Member Info for steph

nice to have 2 CPA's on board.

Seems to me, as a complete amateur, the International private equity and venture capital valuation guild lines during covid for private tech stock was completely in the wrong direction.

Once corrected it is an interesting question what the relationship of our SP to NAV/share should be. If our core portfolio were all traded tech it is obvious SP should be closely correlated to reported NAV/share -plus of minus and market moves since the report. Why would a fund (or indeed us tiddler retail investors) buy into a trust if they could buy the same portfolio cheaper directly ?

Different for our all private core portfolio. If a fund wanted to buy the exact same shares they would have to participate in a future funding round (assuming there was one pre IPO) while NAV/share of GROW is 100% trialing funding rounds -or even worse a modest multiple of sales.

For fast growing tech the difference between a trialing funding round and future funding round might be substantial, 100% or more not uncommon. SO even the best staffed largest funds have an incentive to buy grow at a significant premium to reported NAV/share if they are interested in GROW's portfolio.

Even more so for smaller less intensively staffed funds an even more than that for us retail investors. Basically the barriers to ownership are high for small funds and insurmountable for us retail investors.

What is the correct premium? Well if we really are growing by 20% NAV/share per year with some reasonable probability I'd say for retinal and small funds 5 years growth priced in is quite reasonable. That works out to a bit more than 100% over trailing NAV/share. For larger well staffed funds who can buy directly in future rounds maybe a bit less but they still get some benefit of the stock picking expertise of GROW's 9 strong team and feeder funds intelligence.

SO blending the two somewhere between 50% and 100% premium above trailing NAV/share????

and below in quotes curtesy of a "white house" in a different forum. AGORA is so new it does not even feature GROW's last annual report but it seems to be flying along with Cazoo. Completely dull business model compared to UiPath and graphcore but maybe nice for us to have a % play in the consumer facing internet based sector which has clearly boomed during COVID. I think we will exceed expectations by a wide margin on NAV/share in our finals in July and with that exorcise once and for all the March 31 2020 covid dip. I understand the International private equity and venture capital valuation guild lines(IPAV) guidelines urging caution in the spring of 2020 just as our NAV valuations were being calculated as the COVID impact on tech and internet stock was unknown. Clearly the exact opposite has occurred across the whole of the GROW core portfolio and there needs to be a re-pricing of NAV to correct.

"Agora climbing high in the Apple shopping charts online to 26, above H&M, Tesco and ASDA so gaining a serious amount of traction. Expect this to jump into the high flyers chart along with FreetradeThe inroads/expansion of some within the portfolio of companies is astonishing"

Questor: a recovery built on rising consumer spending can lift British Airways owner IAG
https://www.telegraph.co.uk/investing/shares/questora-recovery-built-rising-consumer-spending-can-lift-british/?WT.mc_id=tmgliveapp_iosshare_Awt4Jt40ZBtm

Tech visas' to boost British industry
https://www.telegraph.co.uk/politics/2021/02/20/tech-visas-boost-british-industry/?WT.mc_id=tmgliveapp_iosshare_AwvMGVBsm3NB

450 m total fu ding not valuation.

Grow has put in 10 m mostly back in Nov 2018 so should be jucy. Was not even mentioned a core in last annual report although was in hKf yearly update.

Last round fundraising was Oct 5 so just missed our half yearly results but will be in our finals. Reported valuation doubled on last round so 17m reported in half yearly should be 34 on finals.

Nice contribution for a relative tiddler for us and helps consolidate the 20+ % year on year nav increases we need for the market to price us at 2x trailing nav/share as I believe meridian currently has.

Dot com speed if it happens and dot com valuation at 5bn. Widely reported in financial press.

I’d not buy it as a traded share but happy for grow to have a % based on last round private valuation of 400m . Good investment at 400m, speculative at 5bn for the same company.

That is the potential arbitrage available for our trust specializing in growing tech (or at least internet based) structure .

Float set to make Cazoo founder £1.6bn richer
https://www.telegraph.co.uk/business/2021/02/19/float-set-make-cazoo-founder-16bn-richer/?WT.mc_id=tmgliveapp_iosshare_Awt23MJMX6LP

Thanks Sage, I stand corrected on BA. Still I'll give it a go until December in a modest punt.

Thanks for all your expertise. As you might have guessed I am not a chartered accountant and struggle to read a balance sheet. I am an economist and maybe with that focus can examine longer term trends and sectors. My work often leads me to comment on the role of innovation within a national or city economy and with that comes working alongside some talented people.

