Every investor needs to take a holistic look at their total assets under management (AUM) when considering what risks they’re taking. For example, we focus largely on tech stocks here at Nanalyze, but the majority of our money (about 60%) is in a dividend growth investing strategy – Quantigence – which is largely rules based and requires little attention. If a company stops increasing their dividend (we’re looking at you, AT&T), we replace it. Simple. Hopefully, this doesn’t happen very often, and all we need to do is cash the 120 dividend checks that show up every year, the total sum of which increases every year.
Around 13% of our assets currently sit in our pummeled tech stock portfolio which presently holds around 12% of cash left to allocate. (Nanalyze Premium subscribers know which positions we’re looking at adding to, and which new positions we’re considering.) Another 14% of our assets lie in foreign-domiciled funds with exposure to Europe and Asia, while 5% remains in cash.
The remaining 9% is allocated to alternative assets – gold (1.60%), art (3.3%), wine (3.7%), and bitcoin (0.7%). While gold has been a traditional safe haven since mankind began walking the earth, we’re looking at reallocating those funds to something more interesting – like startups.
ARK Invest’s recently debuted venture capital fund is certainly looking interesting, but we also want to consider four U.K venture capital funds we’ve looked at in the past. These are listed below along with links to our previous research pieces and NAV discount calculations based on the last date the company disclosed NAV and the price at that time.
Today, we want to take a closer look at each publicly traded fund and consider whether any might provide us with sufficient exposure to startups as an alternative asset class.
One appeal of investing in startups is that they’re not correlated to the broader market. Therefore, we cannot use the Nasdaq as a benchmark to gauge performance. It’s an apples-to-oranges comparison. Instead, we may look to use the Cambridge Associates LLC US Venture Capital Index or something similar, but that only works for funds that consist solely of U.S. startups. IP Group is a fund that’s heavily exposed to the United Kingdom which limits their possibilities. That’s what we concluded when we last looked at the company which now trades at a significant discount to their net asset value. What’s more puzzling is that it’s been that way for the past several years.
As we’re now in a bear market, investors will more heavily discount future cash flows or the promises thereof. This means growth stocks fall in value which is precisely what we’re seeing today. However, IP Group’s consistent NAV discount over time indicates the market doesn’t put a lot of faith in the company’s ability to realize the value of their holdings. This is a phenomenon that holds true across most publicly traded venture capital firms in good times and bad,
The recent IPO of Oxford Nanopore presented an opportunity for IP Group to cash out on one of their largest holdings which represented 33% of NAV prior to the event. IP Group held 14.4% of the company and chose to sell 4.4% in the IPO which left them with 10% which sits on their books today as their largest holding.
It remains to be seen how they’ll fare on that investment, but we’d rather they had cashed out when the exit happened and plowed that money back into other startups.
IP Group’s second largest position, First Light, is a fusion company that recently made headlines for achieving fusion using a cost-effective approach which launches a projectile at 14,500 miles per hour into fuel that’s compressed higher than the pressure in the center of Jupiter. While they claim to have made more rapid progress “than any other fusion technology in history,” they still need to prove they can produce more energy output than the energy that goes in. They’re looking to raise 400 million pounds ($464 million dollars) at a billion-dollar valuation, money they’ll use to continue building a commercial pilot plant. As usual, commercialization is a decade away.
First Light is working towards a pilot plant producing ~150 MW of electricity and costing less than $1 billion in the 2030s. First Light is working with UBS Investment Bank to explore strategic options for the next phase of its scientific and commercial development.
Credit: First Light Fusion
IP Group owns 27% of the company at an implied valuation of $483 million. Evaluating the remainder of their portfolio makes little sense as this isn’t a company we would want to invest in. An unhealthy fascination with ESG, a heavy U.K. focus, and an inability to take profits when an exit opportunity arises means we’re continuing to avoid them no matter how discounted the price is to NAV.
Scottish Mortgage and Baillie Gifford US Growth Trust
Over the last several years, we’ve been refining our tech investing methodology which has led to the 36 tech stocks we’re holding today. Our plan is to hold no more than 40 stocks, and we’ve decided not to invest in any ETFs, though there are several we like. Similarly, we’re not interested in holding funds which have a majority of their exposure to publicly traded equities. That’s the case for both Scottish Mortgage and Ballie Gifford which hold 68% and 64% of publicly traded stocks respectively.
