IP Group — Detailed look at the deeptech portfolio

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IP Group — Detailed look at the deeptech portfolio

IP Group has built a commendable portfolio of businesses developing breakthrough technologies, with an aggregate value of more than £200m at end-June 2023 (c 16% of IP Group’s total portfolio value), mostly across four key focus areas: applied AI, next-generation networks, human-machine interface and future compute. Importantly, around 90% of the deeptech portfolio (by fair value) has already started to generate revenue. Both of its two most valuable holdings, Featurespace (adaptive behavioural analytics for fraud and financial crime detection) and Garrison Technology (which provides a remote web browser and related hardware) have revenues in the tens of millions sterling and growing quickly.

Milosz Papst

Written by

Milosz Papst

Director, Financials

TMT

IP Group

Detailed look at the deeptech portfolio

Deeptech portfolio overview

Investment companies

3 October 2023

Price

51.3p

Market cap

£532m

Net cash (£m) at end-June 2023

111.7

Shares in issue

1.04bn

Code

IPO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.7)

(8.9)

(15.6)

Rel (local)

(11.8)

(8.3)

(21.8)

52-week high/low

75.4p

51.3p

Business description

IP Group helps to create, build and support IP-based companies internationally. The group focuses on companies that meaningfully contribute to regenerative (Kiko), healthier (life sciences) and tech-enriched (deeptech) futures. The group has an international footprint, with investment platforms in Australia, New Zealand, the United States and China, as well as the UK.

Next events

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October 2023

Cleantech event

November 2023

Analysts

Milosz Papst

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

IP Group is a research client of Edison Investment Research Limited

IP Group has built a commendable portfolio of businesses developing breakthrough technologies, with an aggregate value of more than £200m at end-June 2023 (c 16% of IP Group’s total portfolio value), mostly across four key focus areas: applied AI, next-generation networks, human-machine interface and future compute. Importantly, around 90% of the deeptech portfolio (by fair value) has already started to generate revenue. Both of its two most valuable holdings, Featurespace (adaptive behavioural analytics for fraud and financial crime detection) and Garrison Technology (which provides a remote web browser and related hardware) have revenues in the tens of millions sterling and growing quickly.

IP Group’s historical results highlights

Period end

Net cash*
(£m)

Portfolio fair value** (£m)

NAV
(£m)

NAV/share
(p)

Price/NAV
(%)***

12/21

270.1

1,508

1,738

167.0

(26)

06/22

191.6

1,266

1,414

136.7

(49)

12/22

160.1

1,259

1,376

132.9

(58)

06/23

111.7

1,276

1,314

126.7

(55)

Note: *Includes restricted cash but not funds held on behalf of Enterprise Investment Scheme/Venture Capital Trust investors. **Portfolio fair value includes US platform and other LP interests. ***Based on share price at respective period end.

Spotting disruptive technologies early on

IP Group’s tech know-how provides it with the confidence to assume greater (calculated) risk when investing in disruptive technologies of the future ahead of their inflexion points. A good illustration is its investment in WaveOptics, a supplier of augmented reality displays, in 2015. The business was sold to Snap in 2021, generating a multiple on invested capital (MOIC) of 7.9x and gross internal rate of return (IRR) of 54.3%. According to IP Group, the augmented reality (AR) sector is now reaching the point at which hardware capabilities can start supporting the true promise and vision of spatial computing. We believe this is well illustrated by the forthcoming launch of Apple Vision Pro. IP Group retains meaningful exposure to the AR theme through, among others, Ultraleap, the owner of extensive IP in hand tracking and mid-air haptics technologies.

IP Group’s business model well suited for deeptech

Deeptech businesses are characterised by a long initial development phase, which in turn allows them to build a strong IP moat and technological edge over potential competitors. Therefore, IP Group’s evergreen structure, patient approach to grooming university spin-outs, as well as its extensive, global network of lead and co-investors, form an attractive value proposition for deeptech founders. These characteristics help tackle deficiencies in terms of availability of private capital for deeptech investments in Europe (especially in the growth stage). IP Group highlighted that it is the UK’s most active and Europe’s second most active deeptech investor (excluding accelerators and government-backed entities) for venture capital (VC) rounds of more than £1.5m, according to PitchBook data for the last five years.

Deeptech: Science fiction becoming reality

Following IP Group’s deeptech investor event on 19 September 2023, we have prepared a detailed discussion of the company’s current deeptech portfolio.

However, we believe it is instructive to first define what deeptech is and how it differs from more traditional tech. Deeptech is normally defined as breakthrough technologies based on cutting-edge scientific advances and/or tangible engineering innovation with the ability to disrupt several industries. Another way to describe it, according to Bessemer Venture Partners, is that it is ‘a technology that was science fiction in the past but is reality today’.