What I did do -that certainly is chartered territory- is try to understand the valuations best I could based on publically available information. I got nowhere trying to phone GROW to look deeper. I am very cheered by the sales to Nav ratios of the core portfolio and the stated % profit of sales. Those are real, compare very well to benchmarks (even at 8.10) and are not subjective. I wish GROW would report more regularly on those two key statistics. I would not be 90% in without feeling I understand the valuations of the core so I've had a steep learning curve as it was not at all my area and I wanted to be all in.

I am now a convert to seeking a trust that specializes in profitable private tech companies preferably with a UK/EU focus. I'd do a Chinese or an Indian one if available. Quite different a trust that buys listed tech. A large chunk of the forward value is then priced in no matter how skillfully they pick. I just think GROW operate in a niche with some real extra value.

Cazoo on the last funding round might have more forward growth priced in due to it's more understandable retail nature. More understandable the deeper the funding available. Deep tech (like AI in a private company) much harder to understand so maybe fewer specialist private equity firms able to do a valuation before they make an offer in a funding round. If a private fund manager can't understand it he/she can't invest either -I imagine. Usually quite a bit of due diligence normally conducted on a funding round as opposed to a fund manager picking up listed shares. So a filter to weed out the barrow boys.

Hence, it is worth keeping in mind that PE funds inherently have a “surprise factor” which is often only visible when there is a Exit Event in the portfolio. To state the obvious, an assumed future IRR (or Money Multiple) is not de facto real until the point that it is realised, at which time the NAV is adjusted to reality.

One other point to consider is that in PE fund portfolios, a positive Exit Event (e.g. sale or IPO) is of course more likely to occur when things are going well in the economy. By contrast, in an economic downturn it may take longer for Exit Events to occur (e.g. portfolio effective duration extended) and the last assets left if the portfolio could be the most difficult or potential troubled investments.

To evaluate to Total Return on any given PE fund portfolio may take more than 10-years from the initial fund-raising through to the last exit event in a fund. Private Equity is by nature a very long game and not particularly transparent for public investors...

As an aside, the position for inside investors (General Partner, Limited Partners, employees) at PE funds is a little different, as they will usually have more insight into the performance and outlook for portfolio companies at any point in time.

As usual, please do you own research — I sincerely hope that this post helps to share some knowledge about the workings of the Private Equity industry and the potential implications (e.g. surprises) for public investors in PE funds.

Whether their method of valuation is accurate is often debatable, but this difference in methodology is important to understand for any potential investors in PE funds.

So you might wonder what the implications are for Net Asset Value (NAV) in a Private Equity fund?

The reality is that the reported NAV for a PE fund is less likely to be an accurate indication of the CURRENT value of their underlying portfolio in periods where there have been significant changes in short-term economic conditions. So that would make it appear less volatile than public investments.

However, the test of these NAV assumptions is ultimately only found out during an Exit Event, which could be a sale of the business or an IPO (in a positive scenario) or a restructuring or insolvency (in a negative scenario) of an underlying portfolio company.

If the PE Fund always had an up-to-date accurate NAV for every portfolio investment, then such an Exit Event should never cause the PE Fund have to report an adjustment to NAV, as the carrying value would have been accurate.

Of course, in reality, the NAV is very unlikely to be equal to the value of a company at the time of such an Exit Event — hence the adjustments to NAV that are reported.

Unfortunately, some PE funds have held portfolio companies at overly optimistic valuations right up until a bad event, such as a restructuring where the debt investors have converted to equity and taken over ownership of the portfolio company. In that case, the PE fund is forced to write-down NAV accordingly — which may prove to be a surprise to investors in the PE fund.

As a result of the nature of valuations within PE funds, it is very difficult for external investors to have a genuine insight into potential NAV adjustments — unless they have access to inside non-public information.

Of course, investors can react to public announcements and periodic reporting by PE funds, but I would caution against assuming that PE fund valuations will move like public valuations of comparable companies or public equity indices.

Hence, it is worth keeping in mind that PE funds inherently have a “surprise factor” which is often only visible when there is a Exit Ev
Of course, in reality, the NAV is very unlikely to be equal to the value of a company at the time of such an Exit Event — hence the adjustments to NAV that are reported.

