While the fintech sector has been one of the UK’s biggest success stories in recent years, investment has largely been reserved for venture capital and private equity.
Augmentum has long billed itself as the one way retail investors can gain exposure to UK fintechs.
Since its IPO in 2018, it has seen good demand from savers who want to invest their money in cutting-edge startups. But now a volatile macroeconomic environment has dampened the appetite for higher risk investments like these.
We speak to fund manager Tim Levene about how he has managed to resist the technology sell-off and why he believes a subdued IPO market is not the end of the world.
Fund manager Tim Levene says Augmentum’s share price has struggled as retail investors turn away from growth and towards value
Technical sales have been “arbitrary”
Very few asset classes have escaped the volatility of the past 18 months, but technology has been particularly hard hit.
Big hits like Meta, Google owner Alphabet and Netflix have all seen their share prices fall between 30 and 70 percent.
Investors have turned their attention to value stocks, especially banks and oil companies, as inflation is high and central banks raise interest rates.
Augmentum has not been immune to the route. Despite the fact that the NAV remained stable at 155p during the six months to March, Augmentum’s share price performance has been choppy.
It currently trades at 103p after reaching peaks of 173p last year, and trades at a 33.23 per cent discount to NAV.
Levene says he is “frustrated” by the price volatility given the portfolio’s underlying growth, a view also expressed by chairman Neil England in the fund’s recent results.
“It is very difficult for us, we cannot control the share price, we can only control what we can control. When you are a share with a smaller share capital, you appear to be a bit more volatile, says Levene.
“I think I’ve been frustrated with the share price because I think it’s been unfairly maligned if you look at the underlying performance, I think we need to show that we deserve to have a premium rating.
I think we need to demonstrate that we deserve to have a premium rating. Hopefully we can do a better job than we did this year
“Hopefully we can do a better job than we’ve done this year in terms of showing that to investors.”
Most of the volatility in Augmentum’s share price – which is down 35 percent so far this year – can be attributed to private investors turning to value stocks, says Levene, while institutional flows have remained largely stable.
“I recognize that over the last 12 months investors have moved out of growth and into more stable yield generating stocks and looking for value, I get that. I think the selloff has been fairly uncritical across the technology sector.
But he suggests the technology route may have a silver lining and push DIY investors to look more closely at what’s under the hood of these companies.
“I think the scrutiny will be far better and detailed on the underlying performance than we might have seen 18 months ago.”
Strong underlying growth despite revaluation
Augmentum already stands out from the crowd by being the UK’s only listed fintech fund, but its stability over the past six months has been impressive.
Although the share price has certainly been volatile, NAV per share has held firm – falling just 0.1 per cent, or 2p, from March.
Technology has been particularly hard hit by market volatility over the past 18 months. Big hits like Meta, Google owner Alphabet and Netflix have all seen their share prices fall
“A stable NAV in today’s environment is quite good. It’s not because we’re not doing anything and we’re sitting on our hands – it’s growth, says Levene.
It has had to be cautious in some ways, and the fund cut back on its deals when the market was “up” and prices were overinflated.
In March, Augmentum valued its top 10 holdings at 5.7 times its forecasts, which fell to 4.2 times by September, which it says compares favorably with high-growth listed fintech peers.
“When you get into the results and look at underlying growth … had we used the same valuation methodology and used the same multiples that we used six months ago, we could have written up north of 20 percent.
“You couldn’t take the hit [in the selloff] if you don’t take the benefits on the way up. I think we feel comfortable with how we have adopted valuation methodology.
“If we look at our top 10 portfolio companies, which account for about 70 per cent of NAV, they have grown on average 100 per cent year-on-year, which is pretty good. Growth is still strong across the board, which is encouraging.’
Long-term stakes Zopa and Tide have performed particularly well as they quietly build market share.
Zopa, which started as a peer to peer lender before gaining a full banking license in 2020, now has over 800,000 customers and became cash-generating for the first time this year.
Small business bank Tide has increased its market share to eight percent despite headwinds for SMEs.
“I am sure that in a booming economic environment they can grow even faster. But still increasing revenues 60-65 percent year on year? I find it very encouraging, says Levene.
“Basically, why do they grow? Because the big banking platforms cannot serve these small customers efficiently. They do not have the effective digital solutions that these nimble companies are looking for.’
Why a quiet IPO market isn’t bad news
One of Augmentum’s key selling points is that it offers private investors exposure to unlisted fintechs, which is increasingly important given the subdued IPO market.
The London Stock Exchange raised £565.5m from eight IPOs in the third quarter of this year, seven times less than the record £4bn raised from 33 IPOs in the same period last year.
Levene seems unaffected by the depressed outlook for exits via IPOs.
“I wouldn’t say there is an IPO market, I think it’s non-existent. If you look at the last five years and aggregate every fintech exit, 96 percent have happened through M&A not through IPOs.’
Augmentum has this year been the beneficiary of abrdn’s £1.5bn acquisition of broker Interactive Investor, from which it has retained the bulk of the £42.8m it made from the deal.
“As much as people like to point to the IP market, when it comes to fintech exits, it’s actually a small part of the overall jigsaw.
“I’m not overly concerned with the returns to the IPO market… I think it’s important for retail investors to be able to get exposure, but it makes our proposition even more compelling for investors.
“They simply can’t get public market exposure to these assets because they rarely come to market… because the vast majority of them are bought before they go public.
“Even those that go public do so much later, so investors are missing out all the way up. From our point of view, it kind of emphasizes our unique nature. There is no other listed fintech fund in the UK… which can provide investors with particularly diversified exposure to fintech.
“You just have to make sure there are enough winners in the portfolio…”