Deeptech ventures put strong emphasis on R&D early in their lifecycle and are characterised by a long initial development phase, often with substantial expenditure ahead of revenues and product-market fit. Importantly, each of the subsequent development stages can give rise to new challenges. This influences the deeptech funding cycle, with the authors of The European Deep Tech Report 2023 (Dealroom.co, Lakestar and Walden Catalyst) estimating that European deeptech start-ups raised, on average, their Series A (of over €4m) and third funding rounds around two and four years after their seed rounds, respectively, which is later than the 1.5 and three years on average for other start-ups, respectively. The average company age across the XB100 ranking of the most promising private deeptech companies (introduced earlier this year by XPRIZE Foundation and Bessemer Venture Partners) is 9.2 years.

However, this translates into a stronger competitive advantage in the form of technological edge and intellectual property compared to more traditional tech businesses (an average XB100 company had 122 patent documents). Deeptech companies often have no comparable product in the market. Therefore, they do not have to rely on network effects and market lock-up in the way traditional tech companies do. As a result, while the gestation period of deeptech businesses is longer than for traditional tech, they can still provide strong returns, with the average value-capital multiple (ie the ratio of the latest valuation to the total amount of capital raised) on the XB100 list at 5.5x.

Once a new technology or product matures and scales, it is reclassified as regular tech. Consequently, there is no fixed set of deeptech subsectors, but rather a list that evolves over time. The European Deep Tech Report 2023 highlights the following four emerging (‘new/true frontier’) deeptech segments in Europe:

Novel energy: including, among others, nuclear fusion, next-generation battery chemistries, large-scale storage, green hydrogen, supercapacitors and waste heat recovery.

Novel AI: such as generative AI, AI-first biology, privacy-preserving AI, explainable AI, AI acceleration, autonomous systems and general-purpose AI.

Future of computing: for example, quantum computing, silicon photonics, AR, virtual reality (VR), mixed reality (MR), neuromorphic and advanced AI chips, decentralised and distributed computing, brain-computer interfaces and ambient computing.

Space tech: for example, reusable and next-generation rockets, satellites for communication and Earth observation, in-space transportation, in-space manufacturing and debris removal.

Other segments considered by the report as deeptech include synthetic biology, advanced materials, robotics, transportation, foodtech and agtech, as well as cybersecurity. The deeptech sector was broken down into nine categories for the purpose of compiling the XB100 ranking: agriculture, AI, aviation, climate, mobility, next-generation biotech, quantum, robotics and space. That said, we note that the above range of ‘deeptech’ sectors may be considered quite broad, with some deeptech-focused investors using a more narrow definition as part of their investment approach.

IP Group’s evergreen structure and deep investor network an important differentiator

Europe has an excellent footprint in terms of top-tier universities producing technology spin-offs. Moreover, European governments are committing sizeable capital to boost regional deeptech start-ups. This includes a number of EU-wide programmes, such as:

European Innovation Council (EIC) Fund, which supports deeptech breakthrough technologies in Europe and has a budget of over €10bn.

European Investment Fund (EIF): the main limited partner (LP) in most European deeptech funds, providing nearly 40% of the capital allocation, according to the above-mentioned deeptech report.

EIT InnoEnergy: an active investor in energy in Europe.

Joint European Disruptive Initiative (JEDI): sometimes referred to as the European DARPA, which aims to hand out between €50m and €100m in annual challenge grants.

Furthermore, there are several country-level initiatives that are aimed at fostering disruptive tech start-ups, in particular in Germany, France and the UK. For instance, the UK unveiled a 10-year strategy with £2.5bn in funding to turn the country into a leader in quantum computing, while Germany launched a fund of up to €1bn to invest in deeptech and climate tech.

That said, there are certain deficiencies in terms of private capital dedicated to deeptech investments. This particularly applies to late-stage (growth) capital needed to fuel an extensive scaling phase of deeptech businesses (ie beyond Series A round). Overall, the size of the European deeptech VC market remains inferior to the US market. For instance, VC firms invested €10bn into AI and machine learning start-ups in Europe in 2022 compared to €38bn in North America, according to PitchBook. While this is partly due to the smaller size of the overall VC industry in Europe versus the US, it may be also a result of European generalist VC firms being more risk averse in terms of investing in disruptive technologies at their pre-revenue stage (often preferring software-as-service and e-commerce businesses).

