Lull before company profit reporting season

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This week: ASX v Wall Street

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Lull before company profit reporting season

Late July is when there is a lull in company news, as industrial companies are in communication lockdown before company profit reporting in August. Mining companies are busy releasing production reports and not much else, also ahead of profit reporting.

We received especially pleasing production reports from Mineral Resources and Sandfire Metals this week. Both are larger positions in clients’ Australian shares sub-portfolios. Separately, both Aurelia Metals and TZ Limited, amongst the weakest performers in FY-23, reported improved financial and operational performance late in the week.

Acorn Capital Expansion Funds (ACORN I & ACORN II) – from little things, big things (sometimes) grow

For a change from reporting on big companies, this week we are focussing on two smaller but compelling investments in clients’ Alternatives sub-portfolios.

Together they represent around 6% of the sector’s sub-portfolios.

Acorn Capital Expansion Platform (ACEP, or Acorn 1) was designed to provide investors with the opportunity to support and benefit from the innovation underpinning early/expansion stage Australian companies across all industries. ACEP II or Acorn 2 continues this investment thesis.

These investments provide three core features that make clients’ portfolios better.

  1. Access to private markets at an institutional scale in a format that works for individual investors.
  2. Diverse exposure to a very wide range of companies that would otherwise be too risky as stand-alone investments.
  3. The ability to invest across a long-term horizon – Acorn funds require a 3-5 year timeframe. This timeframe, which is perfect for superannuation investors, allows for both higher returns and an investment focus away from the often, short-term focus of equity and income securities markets.

Acorn 2, similar to Acorn 1, is expected to consist of a high conviction portfolio of up to 20 investments. The aim of both funds is to make distributions from the realisation of portfolio holdings within approximately three years from the first committed capital drawdown.

First Samuel is pleased to invest with Acorn on both platforms due to a combination of trust in the management of the fund and our shared belief that:

“Innovation exists across all industries and is not exclusive only to biotech and fintech. From Acorn Capital’s experience, it exists across all industries and includes business processes, being first to market, IP and brand.”

First Samuel made its initial investment in Acorn 1 in FY-20, and its initial investment in ACORN 2 in FY-23. The structure of the investment requires a fixed dollar amount to be committed to the fund in advance. The commitment does not require all the money to be invested upfront. Instead, calls on capital are made throughout the investment period.

In the case of Acorn 1, these capital calls are completed, and all the funds have been invested. In the case of Acorn 2 only 30% has been funded to date. The Acorn team continues to assess new investment opportunities.

When platform investments mature, a range of exit outcomes are possible. These include:

  • The company is listed on the stock exchange (referred to as an IPO), enabling Acorn to realise the proceeds of its investment at the time of listing
  • The company is listed on the stock exchange, and the shares in the company are held for a period before an eventual sale
  • The company is sold in its entirety to a 3rd party, and Acorn realises the sale proceeds
  • The stake that Acorn has in the company is sold to another party (this outcome occurs less often)

As proceeds are recovered by these means, funds are returned to investors – First Samuel clients. More than 35% of the original funds in Acorn 1 have already been returned (at a profit).

Acorn 1 and 2 – Two investments at different points in their evolutions

Acorn 1 is now almost four years into its journey, and hence as investor, we are concentrating on two clear metrics. Firstly, the value of the remaining investments, and secondly monitoring how quickly Acorn can profitably exit these positions.

On current valuations, an exit would prove profitable. As time is money, a careful balance is required between waiting for additional value to be created versus realising existing profits promptly.

Our Acorn 1 investment has returned +23%, including increases in valuation and capital already returned. This return is more than comparable to equity returns over a similar period, without much of the volatility we see in markets over the same period.

One of the best features of the Acorn Investments Platforms is the consistent, timely provision of updated valuations for each portfolio of assets.

Acorn 2 on the other hand, is at an early stage in its evolution, – still searching for companies in which to invest. At this stage, we are concentrating more on monitoring the style of companies that Acorn is approaching, along with indications of how expensive such investments are.

A more detailed look at Acorn 1 investments

The feature of the Acorn 1 platform that is most relevant to our clients is its “portfolio” nature.

In the same way as First Samuel constructs its equity or income sub-portfolios, Acorn takes advantage of the second most important financial concept – diversification (the first being compounding).

The nature of investment and the lifecycle of companies almost guarantees that all positions will work, and some that succeed will profit more than others. Successful portfolio construction spreads the risk of individual outcomes across many companies and many sectors of innovation and the economy.

Below we have included a table from the latest Acorn 1 update outlining each position. It provides a clear idea of the portfolio, and we will assist with interpreting the information provided.

