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30. Uncovering Trusts – IP Group (IPO) – Discussing the roadmap to value
89 Plays9 days ago
In this episode, our director of content, investment trusts Milosz Papst outlines a value accretion roadmap for IP Group, which invests in unlisted technology businesses across life sciences, deeptech and cleantech. The roadmap covers important milestones across IP Group’s portfolio as potential indicators of positive momentum. He highlights IP Group’s solid recent realisation activity. He also covers the developments across IP Group’s major holdings, their cash runway, and valuations. Finally, he discusses IP Group’s approach to capital allocation, including recent buybacks, as well as ambitions in terms of growing third-party capital under management.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to 'Uncovering Trusts' Podcast
00:00:04
Speaker
Welcome to Uncovering Trusts, a podcast by The Edison Group, the content-led IR business integrating analyst content, digital targeting, and investor engagement. Tune in to find interesting investment ideas and stay on top of what's happening in the investment company sector.
Introduction to Milos Papps and IP Group Discussion
00:00:21
Speaker
I'm your host, Will Manuel, and today joined by Milos Papps, Director of Investment Trust Content at The Edison Group, who will talk about IP Group, whose ticker is IPO.
00:00:32
Speaker
Milos, thanks for joining us today. I will. Thanks for having me. Okay, so let's get into
Overview of IP Group's Focus and Challenges
00:00:38
Speaker
it. You you recently published a research note where you discussed a kind of roadmap to value for the company, for IP Group. Can you talk about this, please?
00:00:48
Speaker
Yes, with pleasure. um ip Group invests in unlisted technology businesses across life sciences, deep tech and clean tech. It is mostly active in the UK with an international footprint through investment platforms in Australia, New Zealand and the US. s ah The company made good progress in crystallizing its portfolio value values through through exits last year with proceeds of around £183 million, pounds most notably from the realizations of FeatureSpace, which is an AI-powered fraud and financial crime detection business sold to Visa, and Garrison Technology, a provider of a remote web browser and related hardware, which was sold to Everfox.
00:01:29
Speaker
ah Importantly, all exits were performed at or above previous carrying values. um However, its performance continued to be negatively affected by the demanding environment for early stage businesses, um as well as some company-specific setbacks, markdowns of selected holdings due to a more demanding funding environment, and the derating of the share price of the listed Oxford Nanopore.
Why IP Group Remains Attractive
00:01:50
Speaker
This was only partly of sale but a strong valuation uplift from the above mentioned feature space. um I guess that investors may find the 15% NAV total return loss in 2024 and the lack of historical NAV growth disappointing.
00:02:05
Speaker
um But I believe that there are a few reasons why it is still worth having a closer look at the company. Firstly, its shares trade a wide discount to last reported NAV. um around 56% at the time of recording this episode.
00:02:19
Speaker
Secondly, the company held a sizable net cash of £156.5 million at the end of last year, together with a sizable stake in the listed Oxford Nanopore of around £100 million based on the share price.
00:02:34
Speaker
So if we account for these two items at par, then the current market price implies 76% discount to the company's private portfolio value as at the end of 2024. And thirdly, its portfolio includes a number of companies with good business traction and interest from potential buyers.
00:02:51
Speaker
um Therefore, I thought it would be instructive for investors to um outline a value creation roadmap covering important milestones across IP Group's portfolio um as their materialization would indicate positive momentum.
Discussion on Oxford Nanopore's Growth Plans
00:03:05
Speaker
Okay, yes indeed. um thanks for that. I believe that the first item you discuss in your note is the delivery of milestones across key holdings. you Can you elaborate?
00:03:17
Speaker
Yes, that's right. ah IP Group's management highlighted that there are more than 35 commercial and technical milestones across its portfolio this year, um including funding rounds, clinical trial results, product launches, and technical milestones.
00:03:32
Speaker
um I think that investors should closely track the progress of IP Group's major holdings towards commercialization, especially given last year's sale of its major revenue stage businesses, that is Feature Space and Garrison Technology I've just mentioned.
00:03:46
Speaker
um Let's maybe start with Oxford Nanopore, which was IP Group's largest holding the end of 2024. um IP Group was the company's founding shareholder in 2005, and the company successfully completed its IPO in 2021, allowing IP Group to partially realize its investments, which together with a minor partial realization in 2020 brought it IP Group's total proceeds up so far to slightly over 100 million pounds, already more than its total investment.
00:04:18
Speaker
Now the company offers a new generation of nanopore-based sensing technology, enabling the real-time, high-performance, accessible and scalable analysis, so sequencing of DNA and RNA in patients and pathogens.