With its evergreen structure (providing funding visibility to founders), a patient approach to grooming university spin-outs (often as an active board member providing support in fund-raising, talent acquisition and strategic decision making), as well as an extensive, global network of lead and co-investors, IP Group helps tackle the persistent funding gap for deeptech businesses in Europe. For instance, both Featurespace and Garrison Technology (some of IP Group’s largest deeptech holdings as at end-June 2023) have US VC investors on board, while Ultraleap’s Series D round in 2021 was led by Tencent. Another example is the introduction of the Australian superannuation fund Hostplus as investor in WaveOptics.

That said, it is worth noting that, more recently, IP Group’s preference has been to invest in deeptech ventures at a slightly later stage. This is to leverage the increasing amount of funding provided to spin-out companies at the earliest stages, partly in the form of government grants through university technology transfer offices (TTOs) and InnovateUK, and partly through the UK tax system as (Seed) Enterprise Investment Schemes (EIS/SEIS) eligible investments, which provide incentives to invest capital at this very early stage. In staying close to universities and other centres of innovation, but encouraging the flow of such capital into high-risk opportunities, IP Group can achieve the best of both worlds – de-risking its early stage investments while still maintaining access to the best deals.

Skilled in identifying disruptive technologies early on

According to its mission statement in the deeptech domain, IP Group is working towards a tech-enriched future by investing in assets that will deliver digital resilience, create prosperity and enable new human capability (therefore contributing the United Nations Sustainability Development Goal (SDG) 9: industry, innovation and infrastructure). To achieve this, the company targets ‘differentiated, defensible innovations with a strong value proposition and the potential to disrupt multibillion-dollar global markets’, which is very much aligned with the definition of deeptech.

IP Group’s key focus areas within its deeptech investments currently cover applied AI (including, among others, in cyber security), next-generation networks, human-machine interfaces and the future of computing (see Exhibit 1). Some of IP Group’s deeptech holdings not classified as applied AI still use AI extensively in their operations (eg Ultraleap, Slamcore, Audioscenic). Moreover, it is worth noting that IP Group also invests in novel energy businesses within its cleantech division (21% of IP Group’s total portfolio value at end-June 2023, not covered in this research note).

Exhibit 1: IP Group’s deeptech key focus areas

Source: IP Group

WaveOptics: IP Group’s major success story in AR

IP Group’s technology expertise allows it to take on a greater degree of risk and invest in disruptive technologies before they reach their inflexion point, which in turn provides the prospects for greater returns. The most prominent deeptech exit case within IP Group’s track record is WaveOptics, a human-machine interface business that IP Group invested in back in 2015. WaveOptics is a supplier of AR displays, which allow for the overlaying of virtual objects onto the real world through a transparent surface like glass. The company was acquired by Snap (which used a WaveOptics display for its AR Spectacles glasses launched in 2021) for more than US$0.5bn in May 2021, which IP Group believes to be one of UK’s largest ever venture-backed deeptech exits to that date. IP Group realised a strong MOIC of 7.9x and gross IRR of 54.3% on its WaveOptics investment (IP Group invested in total £7.6m into the business over six years, including an initial investment of £1.5m). The £60.3m consideration was paid in two equal tranches: the first was paid in Snap shares upon completion in May 2021 (IP Group sold the shares shortly after closing the deal) and the second tranche of £31m was paid in cash after 24 months (in H123).

IP Group’s ability to gain exposure to the emerging AR theme is also illustrated by the fact that it was an investor in Ultraleap since the very beginning, providing pre-seed capital in 2014 (the business remains one of its key deeptech holdings, see below). We note that, while the growth of the AR market in recent years has been slower than some expected, the upcoming launch of Apple Vision Pro could spur further demand for similar solutions. IP Group believes that the AR sector is now reaching a point at which hardware capabilities can start supporting the true promise and vision of spatial computing.

Some other notable realisations from IP Group’s portfolio in recent years are listed below. We note that the return IP Group generated on most of these deals was not made public.

Yoyo Wallet, a provider of mobile payments with integrated loyalty schemes (co-founded by Touchstone Innovations in 2013), was sold to SaltPay (now Teya) in 2020. The consideration was paid in Teya shares, and Teya is now IP Group’s fourth largest holding in the deeptech segment (£13.2m fair value at end-June 2023). That said, Teya resembles a more traditional tech business, being a provider of payment processing, point-of-sale, cash advance funding and customer loyalty solutions for small businesses, with revenue of more than £20m pa. The team behind Teya had invested in Yoyo prior to setting up the former.

Process Systems Enterprise, a supplier of advanced process modelling technology to process industries, was acquired by Siemens in 2019. IP Group collected £13.8m of realisation proceeds from the disposal.