We will provide more information on the companies themselves later in the report.

Deciphering the data

The initial weight in the portfolio is essential because it provides a signal as to the confidence the team had in making such a position (the larger the investment, the more confident). The investment structure relates to the availability to extract concessional tax arrangements. ESVCLP (Early Stage Venture Capital Limited Partnerships) status provides additional tax incentives. We outlined the value of such arrangements for each client in the annual Accountant’s Pack.

MoMx (Money on Money multiplier) refers to the current value of the investment expressed as a multiple of the initial capital deployed. Refer to Camplify on the 4th last row. Starting as 5.5% of the portfolio, the team exited the position for gross proceeds equal to 2.9 times the initial outlay.

The Gross IRR (internal rate of return in percentage terms) measures the total return achieved on a per-year compounding basis. So, for instance, doubling your money over three years (2x MoMx) will have a lower Gross IRR than an investment that also doubled its money (2x MoMx) but which took only two years to do so.

We can also note the difference in the status column between Listed, Unlisted, and Exited.

  • Listed means Acorn still owns the shares in the company and is yet to sell
  • Unlisted means that Acorn remains an owner of the company and awaits an exit option
  • Exited means that the fund has realised the proceeds of disposal

The investment returns to date have been pleasing (Gross IRR 9.6%), and we will be looking to realise an exit in some of the companies, such as Marketplacer and Splend, which have the most attractive current MoMx returns and Gross IRR to date.

What’s left in the portfolio?

The diversity of investments is best appreciated by a short precis of each company’s activities. The breadth of the activities is vital to the likely success of an investment such as Acorn. The breadth reduces the overall risk and increases the opportunity for finding spectacular individual success. The following is an outline of each position that remains in Acorn 1.

  • CleanSpace is a manufacturer of advanced positive pressure, smart respirators for use by Healthcare and Industrial sector personnel
  • Cluey is a digital marketplace that connects education professionals looking to provide tutoring services to students; its services are carried out online, with tutors and students working face-to-face
  • Conflux is an advanced Additive Manufacturing (3D Printing) business based at Deakin University. It specialises in manufacturing highly specified heat exchangers for the automotive, defence and industrial sectors.
  • Elenium is an airport automation business developing, amongst other things, touchless check-in kiosks, bag drops and boarding gates. Elenium’s core solutions are aimed at moving people through airports quicker.
  • Marketplacer offers a plug-and-play platform for enterprise customers that facilitates the capability to create marketplaces for products, services, events, and bookings.
  • mx51 is a payments platform that is helping banks compete with new entrants, such as Square and Tyro, by materially improving the functionality of the banks’ payment services to SMEs and their customers.
  • Splend is the leading provider of vehicles to the ride-share market in Australia and the UK. Their customers use the vehicles to generate income driving for the likes of Uber, Ola, and Amazon Flex.
  • ImmVirX is developing novel oncolytic immunotherapy combinations that use certain viruses to infect and kill cancer cells preferentially and induce systemic anti-tumour immune responses. Their viral candidates are intended to increase the effectiveness of current immunotherapies in fighting cancers of high unmet need.

A more detailed look at Acorn 2 investments

The Acorn 2 portfolio is also detailed below. Note that due to the early stage of the investment, the value of the investment is at this stage equal to the initial investment – hence MoMx is 1.0x, and the Gross IRR is Zero.

Note that only $25m or 30% of the final size of the fund has been currently deployed into the 7 positions. Of note is that one of the positions, MX51, overlaps with Acorn 1.

In conclusion

We’d observe that many venture capital funds are patient with the deployment of capital at present.

The change in the interest rate and inflation environment has caused a hiatus in deal flow within both listed and unlisted markets as a larger gap between buyer and seller price expectations has emerged.

However, the venture capital market remains an important source of generating investment returns over a longer-term time horizon. We continue to look to make early-stage investments both directly and also via trusted third-party providers in the Venture Capital and Private Equity markets

More importantly, there are significant and broader benefits from successful venture capital investments. These are the encouragement of investment in Australian innovation; the encouragement of entrepreneurs to be risk takers; and the transition of Australian micro-companies to become larger, listed companies. In turn, successful entrepreneurs often then help fuel the next wave of investment in early-stage companies.

Buying shares in large mining companies and banks does nothing for the development of Australia – these companies generate their own required investment funds.

Australia needs more companies like Cochlear, Canva and Atlassian, which demonstrate Australia’s ‘smarts’ and ability to develop globally relevant businesses. First Samuel is keen to be a small part of the financial infrastructure that enables the next wave of Australian corporate success stories.

The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.

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