00:04:31
Speaker
um I really encourage our listeners to look up their portable, real-time device on the internet to get a flavor of this interesting technology. Now the company seeks to further scale its business via significant growth in its revenue, coupled with realizing economies of scale to expand its gross margin and reach EBITDA and cash flow breakeven points by FY27 and FY28 respectively, ah which is a target that the company's management recently reiterated.
Esteso's Clinical Trial Results
00:05:00
Speaker
um It seeks to deliver a growth rate of more than 30% in underlying revenue between 2024 and 2027, which should be underpinned by the gradual diversification away from the core research market, which faced headwinds from weaker demand in China um due to US semiconductor export restrictions um into industrial, clinical and biopharma markets.
00:05:26
Speaker
I would also note the gross margin improvement in FY24 as the company's management saw the first signs of um positive operating leverage in the second half of the year. The positive outlook for the business seems to be shared by high-profile investors that recently joined the company's shareholder register, Novo Holdings, and Larry Ellison, a tech investor who co-founded Oracle.
00:05:49
Speaker
i would also note the recent expiry of a veto option against acquisitions attached to the shares held by the CEO and co-founder of the company. Now, when it comes to the risk around US tariffs, I would note that Oxford Nanoports Manufacturing is primarily UK-based, while around 34% of its last year's revenue was derived from from the Americas.
00:06:09
Speaker
So this means that the company is exposed to the potential impact of US tariffs, although it may at least partly me mitigate this by its pricing power arising from its differentiated technology.
00:06:22
Speaker
Okay, thanks for that. um So I believe Esteso, I think that's how you pronounce it, another large life sciences holding of IP group ah recently reported clinical trial results for one of its drugs?
00:06:34
Speaker
ah Yes, I have covered it in detail in an update note published in February. The company announced the results of its Phase 2b clinical trial of Laramistat in rheumatoid arthritis. um The drug demonstrated a statistically significant reduction in bone erosion, which was the key secondary endpoint.
00:06:51
Speaker
as well as improvements in disability and
Potential Revaluations in Life Sciences Holdings
00:06:54
Speaker
fatigue. So, ISTESO plans to evaluate the drug's potential to promote adaptive tissue repair in rheumatoid arthritis in combination with existing disease-modifying anti-rheumatoid drugs, as well as for other chronic diseases.
00:07:10
Speaker
highlighted that this is sufficiently funded to conduct these studies. um That said, the study failed to meet its primary endpoint of improvements in ACR20 response versus placebo, ah which resulted in a roughly £32 million i markdown to around £92 million um of ah IP groups carrying value.
00:07:30
Speaker
um The company reported full trial results in due course, which may help assess the future development and marketing potential of the drug. Okay, thanks. Interesting. um And can you touch on IP Group's other life science investments?
00:07:44
Speaker
Yes. So IP Group holds a further 28 life science investments, whose carrying value at the end of last year represented roughly 31% its total portfolio. The largest holding, around 4% the total portfolio is Hinge Health, which is a US-based provider of digital physical therapy services.
00:08:01
Speaker
um The company generates substantial revenue, which increased by 33% $390 million dollars in at a gross margin which allowed it to significantly narrow its net loss to just million dollars from more than million dollars in And then there are at least eight holdings which expect clinical data readouts in 2025 and 2026.
00:08:28
Speaker
So here I would note that development stage life sciences holdings have the potential to be significantly revalued on you know successful trial results and or a takeover a bit. ah For instance, within IP Group's portfolio, the private um kind of the therapeutics acquired by Dr. Falk Pharma following positive phase one results and the listed Abliva bought by farming technology after also after positive trial results were revalued by 100% nearly 300% respectively compared to their carrying value.
00:09:04
Speaker
However, given the small size of many of these holdings, um well, several such events will be needed across IP Group's portfolio to drive a meaningful impact on on its NAV performance.
00:09:15
Speaker
Just for illustrative purposes, out of IP Group's seven holdings that had clinical trial readouts last year, four reported positive results, one mixed, this was the ISTESO I've just talked about, and two negative.
00:09:28
Speaker
Okay, thanks. That's useful um overview of the life science portfolio.
Development of HiSATA's Hydrogen Fuel Technology
00:09:34
Speaker
um what Can we now so move on to the Cleantech holdings? Can talk about that, please?
00:09:39
Speaker
Yes, I believe that among the Cleantech holdings, there is good development momentum for HiSATA, which is a developer of a novel capillary fat electrolyzer, which is a device that uses electricity to split water into hydrogen and oxygen, so crucial to the production of hydrogen fuel.
00:09:56
Speaker
This holding made up 9% of IP Group's and 2024 portfolio value. IP Group's management highlighted that the company remains on course to demonstrate a 100 kilowatt hydrogen system this year, which would um represent an important validation point that its technology is commercially scalable.