Re:Infer, a company that uses machine learning technology to interpret massive volumes of conversational data and identify efficiencies through automating processes, was sold to UiPath in 2022, generating cash proceeds of £8.6m (plus £1.1m deferred consideration) at an IRR realised by IP Group of 29%.

Perpetuum, a provider of train monitoring technology to rail operators, was sold to Hitachi Rail in H1221, with realisation proceeds to IP Group of £2.5m plus a deferred consideration of £0.2m.

Inflowmatix, a water data analytics spinout from Imperial College London founded in 2015, was acquired in 2021 by utility company Suez for £4.9m, returning a modest profit on the £4m capital invested by IP Group.

IP Group will consider various exit routes for its holdings, including sale to a strategic investor and IPO on the Main LSE market or in the US. While the company floated several of its early-stage holdings on AIM in the past (eg Actual Experience, Applied Graphene Materials, Mirriad Advertising), it is less likely to do so in the future, given the volatile market valuations of listed early-stage businesses that are yet to break even, which make subsequent capital raises more challenging.

An overview of IP Group’s current deeptech portfolio

IP Group’s deeptech portfolio consisted of 29 holdings valued at £206.4m at end-June 2023, representing 16% of IP Group’s total portfolio value (see Exhibit 2). Three of its largest deeptech holdings (Featurespace, Garrison and Ultraleap) make up 61% of the total deeptech portfolio value (see Exhibit 3).

Exhibit 2: IP Group’s portfolio by segment at end-June 2023

Source: IP Group

Exhibit 3: IP Group’s deeptech portfolio overview

Company name

Revenue stage

Fair value at end-June 2023 (£m)

Share in deeptech portfolio value

Applied AI

Featurespace

Over £20m revenue

64.1

31%

Diffblue

Early revenue (£1–10m)

5.5

3%

Navenio

Early revenue (£1–10m)

1.5

1%

Monolith

Pre-revenue (<£1m)

1.5

1%

DeepRender

-

-*

-

Mirriad Advertising

-

-

-

Boxarr

-

-

-

Next-generation networks

Garrison Technology

Over £10m revenue

31.6

15%

AccelerComm

Early revenue (£1–10m)

12.7

6%

Quantum Dice

Pre-revenue (<£1m)

0.8

0.4%

Human machine interface

Ultraleap

Early revenue (£1–10m)

31.0

15%

Slamcore

Early revenue (£1–10m)

1.9

1%

Audioscenic

Pre-revenue (<£1m)

4.6

2%

Helio

-

-

-

Future compute

Quantum Motion

Pre-revenue (<£1m)

5.0

2%

Intrinsic Semiconductor Technologies

Pre-revenue (<£1m)

3.5

2%

Lumai

Pre-revenue (<£1m)

1.3

1%

Oxford Quantum Circuits

-

-

-

Oxford Ionics

-

-

-

Other

Teya

Over £20m revenue

13.2

6%

Other (16 companies)

-

28.2

14%

Total

206.4

100%

Source: IP Group. Note: *IP Group invested £3m in DeepRender in H123.

We note that Featurespace, Teya and Garrison Technology already generate meaningful revenue in the tens of millions sterling and that, overall, around 90% of the deeptech portfolio is already recording revenue. Both Featurespace and Garrison (as well as Teya) target continued double-digit top-line growth. Ultraleap may also turn out to be a strong top-line performer (it is currently in the early revenue stage, ie £1–10m pa), but its revenue growth is dependent on a few large, potential royalty-generating contracts, which are yet to be signed. While the revenue traction across IP Group’s deeptech portfolio suggests a certain degree of maturity (and possibly improving realisation prospects), the private investors backing these companies may decide to hold on to their investments for longer to realise their full potential.

Both Featurespace and Ultraleap were valued by an external thirty-party valuer at end-June 2023 (using a revenue multiple and adjusted funding round method, respectively). Garrison Technology was valued based on its oversubscribed £15.5m funding round in H123, with new investors including Legal and General Ventures and British Patient Capital. IP Group did not recognise any fair value gains or losses on the holding in H123, suggesting that the valuation of the latest funding round was in line with its prior carrying value (which was based on a third-party valuation with reference to future market/commercial events). Below we discuss IP Group’s major holdings grouped by its key focus areas.

Applied AI

IP Group’s largest applied AI holding at present is its 20.4% stake in Featurespace (5.0% of IP Group’s total portfolio value at end-June 2023), a University of Cambridge spin-off founded in 2008, which deploys its proprietary machine learning algorithms (based on adaptive behavioural analytics) to monitor customer data for real-time fraud and financial crime detection. Some Featurespace clients that have implemented the company’s ARIC Risk Hub include HSBC, NatWest, Akbank and Danske Bank. Moreover, Featurespace is providing white-label solutions to payment providers (eg TSYS, Worldpay, Elavon).