Unfortunately, some PE funds have held portfolio companies at overly optimistic valuations right up until a bad event, such as a restructuring where the debt investors have converted to equity and taken over ownership of the portfolio company. In that case, the PE fund is forced to write-down NAV accordingly — which may prove to be a surprise to investors in the PE fund.

As a result of the nature of valuations within PE funds, it is very difficult for external investors to have a genuine insight into potential NAV adjustments — unless they have access to inside non-public information.

Posted: about a month ago

From experience, please keep in mind that valuations of portfolio companies in Private Equity are not a mark-to-market exercise that you would see with a fund that holds public securities.

In general, PE funds have a 3-5 year investment horizon for each individual portfolio company. The PE fund buying a new company will run a cashflow model of projected financials - using the management team’s business plan, overlaid with sponsor actions (e.g. cost savings, asset disposals, capital expenditure changes, squeezing working capital) and the proposed leveraged capital structure.

The PE fund (or Financial Sponsor) will use this cash flow model to look at the implied Internal Rate of Return (IRR) assuming an Exit after 3-5 years. There are a multitude of ways that a PE fund (or M&A advisor) can value a company. A simple (and common) method of valuation is to look at the EV / EBITDA multiple (i.e. Enterprise Value / Earnings Before Interest Tax Depreciation and Amortisation) which is calculated on the Purchase Price on Entry using the Last Twelve Months (LTM) EBITDA at the time of acquisition. As the Entry Multiple of EBITDA is known, the PE fund can calculated the implied IRR on Exit after 3-5 years by applying the same multiple (i.e. assuming Exit multiple = Entry multiple) to the assumed future EBITDA at the assumed exit point. That gives them an implied future Enterprise Value. To get the implied future Equity Value, the PE fund has to deduct the Net Debt that the cash flow model shows is assumed outstanding at that future exit point — keeping in mind that the strategy in an LBO is usually for the portfolio company to reduce indebtedness over time. Given the initial equity investment and the implied future Equity Value, the PE fund can calculate an implied IRR for each portfolio company. The PE fund can also refer to a simple multiple of their equity contribution to the expected exit value.

So, as you will appreciate, there are rather a LOT of ASSUMPTIONS that go into the valuation of each Portfolio Company held by a PE Fund.

While there is a periodic re-valuation of each Portfolio Company, this is NOT a mark-to-market exercise. It is usually closer to a mark-to-model exercise. So events such as those of 2020 may impact the model assumptions, but IF they are assuming a short downturn in performance, followed by a bounce back in future years — then the impact on EV from a future exit event may well be much less than the volatility we have all seen in public equity markets, even for comparable companies. PE funds may well suggest that their long-term view is one of the advantages of Private Equity as an investment class.

The flip side is that if PE Funds are not significantly marking-to-market in a downturn, then there will also not be a similar bounce-back in valuations during a recovery phase of a markets cycl

Just for the record I don't think a sudden 45% general tech market drop is odds of more than 1/100 per year. A sudden 10% retrace, however, maybe 1/3 per year. P/E's in US tech pretty high at the moment.

I want to use some leverage but don't want to bet the whole of the farm to do that. Thus I want to keep the odds of me being wiped out on my spread to less than 1/100 per year. That is higher odds than it sounds as I expect to have my spread for 10 years and 1/10 too high a risk or wipe out so I will need to bring the risk level down a bit within 2 years. I'm hoping another 10% + surge in GROW SP on year end results in July will naturally bring down the leverage.

After reviewing many alternatives for diversification I still can't find something I believe in better than GROW for the next 2 years. If one wants to go on "evidence" to be able to beat the market one needs a thesis as to why a particular sector or share is underpriced. Lots of shares have fantastic futures and it's not difficult to pick them -but much of that potential is already priced in with sky high P/E's. The difficulty is finding shares with great futures with much of that potential not priced in for whatever reason.

After meandering about in different shares to diversify a bit more I ended up topping GROW up a bit on yesterday's minor dip. I know there is a Woodford/Enron share specific risk but I'd rather invest in what I am confident in rather than diversify for the sake of it.

Did pick up quite a few IAG (BA-Iberia-AA link) on the minor dip yesterday. Pretty strait forward bet on transatlantic air passenger travel recovering later this year faster than the market expects. I am confident IAG has the cash to last until then. Unlike Virgin they have not asked for government help. The SP is at levels that price in a significant chance of bankruptcy or dilution. I think that fear is overdone and wiling to put a bit of money on that analysis. My IAG position has guaranteed stop losses in place well before a 45% dip so I am not betting part of the farm on that, just some fresh hay.

