Member Info for steph

We dipped 6.5% morning on CO CO jitters. Apparently the swill have different coco bond regs than the rest of EU. In Switzerland a coco bond holder can be wiped out ahead of shareholders rather than afterwards. Big obscure difference that spooked the market this morning. See below:

“ Eurozone regulators weigh in on AT1 bond wipeout

The euro area’s top financial regulators have just issued a statement, in an attempt to reassure markets that the Credit Suisse deal hasn’t changed their position on the hierachy of debt when a bank fails.
The Single Resolution Board, the European Banking Authority and ECB Banking Supervision say they welcome the “comprehensive set of actions taken yesterday by the Swiss authorities”.
The regulators then spell out to investors that their rules will force losses on equity holders, before moving onto investors holding AT1 bonds, despite the Credit Suisse deal inverting this order by wiping out its AT1, or CoCo, bonds “

Sage your assumptions of a dire sp for years is based on 7 key assumptions that align with the current marker price but may not necessarily be true.

1) THe majority of our core portfolio will need to go to market for money before the general market improves to 2019 levels of stability of better (possible but not inevitable if they throttle back on rapid growth and preserve cash. Plenty of growth to cut if they want at 70% pa).
2) When a majority of our core portfolio goes to raise money there will be on average down-rounds substantially below the value that already discounted value they are on GROW’s books (no evidence funding that has taken place post crash is substantially below previous rounds).
3) Interest rates will remain elevated and will go one or 2 % higher in the short terms. The market therefore will not turn for at least 2 years (not my position nor BOE’s)
4) QT will continue and not pause or switch to QE for the foreseeable future.
5) The market will lurch from one crisis of confidence to the next over the next 2 years killing confidence -especially at high interest rates. CoCO bonds for example will prove to be widespread and pose risk.
6) several of our portfolio companies will get into trouble and either go under or have a drastic down round reducing our NAV by 30% or more (no sign).
7) our feeder funds will get down graded in value (no sign of this at all). Also other bits of GROW revenue will disappear. SO far our feeder funds seem to be going up in value. They are so long term maybe they are ideas and IP based and not future revenue based values. This type of company can sell their product development to a large profit making tech company. NO need to grow itself to maturity. Indeed my friends start up nearly did just that. NO obvious decrease, even in theory, in the propensity of profit making large tech to do that.

Lets take a theoretical discounted NPV for a start up that wil earn zero profot fo. 10 yerars, 100 between 10 and 20 years and 200 between 20 and 30 years.

the NPV of the discounted cash flow at 1% interest is 2407. At just 4% interest it is 1269 about half. So if this extreme example applied to all our core portfolio it might justify a 50% discount to NAV calculated before interest rates started to go up.

However our core holdings are much further along the path to net profit than that. So discount should not be so sharp in the change form 1% to 4% interest rates.

As inflation (through the transmission mechanism of interest rates through the transmission of risk free capital alternatives) seems so dominant in determining our SP (rather than news of company by company success or failure in our portfolio) I track inflation futures a lot.

OIl massively down on jitters economies slowing. Other commodities dropping fast and show signs of deflation trends. Chicago wheat well of summer highs of 1100 and down to 700. Across the board freight costs and commodity costs which started this whole mess are now helping pull headline inflation down. Wages fell behind so a natural period of catch up but not driving inflation -more victims of it and playing a bit of catch up that will end soon.

Jitters dominate in spite of UBS rescue. Markets will open down on contagion risk which is not specific to any bank at all.

What will happen to our sp is anybody guess. We have been volatile more so then the market.

We are not a safe investment in a time of crisis like a utility company or cash (which can be volatile depending on how you own it) as SVBN discovered.

However our trust structure does mean we never go bankrupt and the sp will never be worth zero. To be worth zero all of our 1000’s of companies in our seed funds need to go bankrupt and all of our core portfolio companies need to go bankrupt. That is beyond odds or aliens actually control the stock market odds.

So unlike even quite big banks such as SVB or credit suisse we will always be worth something. SO not a safe haven but not as bad as some sectors even ones that are paying a dividend.

That said I am surprised on the downside on how low we were able to go. Of course a higher interest rate logically affects the risk free capital and therefore further earnings get discounted at a steeper rate. But our dip seems out of proportion to that which can be sole attributed to the change in risk free capital. There is some animal spirit there that has caused an overshoot.

That animal spirit may be the fear of substantial bankruptcies in our core portfolio as they run out of runway and can’t raise the needed capital. I think that fear exaggerated but we lack information to reassure. Last time GROW reported anything it was 80% of our core have 18 month runways and Revolut is profitable thus with infinite runway.