In 2021, the company introduced its Automated Deep Behavioural Networks (using deep recurrent neural networks) for the card and payments industry. This allows for the identification of more subtle fraudulent behaviour patterns than what existing models have already been capturing. In a recent podcast, Featurespace’s director of innovation highlighted that he is excited about the applications of generative AI in transaction processing and fighting financial crime, given that these AI models are built to recover and simulate all the information available in a given dataset (as opposed to some other AI models that are focused on a particular outcome, eg fraud or credit default prediction). This full understanding of a dataset can then be used as deep embeddings for downstream models. A generative AI model also allows for the creation of ‘synthetic’ customer data (ie stripped of any privacy-related aspects), and therefore for the resolution of data portability issues, such as the inability to use data for testing, consortia or across different jurisdictions.

The company continues to significantly grow based on its value proposition illustrated, among other things, by the fact that recently NatWest has improved its scam detection rate by 135% using Featurespace’s technology. In this context, we also note that McKinsey highlighted in October 2022 that combining machine learning with other advanced algorithms is where banks can reap the most immediate and significant benefits in their anti-money laundering efforts. Featurespace’s five-year recurring revenue CAGR to 2021 was 74% (with 75% recurring revenue growth in 2021). The company continued growing at a double-digit percentage rate in both 2022 and H123.

IP Group gained exposure to Featurespace via the Touchstone Innovations acquisition in 2017 (with Featurespace’s end-2017 carrying value at £15.6m). Subsequently, IP Group invested £15.1m into Featurespace, with end-June 2023 fair value of its 20.4% stake reaching £64.1m. In November 2022, Featurespace secured funding from the UK and US governments (in the form of the privacy enhancing technologies Challenge Prize).

Other significant applied AI holdings include:

Diffblue: its team describes itself as ‘creators of the world’s first fully autonomous AI-for-code software’. The company leverages AI to automate, expand and accelerate Java unit testing to improve code quality.

DeepRender: a developer of next-generation, AI-powered image and video compression technology aimed at improving internet bandwidth. The company believes that it has developed a solution that offers an at least 80% improvement compared to traditional compression algorithms, which suffer from the following three limitations: 1) they are complex and hand designed, 2) they require specialised hardware, and 3) they are characterised by slow progress and growth in market penetration. DeepRender already has commercial engagement with several of the world’s top technology companies and IP Group has high hopes for rapid progress in that asset.

Navenio: a developer of an infrastructure-free, indoor location technology, which uses only the sensors of a smartphone for AI-powered motion tracking and task management to improve staff productivity in healthcare institutions (see an explainer video here).

Monolith.ai: offers an end-to-end, no-code, AI-powered cloud platform for the automotive, industrial and aerospace and defence sectors, which allows an engineer to solve difficult physics problems using in-house test data.

Boxarr: offers a software platform that enables people to collaboratively create, manage and evolve ‘digital twin’ models of complex systems, plans and organisations.

Next-generation networks

IP Group’s major next-gen network investment is its 23.6% stake is Garrison Technology (2.5% of IP Group’s total portfolio value at end-June 2023), a provider of a remote web browser and related hardware, allowing enterprises and government agencies to prevent local machines from accessing malicious data sources by keeping all activity in the cloud (by means of web isolation). Its solution is primarily aimed at protecting against ransomware and phishing attacks. In recent years, the company reported strong demand from government customers (especially in the UK and US), as well as solid growth across its key commercial accounts (eg Lloyds Banking Group). In its H123 report, IP Group highlighted the large and increasing presence of Garrison in the US.

As a result, Garrison’s revenues in the fiscal year to end-March 2023 reached around £20m after posting a four-year CAGR of 64% (including continued double-digit growth in the last financial year). IP Group expects the business to see further double-digit percentage growth in the current financial year. IP Group gained exposure to Garrison through the acquisition of Touchstone Innovations in 2017 (which backed Garrison’s seed round in 2015). Overall, IP Group has invested £13.8m in Garrison to date, with its end-June 2023 carrying value standing at 2.3x this amount.

Further major holdings in the next-gen network area include:

AccelerComm: a wireless communications company. Its modular channel coding solutions are aimed at halving the cost of spectrum and power in 5G networks by increasing throughput and reducing latency. According to the company, the technology is already being used by several of the world’s largest corporates, and AccelerComm continues to expand by partnering with companies such as Intel, AMD, Vodafone and Xilinx.