I toped up LG robo and LG battery. Long term bet on the sector and, like for GROW, I need a trust to navigate who to choose and for them to include private companies in these fast growing tech areas. Not sure LG has put the effort into having a large % of private companies but the sector a hot spot to be sure.

Topped up Scottish mortgage inv. trust and biotech trust as well.

You can see I am now a bit of a trust junkie. I reduced Polar though. I worry it is 70% exposed to what might be a bit overpriced US tech due a 10% retrace.

I know but I just can't find better value than a trust that holds profit making UK/EU largish private sector tech that is making money at above average listed tech rates. Just toady I was reviewing the alternatives. For example I love GB Group (data and identity verification) but the P/E is stratospheric. SMT I also like but at over double trailing NAV/share so GROW much better short term value.

Yes I worry about a global tech pullback. I don't think GROW will drop more than my 45% safety margin even in a strong pullback but you never know.

An Enron situation yes for sure that is a black swan that is possible. Nobody saw Woodford coming. Odds somewhere between 1% and 5% I guess. GROW have been in business for 20 years and the results are steady not suddenly fantastic so I don't have suspicions. Also I've got into the sales multiples of the core portfolio to create the NAV/share and they look excellent and conservative so I don't expect a NAV exaggeration. I suspect the opposite. They appear to be currently underplaying NAV wherever they can perhaps to smooth out future NAV/share growth since maybe inadvertently goosing it a bit in historical terms (5x sales) in 2019.

I know 90% in one share, even a diversified trust such as GROW, is too high. I just don't have any conviction buys that I think can perform better over the next 2.3 years up to July 2023.

I am tending to diversify a bit on my spread bet not by selling GROW but by adding a basket of others as GROW goes up and I have the headroom on a "safe" level of leverage. (which I define as having cash on hand to weather a sudden overnight 45% drop in the markets). This over time will decrease a bit the % I own of GROW. In my ISA I'm not diversifying at all. It is 97% GROW with a small amount of ISG, Rolls and Polar. I regret even diversifying that 3% as it has underperformed GROW thus far.

The basket of alternatives I hold in my spread are as follows:

Augmentum Fin Tech, arix, BIO biotec trust, gb group, int cons air (BA), L&G ROBO Global,
L&G battery Global, meridian crystalis, polar cap, scot m in trust, rolls Royce

Except for Rolls and BA they are the same sector as GROW. I've been betting for BA and Rolls the return to normal travel will be faster than the market was/is predicting and that both companies are well capitalized (after Roll's dilution) and in no risk of bankruptcy or major further dilution. Upside to July 2023 about 100% in my chart for those 2, which is higher than I pencil in for GROW, but downside and risk greater as well. All right for a punt but not a large chunk of my portfolio.

Interestingly not a single UK builder which used to be the majority of my holdings. With the privatization of Telford I just had no conviction buys in the sector. I was always a London focused builder fan. My confidence in the long term London market has been dented by Brexit and the inexplicable lack of a deal on financial services not to mention the abandonment of London's cultural and creative industries. We were world beating on both and now there is some clouds on the horizon for those sectors. I expect high paid jobs growth for London to slow a bit nd with that the market for London focused builders product. I've never been a fan of builders who concentrate in the midlands. I think in the medium term our manufacturing industries are in serious trouble and further jobs will go.

I think overall the UK housing sector will do OK but not at all equal to UK/EU private tech.

I've also avoided UK banks which used to be a large % of my portfolio. They are at low levels now to be sure and some increase to be expected from here but the upside is not great. No chance of getting back to pre 2009 crash SP levels. Regulation ahs permanently damaged the business model.

yes with our SP anywhere near our trailing NAV/share the temptation must exist for a fund interested in our core portfolio to bypass the time consuming and expensive process of asking 15 private companies to open a funding round for them to just buy GROW and get the whole package.

thanks, still reputational damage for the sub sector occurred even though we are not vulnerable to the same scenario. Impossible to know if it has cleared.

I wonder what the next 3 months might bring for GROW. We don't seem ready to retrace so maybe the drift up not quite over.

Of course or SP can not go up every day. I imagine we can not exceed in the short run what a sustainable SP will be once the year end results are out end of July. Thus we can guess at our NAV/share and whatever premium the market might give on top of that to reflect growth reasonable expectations.

