Is IP Group Stock Something We Want to Invest In?

There’s a recent debate going on about whether or not people who have a PhD ought to put prefix their name with “Dr.” or not. It’s a debate that’s been had plenty of times before. When the flight attendant asks if there’s a doctor on board, don’t use the credentials unless you’re comfortable raising your hand. That’s one school of thought. The other says that anyone who has completed a PhD should use the prefix. What’s appropriate is probably somewhere in the middle, and should take into account cultural norms as well.

In the academic world, a PhD usually makes you qualified to teach a particular subject. There’s a big difference between a career in academics and a career spent saving lives – in prestige, that is. Adding a few letters in front of your name is a quick way to kick your social status up a few notches.

Credit: Statista

Another way to look at the appropriate use of Dr. might be the extent to which your research has had a real impact on society. Many of today’s greatest inventions are born from research institutions where people dedicated their entire lives to creating something, and then licensed the intellectual property (IP) to be commercialized. A British firm called IP Group has based their entire business around taking intellectual property from universities and turning it into cold hard pounds.

About IP Group

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Founded in 2001, London’s IP Group (IPO.L) began their quest for intellectual property by establishing partnerships with some of the leading universities in the U.K. In 2003, they floated on AIM (went public) and have since returned +55% compared to a Nasdaq return of +564% over the same time frame. Now, past performance is no indicator of future performance, but those returns are absolute shite for a firm that’s supposed to be taking some of the world’s most exciting technologies and monetizing them.

It’s important to remember that we’re attracted to publicly traded venture capital firms because they’re supposed to have a loose correlation to the equities markets. Just like wine, art, or bitcoin, venture capital investing is an alternative asset class. That means we wouldn’t expect IP Group to perform similar to the stock market. But still, +55% vs. +564%.

What Investing in IP Group Gets You

IP Group started out in U.K. tech, and that’s where they continue to focus. Today, at least 64% of assets under management (AUM) at IP Group are held in U.K. tech companies.

7 focus areas for IP Group Credit: Credit: IP Group Half-Year Results 2020

The biggest holding for IP Group right now is Oxford Nanopore, a company we covered a few years ago in a piece titled Oxford Nanopore Sequencing vs. Illumina. By purchasing shares of IP Group, you’re taking a meaningful bet in Oxford Nanopore. For every pound you invest in IP Group, you’re getting 25 pence worth of shares in Oxford Nanopore. It’s the single largest position the firm has at the moment.

Credit: IP Group Half-Year Results 2020

IP Group’s holding in Oxford Nanopore is 3X the size of the next biggest company, Istesso Limited, which is a pharmaceutical company. The third biggest holding is Ceres Power, a company we covered in our Guide to Investing in Fuel Cell Stocks. The 2020 half-year results presentation we took the above chart from said about Ceres Power, “the stock afforded the Group the opportunity to realize the majority of its investment at 7x cost.” That alludes to another service you’re paying for. IP Group needs to decide at what time it’s optimal to exit their holdings.

One cool thing about publicly traded VCs is the amount of information they give you about their portfolio holdings. Most of these publicly traded VCs are just fun to follow. If you’re someone with a lot of time and you like hands-on investing, this would actually be an enjoyable company to invest in just because there’s so much happening. On the flip side, it’s difficult to keep track of how fast things change, and we’re reminded of Warren’s Buffet’s advice – only invest in what you understand. What we found easy to understand was their portfolio company Parkwalk.

The Enterprise Investment Scheme

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In 2016, IP Group acquired a company called Parkwalk Advisors which runs the largest EIS funds in the U.K. with about $416 million in AUM (306 million GBP). In the empire where the sun never sets, entrepreneurs never walk alone. That’s because the government encourages investments in startups through the Enterprise Investment Scheme (EIS), one of the most generous tax relief incentives available to investors in the United Kingdom. It’s easy to see why IP Group and Parkwalk Advisors were made for each other.

After a cursory look around the Parkwalk website, their funds also seem like a good way to get exposure to U.K university IP. They even have funds dedicated to the most notorious universities – a Cambridge fund, an Oxford fund, and an Imperial College fund. Did you know Imperial College has created 150 spinout companies in the last five years alone? What Parkwalk is doing bears resemblance to Alumni Group, another company you should check out if you’re an accredited investor looking for exposure to startups.