Quantum Dice: founded in April 2020 as an Oxford University spin-off, it develops encryption solutions in the form of trusted and secure randomness based on quantum optics.

Human-machine interface

IP Group’s holding in the human-machine interface domain that is particularly worth discussing is its 17.0% stake in Ultraleap (3.0% of IP Group’s end-June 2023 total portfolio value). The company was founded in 2013 and is one of the leading IP owners in spatial computing and natural user interface technology, with more than 420 patents (of which 75% have strong to very strong blocking components, according to the company). Ultraleap’s two complementary core technologies are hand tracking (where it believes it has built a comprehensive IP moat) and mid-air haptics (where it claims to have the only commercially available solution in the world).

Haptics may be defined as a technology that transmits tactile information via ultrasound waves using sensations such as vibration, touch and force feedback (‘feeling without touching’). The company’s hand tracking solution involves infrared LEDs and two cameras. The LEDs pulse in sync with the camera frame rate, allowing for significantly lower power use and increased intensity. In this way, Ultraleap's hand tracking software takes raw data on the position, orientation and velocity of the user’s hands and turns it into a real-time digital model. According to Ultraleap, this solution is superior in terms of providing the most consistent and reliable data compared to other sources of raw data (eg RGB camera, GPS, laser arrays or LiDAR). IP Group believes that, while there are competing hand tracking solutions, Ultraleap’s technology is considered ‘gold standard’ within the industry.

Ultraleap enables its customers to use these technologies in three core verticals: XR (extended reality, eg in VR headsets used for safety-critical flight attendant training), out of home (touchless interactions with screens/terminals, interactive touchpoints of a brand, museums and theme parks) and automotive (XR, back-seat digital screens and gesture control; see Exhibit 4).

Exhibit 4: Ultraleap’s technology use case in the automotive industry

Source: Ultraleap. Note: See also a 2018 study on the use of mid-air ultrasonic feedback to enhance automotive user interfaces.

Ultraleap licenses its technologies to key industry players via scalable B2B software-focused solutions. Existing clients that have bought and licensed its solutions include Acer, Autodesk, Qualcomm, Lego, PepsiCo, Skoda, Merlin Entertainments Group, Varjo and Warner Brothers. For instance, Varjo launched two of its latest headsets (Varjo XR-3 and Varjo-VR 3) with Ultraleap’s fifth-generation hand tracking integrated in them. Moreover, Ultraleap’s hand tracking technology is embedded within the Lynx R1 MR headset. Recently, the company launched the next generation of its hand tracking camera product, the Leap Motion Controller 2, which will be compatible with macOS, Android XR2 and Windows.

There are further holdings within IP Group’s portfolio providing exposure to the human-machine interface theme:

Slamcore: a developer of a technology that combines AI (deep learning) with consumer-grade cameras, sensors and processors to allow mapping and navigating for a wide range of autonomous machines and devices. Its algorithms allow robots from domestic vacuum cleaners to precision industrial autonomous vehicles to precisely map the physical environment around them and locate themselves accurately within those maps through what is known as simultaneous localisation and mapping (SLAM). The technology can also be used by producers of XR headsets that require mapping and location to accurately align virtual and physical worlds. Slamcore’s technology has already been used by technology companies such as Meta and Synaos.

Audioscenic: seeks to deliver a personalised, user-adaptive listening experience through a combination of proprietary loudspeaker array technology, head-tracking and AI capabilities. Its main areas of application include gaming, home entertainment, video calls, car audio and display/infotainment in public spaces. The first product containing Audioscenic’s technology was launched earlier this year at CES 2023 in Las Vegas through its partner Razer, a leader in gaming peripherals. According to the company, this next generation soundbar offers truly immersive, 3D audio from a small array of speakers positioned in front of the player and promises to revolutionise the gaming experience, picking up a dozen awards at the show.

Helio Display Materials: a developer of Perovskite-based light-emitting devices for next-gen displays.

Future compute

IP Group is also invested in quantum computing and other novel computing technologies. The future role of quantum computers is hardly deniable, with a high disruption potential across various sectors, including in particular finance, energy, materials, telecoms and healthcare/pharma. As highlighted in our recent short thematic piece, the quantum computing market size was about US$470m in 2021, with prospective growth to 2026 expected at 30% to more than US$1bn by 2026, and potentially exceeding US$125bn by 2030 (though most of the market revenue growth is projected to come from cloud access services to a quantum computer). IP Group is currently cautious in terms of committing new capital to quantum computing given the increasing hype around the theme.