UIPath alone means our NAV/share will be significantly higher. Other funding rounds seem to be occurring so maybe an increasing percentage of the core portfolio will be last round valuations rather than multiples of sales. That % shift will have a dramatic impact on NAV/share.

Last round generally gives significantly higher valuation than multiples of sales. THis is because our core holdings are fully profitable (not so amongst our private sector tech peers where the multiple averages are calibrated) and thus more equivalent to publically listed tech with actual earnings (profits) that form the high tech sector P/E ratios.

Just for fun I'll guess our NAV/share will be 7.80 on year end results and our premium over NAV/share will be a modest 20% by year end or shortly afterwards. That gives a SP of 9.36 so maybe we have some headroom room to run up a bit more. The premium of NAV/share is quite modest and well below what GROW has had in the past.

Good NAV/share results this July will show a steady climb since GROW went on the market 4 years ago (with the exception of the COVID pause last half 2020 but maybe balancing "catchup" this half) and thus maybe more market confidence to price in steady future NAV/share growth of 15% to 20% pa. Once the market prices in a probable NAV/share growth of 15 to 20% we should be at an SP of around 2x trailing NAV/share. Might come suddenly or slowly over a few years. Matters not for me as I am in for at least a few years.

That expected repricing plus the NAV/share growth makes GROW for me the best "knowable" value in the market. Of course might make more on a crypto currency or on a future AMAZON or TESLA but then might lose a bunch trying as well. The downside risk of holding GROW is quite modest in my risk appraisal. It can dip with the market for sure but I don't think any dip however deep will last. Just need to hold through a dip and not panic.

GROW will sooner or later make a major mistake on a core portfolio holding but even if it does that is at most 10% of the portfolio and at most a half a years NAV/share growth. It is pretty diversified as it is.

thanks for the city wire.

I think the main thing holding us back from a stronger premium over trailing NAV/share is investor nervousness on our structure. I can't see any other rational reason for trading at such a steep discount to the P/E's of traded tech as our core holdings are rather large private tech companies and profitable above sector norms.

This steep discount might have been in part stimulated by the Woodford Fiasco.

As I understand it Woodford was not an equivalent structure to our trust holdings -but it was close enough to cause us some collateral damage. IN theory GROW SP can drop 90% and GROW will not not need to sell off any of it's holdings. Woodford appeared to be in a different position where redemptions needed to be met by sales of the assets creating a downwards spiral of the fundamental holdings rather than just the SP of Woodford.

https://www.telegraph.co.uk/business/2021/02/13/woodford-accident-waiting-happen-watchdogs-failed-take-action/?WT.mc_id=tmgliveapp_iosshare_AwsCn02ysppV

https://www.cityam.com/opening-the-fund-gate-how-to-prevent-the-woodford-saga-from-happening-again/

I am confident we are not in that situation at all but Woodford did do our subsector (trusts that hold privately listed tech firms) some reputational damage that might still be holding us back.

GROW has:
1) a much safer core portfolio
2) no obligation to meet fund withdrawals
3) some ability to buy it's own shares that it could use if a fund needed a fast exist and GROW wished to have an orderly market for it's shares.

So layers of protection the Woodford investors did not have.

Anybody more expert than I able to confirm?

Volume above 800 is a good sign that we will not have a big retrace,

of course some funds need to take profit but there are others Coming in to balance.

I think we have paused for breath after the big movement in the last 2 weeks rather than retraced.

I’ve topped up a bit at 800. Never thought I’d be doing that.

We have been 828 with moderate rather than light volume so buyers about.

Rightly or wrongly I have pencilled in a 2 year target so rise from here of 22% per annum. I’ve pencilled in 42% pa over the same 2 years for iag (British airways) but not with the same confidence level and thus a much smaller amount. Ba seems well financed and will emerge in a position to buy distressed rivals but it could go horribly wrong as well.

Looking it up (I have no expertise) I suppose any AIM tracker will need to sell and any FTSE 250 tracker will need to buy. As there are more weight in the FTSE 250 trackers it is probably net positive the day of the move. I suppose other trackers that target the sector (and not the dividing line between our AIM and FTSE 250) will be unaffected. We look to be an automated entry based on the chart you enclosed so sooner rather than later.

https://www.taylorwessing.com/en/insights-and-events/news/media-centre/press-releases/2021/02/investment-round-for-cambridge-quantum-computing-company

Proj: Edison mention main index but not when -but context sounded near future not long term. Edison must have been good guidance on that.