Who has on a company level what runway and what tare the plans to extend the runway or fundraise is information we are entirely lacking at a portfolio company level and thus not surprising the market assumes the worst. Thus a 3 quid sp when we should be at least 6 quid even in these choppy conditions.

Good news on UBS but futures markets flat. I suppose it was priced in Friday and underlines how delicate the banking sector is.

IN UK Blanchflower former BOE member calling for rate cuts and end of QT. He even makes a case for some QE. Blanchflower was always a dove but an indicator of how the debate has moved on.

Be interesting what they do and say Thursday. If BOE does raise rates by a 1/4 I expect forward guidance ot be more dovish indicating that is likely the last one. I also expect BOE to throttle back on QT if not stop it entirely.

FED also has a rate decision this week. If they do raise it will be a small one but much debate as to whether they raise at all. BIt of macho postering going on so hard to disaggregate data from behaviour. Logically they pause and let the evidence come in for a few months before any further increases. Probably not necessary now as commodity prices dropping fast which wil help plus jitters affects confidence which affects hiring. Jitters does the same job as higher rates in tightening credit and slowing the economy.

All more likely than not.

However in the weird world of our sp it seems to go up on bad news for the economy due to the transmission mechanism of lower interest rates. We seem to be far more sensitive to interest rates than economic health. Of course as last week volatility in the transition but medium term (3 months or so) this inverse relationship holds. We soared during the severe GDP reduction while covid was raging.

https://economictimes.indiatimes.com/news/international/business/merger-of-the-century-ubs-against-the-clock-in-credit-suisse-takeover-talks/articleshow/98765514.cms

Monday on of the 30 largest banks win the world will likely disappear. On the whole the Americans seem to be in more banking sector trouble this time than the EU when Greek banks looked posed to bring down the whole system and trigger sovereign defaults. USA has a lot of small regional banks with up to 1/4 trillion in assets each stupidly exempt from tougher equity retention requirements due to trump era legislation in 2018. How a bank with a quarter of trillion of assets is “too small to regulate ” I don’t know. Same hypocrites that say government regulation is like living in Stalinist russia were the first to ask for government help when their own money was at risk.

https://www.morningstar.com/articles/1106505/when-will-the-fed-start-cutting-interest-rates

agreed

https://www.independent.ie/business/irish/executives-at-venture-capital-firm-molten-buy-shares-after-reassuring-investors-42388430.html

i dong think we were overpriced back then. i think we are underpriced now -market conditions included. us tech 100!which we tend to track now well off fall lows. come on grow get moving

Another director purchase at 3.15 p

Being bought out anywhere near these sp levels is a fear of mine. either a fund or a management buy out as happened to telford homes which I used to hold. For me whatever the temporary relief from a 50% sp jump on take over would be tempered by this being the only share I think can grow in value by 20% per year on average over a 30 year period. SO for me one for the ISA.

Sang, switched to desktop android rather than apple pad. Much easier to format and spell check.

I stand by 1.5 years to 11.82. Interest rates will be declining by then. Fear of high rates similar to the 70’s spike was the main factor that pushed us down. Our valuations based on sales multiples are perfectly in line with pre 2008 unlisted valuations (google it) when central bank interest rates averaged 4%. It was the risk of 10 or 15% that made things go crazy.

1) Stripe is a good example of what I am saying. A 100bn valuation on March 2021 (peak of peaks) fundraise reduced to 50 bn March 2023 (crash of crashes). That is in line with GROW’s haircuts for valuations. Also GROW mostly has preference shares so would not have a 50% markdown on this peak to trough example but around 25%.

With Aiven I calculated a 25% haircut for a post crash valuation. One “lucky” portfolio has a 80% haircut. SO GROW valuation caution to be sure. No need for SP right now to be significantly below GROW NAV/share.

Also shows that at peak crash money there if need be, albeit at valuation half the peak.

2) Relevance of 5 month long Covid crash. In the middle of that crash nobody know what was happening to the global economy and its impact on unlisted tech. Thus the dip. . The information that tech was unaffected by covid induced crashing of all G20’s GDP came later.

Thus a classic example of my point that the dip was based on faulty information that self corrected when the information became clear.

IN the dip we are in, no core company has been damaged yet in a way that limits their progress to net profitabity. That could come to be sure but 1.5 years in no evidence yet just a theoretical possibility they might run out of runway and be unable to raise capital even at the impaled discounted NAV GROW has calculated they are worth (calculations not shared with us).

3) I expect we will not get the SP back to the previous peak of 11.82 for 1.5 years so a 3 year dip. Longish. The valuations based on employee numbers, sales and other metrics of future potential will not need to be as “frothy” to get to the very same SP peak.

