European VC an attractive way to gain tech exposure
Despite the recent weakness in deal activity, we consider European venture capital (VC) as a compelling route to gain exposure to the European tech sector, especially given the limited options in European public markets, the fact that companies are staying private for longer, as well as superior historical VC returns versus public markets. Furthermore, we note several government initiatives across Europe aimed at supporting the development of an innovative tech ecosystem, such as the UK’s Science and Technology Framework (launched in March 2023), the Mansion House reforms (unveiled in July 2023) and Germany’s €1bn VC start-up growth fund of funds, launched in November 2023, with the federal government and development bank KfW as anchor investors.
Why consider Molten Ventures now?
As a well-established listed VC player in Europe, Molten provides exposure to a diverse portfolio of private high-growth technology companies across enterprise software, hardware and deeptech, as well as digital health and wellness, which are otherwise hard to access. The completion of the Forward Partners (FP) acquisition (discussed in our previous note) expands its portfolio into further tech subsectors. Molten’s liquid resources (cash and undrawn credit facility) of £117m at end-March 2024 provide good balance sheet headroom for new and follow-on investments. We also note that Molten Ventures (LON:GROW) was recently added to the UK flagship mid-cap index. Molten’s shares now trade at a discount of c 41% to the end-FY24 NAV of 662p per share. NOT INTENDED FOR PERSONS IN THE EEA
Tentative signs of stabilisation in valuations in H224
In line with the developments covered in our May update note (published following Molten’s full-year trading update), fair values across the company’s portfolio remained broadly stable in FY24 (1% reduction, or a slight 0.4% uplift excluding FX), assisted by the positive developments in H224 that saw a £56m net fair value increase excluding FX (which offset the H124 decline). We note that the H224 performance includes a £38.6m gain on a bargain purchase, which Molten recognised on the acquisition of FP (based on FP’s share price discount to NAV at which the all-share deal was completed), as well as a fair value uplift related to the secondary investment in the Seedcamp Fund III completed in February 2024 (see our May update note for details). We calculate that excluding the gain on the FP bargain purchase, Molten’s net negative fair value change in FY24 stood at c £34m, or 2.5% of the opening gross portfolio value (including a c 1.3% rebound in H224), which still suggests a degree of stabilisation in portfolio valuations.
Molten’s NAV per share fell by c 15% in FY24, mostly due to the dilutive impact of the recent capital raise and the all-share FP deal, the above-mentioned limited decline in portfolio value, as well as FX headwinds of £24m (or 1.7% of opening gross portfolio value). For details on discrete NAV TR performance for previous financial years, please see our May update note.
Two exits agreed at a modest uplift to last carrying value
We believe the diminishing valuation headwinds are also illustrated by the fact that the recently announced realisations of Endomag and Perkbox were agreed at a modest uplift to their last carrying values at end-March 2024, which implied multiples on invested capital of c 3.7x (quite a healthy return since the initial investment in 2018) and c 1.2x (a rather moderate but still positive return), respectively. Endomag is being acquired by the Nasdaq-listed Hologic, as per the definitive agreement announced on 29 April 2024. Molten will exit Perkbox following the latter’s combination with Vivup, a provider of health and well-being benefits, through a strategic majority investment from private equity firm Great Hill Partners.
Share of rounds at lower valuations up only slightly in Q124
The proportion of down rounds across the broader European VC market stood at 21.7% in Q124, only a slight increase from 20.8% in 2023 (vs 14.5% in 2022), according to PitchBook (see Exhibit 1). Further valuation headwinds cannot be ruled out, given that many VC-backed companies delayed new funding rounds in recent months by reducing their cash burn rates. Still, it seems that the European VC valuation environment is gradually stabilising, with median deal sizes increasing across all stages in Q124. Moreover, the recent onset of the rate cut cycle of the European Central Bank (with a 25bp reduction of the main interest rate in June) may prove supportive to private company valuations. That said, we note that the US Fed chair recently communicated a more hawkish stance, signalling only one rate cut until the end of 2024.
Deal activity gradually picking up as well
There are some tentative signs of a revival in the broader IPO and private M&A markets. Reuters recently indicated, citing Dealogic data, that Q124 global M&A volumes increased by 30% y-o-y to US$755.1m, mostly on the back of a pick-up in mega-cap deals. European VC deal value increased by 19% y-o-y to €16.3bn in Q124 (though deal count was down c 46% y-o-y, based on PitchBook data as at end-March 2024), assisted by the €4.75bn megadeal of the cleantech business H2 Green Steel in January 2024. The Q124 figure is still 54% lower than the Q122 level; hence, activity remains modest for the time being. That said, fund-raising volumes in recent years, coupled with cautious capital deployment in 2023, have left VC funds with a significant amount of dry powder, which may support deal activity throughout 2024. Despite this, European VC fund-raising was quite resilient in Q124, at €4.6bn (across more than 47 vehicles), compared to full-year figures of €19.0bn in 2023 and €30.6bn in 2022, according to PitchBook. Meanwhile, European VC exits remained subdued in Q124, at €1.9bn (lower than the €3.4bn in Q123 and well below the €14.6bn in Q122), based on PitchBook data.