IP Group holds a stake in Quantum Motion, a company developing fault tolerant quantum computing architectures that are compatible with standard silicon processing. In February 2023, the company raised more than £42m in its latest funding round, the largest ever single investment into a quantum computing start-up in the UK. The oversubscribed round was led by Bosch Ventures alongside Porsche SE and British Patient Capital. All the company’s existing investors (Inkef, IP Group, NSSIF, Octopus Ventures, Oxford Sciences Enterprises and Parkwalk Advisors) also participated. The company will use the funding to accelerate the development of its silicon-based approach to building a cost-effective and scalable quantum computer, especially by developing deeper ties with its manufacturing partners and expanding its central London headquarters.

Intrinsic Semiconductor Technologies developed an innovative approach to non-volatile memory using resistive random-access memory (RRAM), which can read data 10x to 100x faster and write it 1,000x faster than existing solutions. Importantly, it uses standard, frequently used materials (it is based on silicon oxide), as opposed to some other RRAM solutions. The company highlights that it can put efficient non-volatile memory directly on advanced processor chips, revolutionising next-generation microcontrollers and edge processors.

This is a high conviction asset for IP Group’s deeptech team, which believes the company has the potential to become the next unicorn as it seeks to disrupt the US$100bn+ FLASH memory market with its simple yet powerful technology, first created at University College London. IP Group notes that a company at only a slightly later stage of development, Weebit Nano, is listed in Australia with a current market cap of c £300m.

Lumai develops optically trained, photonic neural networks based on free space optics, which it claims has a near-term speed limit that is 100x faster than the human brain and 1,000x faster than traditional electronics. Lumai’s solutions are aimed at bypassing the Moore’s Law limitation and addressing the need for energy efficiency by moving from digital to analogue computation. IP Group’s deeptech team will be looking closely at the near-term growth of Lumai, given the massive interest it sees in the sector on the back of generative AI.

Exhibit 5: An introduction to Lumai

Source: Lumai

IP Group also holds a stake in Oxford Quantum Circuits, which owns the only quantum computer that is commercially available in the UK. The company’s computer is a complete functional unit, including the control system, the hardware and the software.

Other deeptech holdings

In the exhibit below, we present IP Group’s other deeptech holdings (excluding organic and de minimis investments).

Exhibit 6: Overview of IP Group’s other deeptech holdings

Company name

Description

Teya

Provider of payment processing, point-of-sale, cash advance funding and customer loyalty solutions for small businesses

Aqdot

Unique solutions for encapsulation based on cutting-edge research

Econic Technologies

Novel catalyst technologies to build carbon dioxide into polyurethanes and other polymers

Inductosense

Wireless, battery-free ultrasonic sensors that can be embedded or attached to a structure to conduct fast, reliable and low-cost inspections of cracks, defects or corrosion across a range of applications

Ionix

Developer of high temperature capable piezoelectric devices

Itaconix

Novel polymers from itaconic acid, eg environmentally sustainable detergent ingredients

Mirriad Advertising

An AIM-listed company (ticker: MIRI) that uses AI for native in-video advertising allowing post-production ad placement. Raised £6.3m through a placing and open offer in H123.

Salunda

Real-time monitoring of people and assets in harsh, dynamic environments

SAM Labs

Wireless, programmable construction kits for creative kids

Surrey NanoSystems

Provider of super-black coatings (Vantablack) used for space technology and astronomy, LED billboard display contrast improvement and automotive advanced driver assistance systems (ADAS) stray light control

Telectica

AI interpretation of the internet

Company name

Teya

Aqdot

Econic Technologies

Inductosense

Ionix

Itaconix

Mirriad Advertising

Salunda

SAM Labs

Surrey NanoSystems

Telectica

Description

Provider of payment processing, point-of-sale, cash advance funding and customer loyalty solutions for small businesses

Unique solutions for encapsulation based on cutting-edge research

Novel catalyst technologies to build carbon dioxide into polyurethanes and other polymers

Wireless, battery-free ultrasonic sensors that can be embedded or attached to a structure to conduct fast, reliable and low-cost inspections of cracks, defects or corrosion across a range of applications

Developer of high temperature capable piezoelectric devices

Novel polymers from itaconic acid, eg environmentally sustainable detergent ingredients

An AIM-listed company (ticker: MIRI) that uses AI for native in-video advertising allowing post-production ad placement. Raised £6.3m through a placing and open offer in H123.

