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.
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
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.
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.
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
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:
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.
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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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.
Also consider TEK – TekCapital. Great performer.
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.
For me the best performer was TEK. 1 year ago price: 6p, now 18p, so 1 year gain is 200%.
Now compare its performance to best performing ARK funds (famous for its incredible performance): ARKG : 1 year gain: 122%.
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%
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.
Oxford Nanopore said on Tuesday that it has started preparing for a potential initial public offering, which could value the U.K.-based biotech revolutionizing real-time genetic sequencing at more than £2 billion ($3.17 billion).
So maybe it is worth looking at IPO.L now .. I checked Oxford Nanopore makes 15.8% of the IPO.L portfolio. So it is a very substantial amount.
There are 2 stories when we look at the IPO.L chart:
1. All time historical performance is not great – since 2003 it gained only around 100%.
2. 1 year performance is great: 140% gain and it was growing very consistently, nice linear growth.
IP Group premium could soon return
March 18, 2021
While the proprietary technology incubator remains a high-risk pick, several important trends point to a possible re-rating
Full-year results, released last week, are a good place to start. After the portfolio dipped in value in 2019, net portfolio gains of £231m pushed NAV up by 17 per cent to £1.33bn in 2020. This included record cash realisations of £191m, primarily from IP’s staged exit of Aim-traded fuel cell pioneer Ceres Power (CWR), whose soaring valuation provided a seven-fold return on investment and made it the second so-called ‘unicorn’ to emerge from IP’s seed portfolio.
Currently, one investment commands the bulk of attention. DNA sequencing specialist Oxford Nanopore, which earned its unicorn stripes in 2016, accounted for 7.1p of the uplift in IP’s NAV last year after it raised £162m from new and existing investors at a higher valuation. That support looks warranted, especially after a year of major progress. In addition to mapping several Covid-19 variants and improving the cost and accuracy of its sequencing technology, the group landed regulatory approval for a diagnostic test for the virus and a fat NHS contract.
Interest in the company looks set to continue ahead of a slated initial public offering in 2021, which would either give IP a cash windfall or a liquid holding in a hot biotech stock. There’s also the prospect of a further upward revaluation: analysts at Berenberg believe IP has adopted a “fairly conservative approach to valuation”, while Jefferies reckons Oxford Nanopore could be worth at $5.4bn on listing, versus IP’s carrying value of $3bn. If Jefferies is proved right, this alone would add 25p to group-wide NAV (see pie-chart).
For every pound you invest in IP Group, you’re getting 25 pence worth of shares in Oxford Nanopore. That’s potentially a double-edged sword. Publicly traded VC firms haven’t fared well based on our research in terms of returns, and as long-term investors we’re interested in the potential of an asset beyond a single event.
IP Group plc (LSE: IPO), the developer of intellectual property-based businesses, today announces its financial results for the six months ended 30 June 2021.
· Strong Return on Hard NAV of £117.9m, or 9%, (HY20: £14.2m; FY20: £189.5m)
· Hard NAV of £1,439.3m or 135.4 pence per share (HY20: £1,156.4m or 108.8pps; FY20: £1,331.5m or 125.3pps)
· Cash realisations of £111.4m (HY20: £113.7m; FY20: £191.0m)
· Sustained investment into portfolio: £69.5m into 41 companies (HY20 £36.9m; FY20: £67.5m)
· Interim dividend of 0.48p per share and £20m allocated to buying back the Group’s shares
· Fair value of portfolio: £1,246.4m (HY20: £1,025.0m; FY20: £1,162.7m)
· Net portfolio gains of £143.1m (HY20: £34.9m; FY20: £231.4m)
· Sales of Inivata Ltd to NeoGenomics, Inc, WaveOptics Ltd to Snap, Inc and Kuur Therapeutics Ltd to Athenex, Inc.
· Oxford Nanopore announced it has begun preparations for a potential IPO
· Total funds raised by portfolio companies: Approximately £1.0bn (HY20 £365m; FY20: £1.1bn) including Oxford Nanopore Technologies Ltd (£202m), Centessa Pharmaceuticals Ltd (US$630m/£457m), Pulmocide Ltd (US$92m/£67m committed, US$25m/£18m invested) and MOBILion (US$60m/£43m)
Thank you for the update.
IP Group announces that it has realised approximately £84m of proceeds* through the partial sale of its holding in Oxford Nanopore. Consistent with the Group’s Capital Allocation Policy, the Board is allocating £15m of this realisation towards buybacks of its own shares, with the balance to be invested into opportunities within the Group’s existing business. Including the £20m announced earlier this year, none of which has been utilised to date, a total of £35m is now reserved for buybacks. The buyback programme remains subject to various factors including our shareholder authorities to only buy back shares at a discount to Hard NAV per share. Decisions to repurchase shares will always be undertaken in conjunction with considering other potential investment opportunities for the benefit of stakeholders. The Group will update shareholders on the utilisation of this capital via the relevant regulatory announcements.