00:10:15
Speaker
It is of course aiming for much larger gigawatt scale manufacturing. I think the company is likely well-funded following its oversubscribed Series B round of more than $100 million dollars completed in May last year.
00:10:28
Speaker
um And I think the business's potential is illustrated by the fact that its technology exhibits a 95% system efficiency compared to 75% for the best incumbent solutions.
00:10:40
Speaker
Now, IP group men and myp Group's management also highlighted that high status addressing of the green hydrogen market, which should be worth around 17 billion pounds by 2030 across zero carbon production of steel, fertilizers, and methanol, as well as in shipping, which together make up around 12% of global carbon emissions and where there are no practical alternatives to green hydrogen.
00:11:04
Speaker
Right. That's something to keep an eye out for. Can you tell our listeners more about their nuclear fusion business?
First Light Fusion's Capital-Light Model
00:11:11
Speaker
Yes, sure. ah First Light Fusion, which is the company you are referring to, is a developer of nuclear fusion technology based on the national confinement.
00:11:20
Speaker
It achieved a major technical milestone in February 2024 as it became the first fusion company to successfully fire a shot on the Z machine of Sandia National Laboratories, largest pulse power machine globally, breaking the machine's pressure record. And while achieving higher pressures is critical in fusion energy development.
00:11:39
Speaker
IP Group highlighted that this also validates the company's ability to work with third-party facilities, potentially opening the door for a more capital-light business strategy ah based on its amplifier technologies for international confinement fusion schemes. so The company shifted to a capital-light model as a specialist component supplier, and an IP Group expects it to secure first revenues imminently.
00:12:02
Speaker
ah But you should still view it as a kind of a long duration play, given that, well, the commercial viability of nuclear fusion remains to be proved. In terms of other clean tech holdings, I would highlight OXA Autonomy, a B2B-focused developer of universal autonomous software for basically any type of vehicle.
00:12:21
Speaker
ah The company continues to advance its technology, including through NVIDIA's AI-powered Cosmos World Foundation models, and entered several partnerships, for instance, with DHL supply chain at Heathrow Airport.
00:12:33
Speaker
um But it is yet to generate meaningful revenue. So the company's progress in signing major contracts and producing revenue remains key to unlock
Restructuring of Deep Tech Portfolio
00:12:41
Speaker
its value. Okay, thanks. So if we can move on to IP Group's deep tech holdings.
00:12:47
Speaker
Of course. um So after the sale of feature space in Garrison Technology, um the company's deep tech portfolio consisted of 27 smaller holdings across themes such as applied AI, next generation networks, human machine interface, and future compute, including quantum computing.
00:13:05
Speaker
Ultra Leap, IP Group's third largest holding at the end of 2023, was significantly written down with the company undergoing restructuring and headcount reduction triggered by well changing dynamics and slower custom adoption in the extended reality sector.
00:13:22
Speaker
That said, IP Group highlighted that the company recently announced a partnership to exploit the value of its foundational patents that, if successful, has the potential to yield some substantial future value for IP Group.
00:13:35
Speaker
um Moreover, IP Group highlighted that it sees strong interest in businesses developing faster, more efficient computing hardware for AI, um including IP Group's portfolio companies, intrinsic semiconductor technologies and Lumai.
00:13:48
Speaker
Okay, that's helpful. um You mentioned at the beginning that IP Group generated healthy realisation proceeds last year.
Promising Realization Pipeline for IP Group
00:13:55
Speaker
ah What's the outlook for further realisations? Yeah, so IP Group's management sees a promising realization pipeline that aims to deliver more than £250 million pounds in realization proceeds from its private portfolio in 2025-2027, including roughly £50 million this year.
00:14:13
Speaker
ah This is roughly 30% of its end 2024 portfolio value, so a quite significant chunk. um ah What's interesting to note is that management highlighted that the achievement of this exit level is not dependent on a significant pickup in availability of capital for early stage businesses.
00:14:30
Speaker
um Although I would not note that, of course, the macro uncertainty triggered by US tariffs might affect VCD volumes and in turn IP Group's transactional activity. um I think that IP Group's recent exits are a strong achievement given the still demanding venture capital deal environment.
00:14:47
Speaker
Yeah, I agree. I think it's a fair point. And so what's the next item on your roadmap ah to value for IP
Portfolio Valuation Adjustments and Funding Needs
00:14:55
Speaker
group? ah Yes, so as we all know, the pricing environment for early stage businesses deteriorated after 2021. So if you look at you know a VC portfolio, it's important to understand what was the last time portfolio companies raised capital.
