A recent dip in the share price has provided an ideal chance to benefit from a successful venture capital fund as it gains access to some of the most exciting, high-growth private tech companies in Europe.
Draper Esprit (LON: GROW) is a Venture Capital Trust (VCT) that invests in disruptive, high-tech businesses across the UK and Continental Europe. These sorts of private companies have the potential to provide fast revenue growth and significant capital appreciation ahead of a potential IPO or buyout.
Cash available for future investment
At the end of March the fund’s portfolio value had grown to £594m with cash available for future investment of over £150m. This gives it plenty of negotiating power to drive better deal flow, which combined with the expertise and track record of the management team bodes well for its future performance.
GROW has a target portfolio return of at least 20% per annum through the cycle, but has recently outperformed with a gain of 21% in the year to March 2018 and 26% to March 2019. It has an equally strong track record of realisations since the IPO in 2016 with 18 exits generating £81.6m in cash for reinvesting in new opportunities.
The fund currently has 54 holdings, with a core portfolio of 15. These account for 64% of its NAV and have an average forecast revenue of $142m with 65% gross margin. Having such well-established businesses means that the risk profile is lower than for other funds that invest in earlier stage start-ups where the business models are still unproven.
Its managers invest in revenue-generating businesses that have the ability to be category leaders and have a global addressable market. They look for healthy gross margins and capital efficient models that will be attractive candidates for acquisition or IPO.
The largest holding, Graphcore, is a good example. It has built a new kind of processor and software that is specifically designed for artificial intelligence. The company’s IPU chips are said to provide a huge improvement in performance and are up to 100 times faster in training and inference.
Another interesting investment is Peak Games, a leading mobile gaming developer company that has produced viral games such as Toy Blast and Toon Blast. It is thought that the business has generated more than $1.1bn in gross player spending to date, which is considered to be a major milestone.
There is also UiPath, a market leader in robotic process automation. This is essentially software that can provide organisations with a ‘digital workforce’ to handle high-volume repeatable tasks that previously required humans to perform.
At the AGM in July the company confirmed that it had continued to make strong progress across its portfolio, yet the shares have experienced a period of weakness. At the current price of 447 pence they are trading on a wider than normal discount of 15% to the end of March NAV of 524p.
The analysts at Numis believe that this represents a good buying opportunity and have set a target price of 680p. This is based on 1.1 times the estimated March 2020 NAV, as they believe that the asset class, track record and active management justify a premium rating rather than the current discount.
All VCTs entail a fair degree of risk and can move in and out of favour depending on investor sentiment towards the sector. If you are a long-term investor and are prepared to ride out the inevitable volatility then there is a good chance that there will be some strong gains as and when the underlying tech companies make it to market.