Solid top-line momentum and cash runway of core holdings maintained
The valuation markdowns in FY24 were primarily related to holdings outside of Molten’s end-March 2024 core holdings, which saw a minor £3.4m net negative fair value movement in FY24. Molten’s 20 core portfolio holdings (which made up c 62% of end-March 2024 gross portfolio value) sustained strong top-line growth, with value-weighted average revenues growing by 63% in 2023 to £211m, and Molten’s management expects 2024 growth to reach 52% (based on current reported projections; see chart on front page). The above figures exclude Graphcore and Isar Aerospace as outliers (which together made up c 5% of Molten’s core portfolio value at end-March 2024).
Moreover, Molten’s core portfolio remains well funded, with 95% of its holdings by value having a cash runway of more than 12 months, including 55% with a cash runway of more than 24 months (see Exhibit 2). Molten’s management highlighted that its core portfolio companies raised in aggregate over £1.2bn in FY23 and FY24, with 90% of the capital raised at valuations in line with or above previous funding rounds.
Most of portfolio valued using a revenue multiple
The above-mentioned good top-line momentum had a direct impact on Molten’s fair values, as 57% of its portfolio at end-March 2024 (34% at end-March 2023) was valued based on market comparables (see Exhibit 3), primarily revenue multiples of listed peers or relevant private market transactions (with a weighted average multiple of 6.6x at end-March 2024 vs 7.5x at end-March 2023). We understand that the significant increase in the proportion of holdings valued using revenue multiples reflects a less active fund-raising environment (therefore making public multiples a better comparator than last founding round valuation). Around 20% of Molten’s portfolio at end-March 2024 (49% at end-March 2023) was valued using the last funding round, which is calibrated to account for movements in the revenue multiples of public peers since the deal closure, as well as any subsequent technical/product milestones and the trading performance of the company compared to expectations at the time of the funding round. As regards this valuation technique, Molten’s aim is to reflect the current revenue trajectory in its carrying values (rather than the full prospective growth path, which normally determines valuations of funding rounds), as it prefers to gradually recognise the ‘success story’ of its portfolio winners. As a result, it applied a weighted average discount of 21% to 61% of its holdings valued based on the calibrated last funding round (see Exhibit 4). This compares with 35% and 65%, respectively, at end-March 2023, with the narrowing of the discount reflecting the revenue growth of the companies (which assisted the closing of the valuation gap to last funding round) and improving public comparable multiples. The remaining 23% of Molten’s portfolio represent investments as a limited partner in seed fund of funds, valued at NAV of the underlying fund.
Strengthened balance sheet
Molten invested £65m (including £25m in the FP deal) while collecting £39m in realisation proceeds in FY24 (see our previous note for details) at a fair value uplift of £6m excluding FX. The company’s liquidity at end-March 2024 consisted of a £57m cash balance and £60m of an undrawn revolving credit facility (RCF, available until September 2024), which together represented 9.4% of net assets. Alongside the RCF, Molten has a £90m drawn debt facility, which is subject to certain covenants as outlined in the company’s annual report.
Molten’s management highlighted that there are multiple realisation processes either underway or planned across the company’s portfolio and it therefore expects FY25 realisations of around £100m (or c 7.3% of opening gross portfolio value), which is closer to the company’s FY17–24 average of around 10% (see Exhibit 5).
We note that roughly half of the guided FY25 exits are already covered by the announced realisations of Endomag and Perkbox, which at end-March 2024 were valued at £34.7m and £16.7m, respectively. While management did not disclose any further details with respect to potential exits, we note that some of Molten’s core holdings are held at a multiple of cost, which potentially makes them ripe for an exit from a return perspective (see Exhibit 6).
Updated capital allocation policy revealed
Following Molten’s equity raise last year, and with an improving exit outlook, Molten has updated its capital allocation policy. The company maintains its focus on deploying capital into attractively priced investment opportunities across primary and secondary deals, with a particular emphasis on the latter. Molten’s management indicated that it expects a window of opportunity for attractively priced secondary deals of 12–18 months. Furthermore, Molten earmarked a minimum of 10% of future realisation proceeds for share buybacks under the existing authority granted to the board by the AGM. In this context, we note that Molten’s current discount to NAV, while still wide at c 41%, is narrower than the 62% at the time of the last equity raise.
The company aims to maintain a liquidity reserve equal to 18 months of rolling operating expenses net of fee income. Molten’s operating expenses remain comfortably within its target of less than 1%, standing at 0.5% in FY24 net of fee income and excluding exceptional items (or 0.1% if non-cash expenses are excluded as well), see Exhibit 7. This was supported by £20m of fee income on the assets it manages (including the £400m of third-party assets across EIS and VCT strategies), slightly down from £23m in FY23 due to performance fee hurdle requirements. We note that Molten recently launched a €50m Irish-focused fund with Ireland Strategic Investment Fund.
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