00:15:08
Speaker
Those which haven't raised capital since 2021 and are not profitable yet will soon have to return to market for fresh funding and their last funding rounds may be considered stale.
00:15:20
Speaker
Yeah, so the the last funding round valuations, I mean. um IP Group mitigates the issue of outdated valuations by adjusting the valuations of the last funding rounds for some of its assets, with 18% of portfolio value the end of 2024 reflecting downward adjustment and 4% incorporating an upward adjustment. 6% of the portfolio value is is is based on a funding round that was completed in last 12 months.
00:15:47
Speaker
There were 19 funding rounds closed across IP Group's portfolio in 2024, 10 of which were up rounds, three were flat rounds, and six were down rounds. And only 70% of its portfolio reflects an unadjusted valuation of a funding round closed more than 12 months ago.
00:16:05
Speaker
um Now, its other holdings are valued using other methods than less funding round valuation, for instance, a discounted cash flow model or valuation based on future market or commercial events. Right. Okay. But, you know, as we all know, cash is king. So maybe you can tell our listeners more about the cash runway IP portfolio companies have at the moment.
00:16:25
Speaker
Yes, of course, that's a fair point. So around 18% of IP Group's and 2024 portfolio of investments, above 4 million threshold, needs to raise funding in 2025, according to IP Group's management.
00:16:38
Speaker
This includes First Light Fusion, which has failed so far to complete Series D round and therefore is pursuing alternative funding options, as the funding available for nuclear fusion projects in the market has not returned to 2021 levels.
00:16:52
Speaker
um IP Group's management said that around 32% of portfolio holdings are funded to expected profitability, including Oxford Nanopore, and a 45% and 5% are funded until 2026 and 2027, respectively.
00:17:05
Speaker
Here I would note that Hinge Health filed for an IPO on the New York york Stock Exchange in March this year. um That said, the recent market turmoil triggered by Trump's announcements of new tariffs will likely put a pause on IPO processes, at least in the short term.
00:17:19
Speaker
Yeah, I think that's probably right.
Focus on Shareholder Returns and Buybacks
00:17:21
Speaker
um So was just wondering how IP Group plans to allocate um a significant realisation proceeds? IP Group remained disciplined in terms of investments last year, and its recent focus has been on supporting key existing holdings.
00:17:35
Speaker
ah But the company also puts emphasis on shareholder returns, and given the wide discount to NAV, which is above the 20% threshold defined by the management for pursuing buybacks, this is the form of returns it's focusing on.
00:17:48
Speaker
The company completed 30 million buyback program in FY24 and has retired more than 10% of its capital to date, ah with an additional 50 million buyback in progress, um of which 10 million was announced in March.
00:18:02
Speaker
AP Group's management declared upon releasing the FY24 results that it is raising the proportion of realization procedures used for share repurchases from 20% to 50% in um I believe it is also important that IP Group nurtures its remaining portfolio to create the next wave of winners and the company mentioned some promising next winners during the results presentation such as introducing semiconductor technologies, oxyhealth and genomics.
00:18:30
Speaker
Perfect. um Is there anything else worth noting?
Growth of Third-Party Capital Under Management
00:18:34
Speaker
Yes, IP Group aims to expand its ecosystem by growing its third-party capital under management. At the end of last year, it managed close to £700 million pounds of third-party capital, including most notably Parkwalk, so IP Group's EIS fund management subsidiary, investing at the pre-seed, seed, and Series A stages, and the IP Group Host Plus Innovation Fund.
00:18:57
Speaker
Overall, the company generated £5.5 million pounds of income in FY24 from fund management fees and licensing and patent income. Management highlighted that it had hoped that the proposals of the Mention House Compacts, which is a voluntary commitment by some of the UK's largest pension firms to allocate at least 5% of defined contribution funds to understand equities by 2030, would be implemented sooner.
00:19:24
Speaker
um These were held up by some ongoing regulatory changes, example around fee caps, but IP Group expects better traction in the second half of this year. And its ambition is to reach $1 billion dollars of total third party AUM in the near term.
00:19:41
Speaker
ah It aims to set up a UK scale up fund focused on series B and beyond, which would support companies, possibly also IP groups holdings at a later ah you know growth scaling stage, much like Hostplus.
00:19:55
Speaker
I see.
Conclusion and Further Information
00:19:56
Speaker
So thank you very much for this detailed and insightful conversation this investment company, which I can see provides a unique exposure to really impactful technology businesses.
00:20:08
Speaker
You've been listening to Uncovering Trusts, a podcast by The Edison Group. If you want to find out more about IP Group and other investment companies that we cover, please visit www.edisongroup.com.
00:20:19
Speaker
Thank you.