While the fintech industry has been one of Britain’s major success stories in recent years, venture capital and private equity have dominated the investment landscape.
Augmentum has long been touted as the only avenue for regular investors to obtain exposure to British fintech.
Since its IPO in 2018, it has experienced robust demand from investors seeking to invest in innovative firms. Now, however, a turbulent macroeconomic climate has lowered demand for such high-risk ventures.
Tim Levene, a fund manager, discusses how he’s survived the tech selloff and why he doesn’t believe a sluggish IPO market is the end of the world.
The sell-off in the technology sector has been “indiscriminate.”
In the past 18 months, few asset sectors have been immune to volatility, but technology has been hammered particularly hard.
The share prices of titans like Meta, Google’s parent company Alphabet, and Netflix have fallen between 30 and 70 percent.
As inflation soars and central banks hike interest rates, investors have moved their focus to value companies, especially banks and oil majors.
The rout has not been impervious to Augmentum. Despite a consistent NAV of 155p in the six months leading up to March, the performance of Augmentum’s share price has been erratic.
It is currently trading at a discount of 33.23 percent to NAV, trading at 103p after reaching 173p last year.
Levene is “frustrated” by the portfolio’s price volatility in light of its underlying growth, a sentiment echoed by the fund’s chairman Neil England in the most recent quarterly report.
It is very difficult for us since we cannot control the share price; we can only control what we can. ‘Stocks with a smaller market capitalization appear to be more volatile,’ says Levene.
‘I believe I’ve been disappointed by the share price because I believe the company has been unfairly vilified based on its fundamental performance. I believe we must demonstrate that we merit a premium rating.
“Hopefully, we can do a better job of demonstrating that to investors next year than we did this year.”
According to Levene, the majority of the volatility in Augmentum’s share price, which is down 35% year-to-date, may be linked to retail investors’ shift toward value companies, while institutional flows have remained relatively consistent.
‘I understand that, over the past year, investors have shifted away from growth equities in favor of more stable yield-generating firms and value investments. I believe the selloff has been quite indiscriminate throughout the technology sector.
However, he argues that the IT downturn may have a silver lining and prompt individual investors to examine these companies’ inner workings more closely.
I believe the scrutiny of the underlying performance will be a lot more thorough than it was, say, 18 months ago.
Despite devaluation, underlying growth is robust.
As the only public fintech fund in the United Kingdom, Augmentum already stands out from the crowd, but its steadiness over the past six months has been remarkable.
Despite the volatility of the share price, the NAV per share has remained stable, decreasing by only 0.1%, or 2 pence, since March.
“A stable NAV in the current situation is quite favorable.” This is not because we are doing nothing and sitting on our hands, argues Levene; there is growth.
When the market was “bullish” and prices were excessively inflated, the fund reduced the number of transactions it undertook.
In March, Augmentum valued its top 10 holdings at 5.7 times its projected revenues; by September, this ratio had decreased to 4.2 times, which it deems favorable relative to its high-growth listed fintech competitors.
“When you look at the performance and the underlying growth, if we had applied the same valuation technique and employed the same multiples as we did six months ago, we would have been able to write up more than 20%.”
You couldn’t accept the loss [during the selloff] if you didn’t take advantage of the gains on the way up. I believe we are content with our use of the valuation approach.
‘If we examine our top 10 portfolio firms, which account for approximately 70% of the NAV, they have gained by an average of 100% year-over-year this year, which is quite impressive. Across the board, growth remains robust, which is positive.
Long-term investments in Zopa and Tide have succeeded exceptionally well while steadily expanding their market share.
Zopa, which began as a peer-to-peer lender before receiving a full banking license in 2020, currently has more than 800,000 members and became cash-generative for the first time this year.
Despite difficulties for small and medium-sized businesses, Tide has raised its market share to 8%.
I’m certain that in a prosperous economic climate they could expand much more rapidly. But still, boosting revenues by 60 to 65% annually? I believe it to be positive,’ says Levene.
Why, fundamentally, are they expanding? Because the large financial platforms cannot successfully serve these tiny customers. They lack the effective digital solutions that these agile businesses are seeking.
Why a quiet IPO market is not causing news
Given the sluggish IPO market, one of Augmentum’s primary selling points is that it provides retail investors with exposure to unlisted fintech, which is becoming increasingly relevant.
In the third quarter of this year, the London Stock Exchange raised £ 565.5 million from eight IPOs, which is seven times less than the record £ 4 billion raised from 33 IPOs in the same period last year.
Levene appears undaunted by the pessimistic outlook for IPO exits.
I would not argue there is a market for IPOs; I believe there is none. 96 percent of fintech exits over the past five years have been through mergers and acquisitions, not initial public offerings.
This year, Augmentum benefited from the bird’s £1.5 billion acquisition of Interactive Investor, retaining the majority of the £42.8 million it earned from the transaction.
People like to refer to the IP market, but when it comes to fintech exits, it’s only a small piece of the entire puzzle.
I’m not unduly preoccupied with the comeback of the IPO market… I believe regular investors must be able to gain exposure, but that only makes our proposal more attractive to investors.
They simply cannot gain exposure to these assets on the public market since they rarely come to market… and the great majority are acquired before becoming public.
Even those that do go public do so considerably later, thus investors lose out on this opportunity the entire time. From our perspective, it highlights our unique characteristics. In the United Kingdom, there are no other listed fintech funds that provide investors with diversified exposure to fintech.
You must ensure that there are sufficient winners in the portfolio…