The Bull Thesis

It’s easy enough to tease out the bull thesis for IP Group because the company gives it to you over a series of slides. Their business model was to plant the seeds early on, then reap the rewards later when the investments had some time to mature. These days, they’re starting to reap what they sowed. Note the high percentage of assets with 8 years or more holding time in Life Sciences below:

Credit: Credit: IP Group Half-Year Results 2020

Once the investments are liquidated, the cash can be put into more exciting tech startups. Perhaps some may be dispensed as a dividend.

To Buy or Not to Buy

IP Group is heavily focused on the U.K. startup scene which is probably already flush with capital from the EIS scheme. The decision to expand outside their backyard into ‘Murica and Australia is how the firm can find new regions where intellectual property isn’t being commercialized.

There’s a much bigger question to ask here. Why the sub-par performance for publicly traded venture capital firms? For one, being publicly traded means you’re dealing with a whole lot more than just vetting new investments and providing guidance to existing portfolio companies. You now have the markets to answer to. A lot of overhead comes with that. More lawyers, investor relations, earnings calls, accounting regulations, these are all things that detract from being a VC.

IP Group happens to be one of several publicly traded venture capital firms we’ve covered. Several have caught our eye. We like Draper Esprit (GROW.L) because they’re split between growing startups with traction and seed rounds which help discover more growing startups with traction. While Scottish Mortgage (SMT.L) also dabbles in publicly traded stocks, they also invest in some startups too. Perhaps most attractive is their investing methodology which is worth a read for its wisdom alone.

Both Draper Esprit and Scottish Mortgage happen to be hitting new highs these days. Couple that with all the uncertainty surrounding The Rona and we’re waiting for buying opportunities (dips) before taking any new positions. If we were to invest in one of these firms, we’d do so in an attempt to provide some non-correlated returns to our broader 26-stock tech portfolio. (Some say venture capital returns are actually inversely correlated to equities markets.) IP Group is one firm we’ll pass on in favor of others we find more attractive.

Conclusion

Venture capital investing has largely been out of reach for non-accredited investors. That’s why publicly traded venture capital firms are appealing. The problem with IP Group is they’re heavily exposed to the United Kingdom which limits their possibilities. The recent acquisition of Parkwalk seems to put all the IP coming out of U.K. universities on lockdown, so maybe it’s time to start looking elsewhere for opportunities with the windfall of cash they’ll soon have on their books.

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7 thoughts on “Is IP Group Stock Something We Want to Invest In?

  1. One of the reasons I bought IPO was exposure to Oxford Nanopore.
    I also like FFWD and GROW. All of them give exposure so some very interesing unlisted companies, not only UK companies.
    Eg FFWD gives exposure to Insilico Medicine, which is biotech/AI company.
    GROW gives exposure to Graphcore, UIPath.
    This year could be good for UK stock market (post Brexit, undervalued), so having IPO, FFWD and GROW may be a good idea.

    1. Look at you dropping all these new names on us.

      Haven’t really looked at the mechanics of IPO but may be worth a look – at least while everyone is speculating like it’s 1999.

      GROW we hadn’t come across but they’re very small (sub 100 million). If they have Graphcore exposure and UIPath we may take a closer look then. Of course if you’re an accredited investor, just go buy the shares on secondary markets and cut out the middleman.

      FFWD is way, way too small. Would never touch anything with a $22 million market cap.

      Thanks for the comment mate.

        1. Now compare its performance to best performing ARK funds (famous for its incredible performance): ARKG : 1 year gain: 122%.

          1. TEK – Tekcapital: 1 year gain: 200%
            IPO – IP Group : 1 year gain was 49%

            GROW – Draper Esprit : 1 year gain: 8.1%
            FFWD – Fast Forward: 1 year gain: 5.4%

          2. Looking at stock price performance over a single year is irrelevant to a longer term thesis. Paper gains are just that unless you realize them. Didn’t realize you were talking about GROW.L. Yes, we published a piece on them as you probably know. TEK.L is a miniscule company and we stay away from those.

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