We were particularly impressed by the investment approach taken by Scottish Mortgage when we looked at their fund several years ago. The majority of their portfolio will be held in quoted equities and up to a maximum of 30% of assets may be invested in companies not listed on a public market (measured at the time of purchase). It’s a fund worth considering, and it was trading at a 10% discount to NAV as of last month (compared to a 3.6% 12-month average). Their top-ten holdings are as follows:
If you’re excited to see SpaceX in the list, then you’ll really be excited when you see that Ballie Gifford US Growth Trust holds SpaceX as their largest position at 6.0%, up from 1.6% the last time we looked back in February 2021.
Since both firms have the majority of assets in publicly traded stocks, investing in either defeats the purpose. We want to invest in startups as an asset class because they provide a diversification effect for our overall portfolio. Still, we really like how these funds are being managed and think technology investors should consider them as useful ways to get active investment management that’s probably worth paying for. We had Baillie Gifford inadvertently listed as an “avoid” in our catalog which we’ll change to a like in the next update. Scottish Mortgage remains a “like.”
Molten Ventures (Draper Esprit)
That leaves us with Molten Ventures, perhaps the most compelling firm we’ve discussed today, mainly because they’re purely exposed to startups across a broader geographic area.
In the above table, you can see how Molten Ventures’ decision to hold publicly traded companies – UiPath (PATH), Cazoo (CZOO), and Trustpilot (TRST.L) – resulted in a great deal of losses year-over-year. Exits should be an opportunity to cash in and plow the proceeds back into more startups.
One concern around Molten Ventures is the extent to which they’re focused on distractions like ESG and DEI, both of which are represented by opaque methodologies interpreted differently by everyone. Hiring external “ESG consultants” is a waste of money when they should be focused on finding ventures that demonstrate the highest likelihood of succeeding.
The fund looks interesting, but we’re getting the feeling that publicly traded venture capital funds waste too much time and energy on being publicly traded. They need to adhere to more rules and regulations, not to mention the need to spend money on investor relations and marketing. We prefer the simplicity of a venture capital firm like SPiCE VC which sends out a few pages every quarter with simple updates for their portfolio of companies.
Aside from the publicly traded funds we’ve talked about today and ARK’s new venture fund, we’re not aware of any compelling ways for Joe Retail Investor to get exposure to startups. Accredited investors might want to check out Alumni Ventures, while the funds on offer from secondary markets like EquityZen don’t offer the benefit of a dedicated tenured venture capitalist deciding what to invest in and when to exit. Edison Investment Research produced a peer group of other publicly traded venture capital stocks out there, none of which we find compelling.
A few side notes. The NAV for Molten Ventures – 937p – is from the March 2022 deck. Ideally, the NAV should be compared to price at the same points in time, though we can probably assume NAV doesn’t fall over time since revenue growth in the portfolio companies is strong. If that’s the case, then why is Molten trading at a 62% discount to NAV? What does the market know that we don’t? We may come back around and try to answer this question when the company produces their next fund update.
You’ll notice the above table doesn’t contain Scottish Mortgage or Ballie Gifford US Trust. That’s because they’re probably only considering funds with a majority of their assets in startups (as are we). The entire appeal of investing in startups (at least for us) is the diversification effect. The more equity exposure the fund contains, the less diversification effect we’ll enjoy.
We’re convinced the way forward for retail investors is a platform that allows ownership and liquidity functions for accredited or non-accredited investors that bypasses the public markets entirely. That’s precisely the appeal of ARK’s new venture fund.
There are some startups we like based on past window shopping, but we’re in no position to decide which companies we should invest in and at what valuation. That’s why we want to invest alongside a manager to whom we’ll gladly pay some fees for guidance. Publicly traded venture capital firms have the expertise, but too much unnecessary overhead that eats into returns. Perhaps that’s why most trade at a discount to their actual value. We’re interested in getting pure exposure to startups in a fund managed by a very lean team with a great deal of transparency for a decent price. Now that ARK has published details surrounding the weightings of companies they’re holding, we may take a closer look at their offering.
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