Following the sale, IP Group holds 82,062,144 shares (or 10.3% of Oxford Nanopore) which is valued at £348.8 million based on the £4.25 Offer Price of Oxford Nanopore. This represents a realised and unrealised fair value gain to IP Group of approximately £74m*.
BTW: As Oxford Nanopore trades now at around 610p on the first day of trading, the above value of IP Group’s Oxford Nanopore holdings is 43% larger, so that means around £500M. Plus they already received £84M for selling some Oxford Nanopore shares in IPO. So if we add these 2 we get total value: £584M.
The current IP Group market cap is £1.49B – which I believe is not reflecting yet current value of Oxford Nanopore.
Performance of UK listed VC / intellectual property companies:
TEK – Tekcapital: 1 year gain: +174%
GROW – Draper Esprit : 1 year gain: +63%
IPO – IP Group : 1 year gain was +58%
FIPP – Frontier IP Group: 1 year gain: +58%
Tekcapital is a star performer and I already pointed at it back in January when it had 1 year performance: +200%.
So now its 2 year performance is +408% !
Compare that to ARK funds – many of them now have negative returns this year.
We don’t hold stocks for one year or two years. We want to hold them for decades. Short term fund performance needs to be compared to an appropriate benchmark as well which is not “ARK funds.” ARK Invest is an active manager that trades in and out of U.S. stocks predominantly. The funds you mention have various strategies that dabble in all sorts of stuff across various geographies and asset types. Also, what do you plan to do with a 2 year performance of +400%? Sell some? Sell it all? Buy more? Paper gains only create more problems for people who think in short durations when it comes to returns. Until you have exited a position and captured the alpha, it’s all on paper. When you do exit, do so with conviction. If the stock/fund runs up another +1,000%, don’t experience FOMO and jump back in. Make decisions and stick with them. Most investors who think in short durations aren’t capable of this.
I just came across Finlab (A7A.DE). Finlab invests and incubates German financial technology startups.
Current price: €23.10 , NAV: €37.73 .
Currently it trades at a very deep discount comparing to NAV: 39%.
Maybe worth looking at ..
Finlab is a venture capital firm based in Frankfurt, Germany. The firm focuses on incubating German-based financial technology startups and investing globally in venture funding rounds of financial technology companies. It also invests in other funds and incubators that focus on financial technology investments, especially in the United States and Asia.
Finlab AG was started in December 2005. Finlab is focuses on providing capital for startups with the aim for long term participation and ongoing support of their investments. The support Finlab offers depends on the respective development phase with regard to their network and know-how. Finlab also acts as an asset manager, and their managed assets are in the three-digit million-dollar range.
They’re quite small at under $150 million market cap, regardless of how much a discount they’re trading compared to NAV. A cursory look at their portfolio shows a lot of obscure names. This isn’t something we’d dedicate resources to looking at right now but thank you for putting them on our radar!
Intellectual property investor and developer IP Group reported a “highly successful” 2021 in a trading update on Thursday, indicating that it now expected profit to be higher than £425m. The FTSE 250 company said the year included a large number of “significant” transactions, including the flotation of Oxford Nanopore Technologies on the London Stock Exchange, and the sales of Inivata and WaveOptics. As a result, its board now expected profit to be above £425m – a marked increase from the £185.4m it recorded for 2020. Hard net asset value per share was anticipated to be above 165p, making for a return of at least 31%. “The group is in a strong financial position with net cash and deposits of £276m at year-end,” the board said in its statement. “The group’s portfolio is well funded with portfolio companies having raised over £2bn in 2021. “This, combined with the exciting prospects and investment opportunities within the portfolio, gives us confidence for 2022.” IP Group said it would announce its 2021 results in mid-March. At 0901 GMT, shares in IP Group were up 5.38% at 115.7p.
Perhaps the UiPath profits you were pointing to earlier?
TekCapital (TEK.L) had another great year: share price gained over 100%.
Much better than IP Group (IPO.L). IP Group share price lost a little bit value in the last year: from 106p to 97p.
However IP Group is heavily undervalued now: its NAV is 165p: +70% over the current share price. So IPO.L looks like a bargain now.
Thanks for that heads up Stan! We hadn’t come across this firm. At a $60 million market cap, it’s just too small to look at. Stocks of that size will be extremely volatile over time. We usually don’t pay much attention to one-year stock price returns because he hold with a decade-long time horizon unless the thesis changes. UK firms that operate as publicly traded VCs are interesting, but wouldn’t grace our portfolio for the same reason we’re looking to move out of our two remaining ETFs.