The companies themselves in our core portfolio will have matured 3 years and be 3 years closer to stable net profitabity that would lend itself to a traditional P/E ratio even if they had not had a corporate sale or IPO to reveal a true market price. 60% plus sales growth means a lot.

GROW once stated that gross margins on the average of it’s portfolio above listed sector averages at around 75% so the core companies are moving to net profitabity in a good way. Assuming many won’t is not analysis. We pay for stock picking and as far as we know those GROW has are better than the sector averages in terms of ability to progress to maturity and exit.

4) getting: how is my formatting here?

As always I defer to your experience in the area of company accounts and valuaiton methodologies. All new areas for me. You called the retrace, although the depth and extent was beyond your earlier suggestions. You called the overvaluation of CAZOO when all looked rosy and even underestimated the needed dip.

That said I am getting up to speed. Historically as far as I can see there was no comparable dip of unlisted tech (as there is no) as there was no meaningful retail market to price it and changes in valuations moved so slowly that it was effectively marching to a different drummer. GROW going retail in 2016 giving us retail investors an look in is the exception not the rule.

We have 2 crashes to study for post 2016 GROW. The first covid crash in March 2020 only lasted 5 months before sp recovered to pre crash highs. At the height of the dip we were half NAV/share. Quite a dip.

The second dip we are in now. Started August 2021, was at it’s peak October 2021 which exceeded the covid dip in SP value and exceeded more than that in terms of discount from NAV/share. It is also lasting much longer. ABout 1.5 years and counting.

IN that 1.5 years time there has been no retrace of sales growth in any portfolio company (CAZOO put aside). Indeed sales growth has been above 60% on average. No known bad news for any portfolio core company either. All the sp decrease seems to be down to a death of IPO’s in 2022 that could have created hard cash rather than theoretical profits. GRWO has not done institution to institution sales either which also would have given hard cash values rather than theoretical ones.

As an economist I know it is possible for a new investment class (retail wrapper on unlisted tech companies) to under or overprice substantially if it lacks history and market understanding.

I genuinely think the market is mistaken. GROW NAV is fair value tracking an orderly sale corporate to corporate in current market conditions. Aiven is a rare example in May 2022.

If the market is mistaken we will reprice at some point and added to that will be the organic growth we have been enjoying year on year of the companies themselves.

I don’t think that repricing will take many years. I can’t say when but I think in terms of months not years on that to really start.

Unfortunately UI path is now a very small part of our portfolio worth 1.2m on our books in our half yearly results. Worth looking at page 19 of our half yearly 2023 results to see teh weightings.

Aiven is our biggest holding at 127m.

Aiven a cloud computing company jumped in valuation between March 2021 and October 19 2021 from 800m to 2bn.

More interestingly it got a 3bn valuation on the May 11 2022 series D well into the sector pullback. GROW was 650 well down from it’s 11.82 peak. I can’t find the number or % of shares GrOW have in Aiven but assume they have discounted the 3bn valuation a bit along with most of the core portfolio. Interstingly GROW log a 22m uplift in Aiven on i’s books between March 30 2022 and Spet 30 2022 which must be based on the. May 11 2022 3bn valuation. HOwever reverse engineering the jump it is only 25% on GROWS books but 50% in actual differential between valuations. So an example of the haircut applied

Upshot is it indicates GROW have Aiven on the books assuming a 2.5bn valuation. Neither the 3bn it got in May 2022 nor the 2bn it got earlier. Is 2.5 the right number? It is not far out. May 2022 was a rough time to do a fundraising series D. NOt the worst (November 2022) but well off peak.

I think Aiven is a good example of judicious nav calculations based on real market data. Aiven is also our largest holding. No justification for GROW overall being under half NAV. Just poor information available and market assuming the worst.

good news. I see no signs of stress on any of our core portfolio. Not even one (except for listed CAZOO which is effectively written off on half yearly valuations). I just don't get us trading below 2/3rds reported NAV even in this choppy market.

https://assets.revolut.com/pdf/Revolut_Ltd_YE_2021_Annual%20Report.pdf

worth a look at annual report for Revolut

I can’t find anywhere the number or percentage of shares in Revolut held by GROW. It is not in the top 10 so under 1.11%. I’d guess in the neighborhood of 0.5% meaning GRWO give REVolut a valuation of circa 15bn not the 33bn last round.

If we can find eh % somewhere we know exactly how much GROW discounted REvolut from last round which will either reassure us or frighten us. Market assuming the worst so probably reassurance.

Seven have a value above 60m on our books against a discounted NAV from last round.

AN IPO in a stable market would often double last round valuations. SO yes only one needed.

That said I don’t see a IPO in 2023 but you never know.