman has a decent sized holding, but he has been selling over the years, the last of which was 300k of shares at 6.69 a piece back in Jan 2021. I don't think buys of the size we saw here mean a lot - just a minor bit of portfolio balancing, shoring up confidence, using ISA allowances etc.
I did hold some Polar Capital - i.e. the actual fund manager itself. Given their heavy bias to ESG and Technology a lot of their performance fees and hence profit are dependent on performance of these markets. Served me very well, but sold out at around £8.50. Currently just below £7. I would consider buying back in again at £6/£6.50. Fund managers are a very leveraged play on the performance of a particular market / sector, but when they go up, they go up.