Real-time monitoring of people and assets in harsh, dynamic environments

Wireless, programmable construction kits for creative kids

Provider of super-black coatings (Vantablack) used for space technology and astronomy, LED billboard display contrast improvement and automotive advanced driver assistance systems (ADAS) stray light control

AI interpretation of the internet

Source: IP Group

Exhibit 7: Financial summary

Year end 31 December

£m

FY17

FY18

FY19

FY20

FY21

FY22

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Portfolio returns

97.4

(46.1)

(44.6)

228.0

495.3

(309.1)

Fee income

6.1

9.9

8.6

6.2

13.6

7.1

Revenue

 

 

103.5

(36.2)

(36.0)

234.2

508.9

(302.0)

Cost of sales

-

-

-

-

-

-

Gross Profit

103.5

(36.2)

(36.0)

234.2

508.9

(302.0)

Carried interest charge

(1.3)

1.1

1.3

(14.3)

(17.2)

(12.0)

Operating costs

(37.6)

(51.7)

(39.4)

(29.4)

(33.1)

(27.4)

Investment and acquisition costs

(9.1)

-

-

-

-

-

Normalised operating profit

 

 

55.5

(86.8)

(74.1)

190.5

458.6

(341.4)

Exceptionals

-

(203.2)

-

-

-

-

Share-based payments

(2.4)

(1.9)

(2.3)

(2.9)

(2.6)

(2.9)

Reported operating profit

53.1

(291.9)

(76.4)

187.6

456.0

(344.3)

Net Interest

0.3

(1.8)

(2.4)

(1.5)

(1.4)

0.8

Profit Before Tax (norm)

 

 

55.8

(88.6)

(76.5)

189.0

457.2

-

Profit Before Tax (reported)

 

 

53.4

(293.7)

(78.8)

186.1

454.6

(340.6)

Reported tax

-

(0.1)

(0.1)

(0.7)

(5.3)

(1.0)

Profit After Tax (norm)

55.8

(88.6)

(76.6)

188.3

451.9

(339.6)

Profit After Tax (reported)

53.4

(293.8)

(78.9)

185.4

449.3

(344.5)

Minority interests

(3.7)

0.1

3.4

-

(1.1)

-

Net income (normalised)

52.1

(88.5)

(73.2)

188.3

450.8

(339.6)

Net income (reported)

49.7

(293.7)

(75.5)

185.4

448.2

(344.5)

Basic average number of shares outstanding (m)

704

1,059

1,059

1,062

1,060

1,034

EPS - basic normalised (p)

 

 

7.4

(8.4)

(6.9)

17.7

42.5

(32.8)

EPS - diluted normalised (p)

 

 

7.4

(8.4)

(6.9)

17.6

41.9

(32.8)

EPS - basic reported (p)

 

 

7.1

(27.7)

(7.1)

17.5

42.3

(33.3)

Dividend (p)

-

-

-

-

1.48

1.22

Revenue growth (%)

(135.0)

(0.6)

(750.6)

117.3

0.0

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

Normalised Operating Margin (%)

53.6

239.8

205.8

81.3

90.1

113.0

Net overheads (operating costs less fee income)/NAV (%)

(2.1)

(3.4)

(2.7)

(1.7)

(1.1)

(1.5)

BALANCE SHEET

Fixed Assets

 

 

1,325.1

1,147.7

1,068.5

1,186.1

1,539.5

1,266.2

Intangible Assets

212.7

0.7

0.4

0.4

0.4

0.4

Tangible Assets

1.6

1.5

1.1

0.8

0.3

0.4

Investments

1,099.8

1,128.2

1,045.6

1,162.7

1,445.9

1,165.8

Investments in Associates

11.0

17.3

21.4

22.2

92.9

99.6

Current Assets

 

 

334.6

225.6

227.2

289.2

339.8

291.6

Stocks

8.3

6.6

32.3

18.9

17.9

50.1

Cash & equivalents

231.3

129.0

121.9

127.6

105.7

88.7

Deposits

95.0

90.0

73.0

142.7

216.2

152.8

Current Liabilities

 

 

(26.0)

(31.9)

(41.4)

(26.4)

(34.1)

(23.2)

Creditors

(19.7)

(16.5)

(26.0)

(11.0)

(18.7)

(16.9)

Lease liabilities

-

-

-

-

-

-

Short term borrowings

(6.3)

(15.4)

(15.4)

(15.4)

(15.4)

(6.3)

Long Term Liabilities

 

 

(125.2)

(123.2)

(112.4)

(117.0)

(107.1)

(158.5)

EIB loans

(97.7)

(82.4)

(67.1)

(51.9)

(36.4)

(75.1)

Other borrowings

(13.1)

(23.0)

(26.0)

(32.9)

(18.7)

(19.5)

Lease liabilities

-

-

-

-

-

-

Other long term liabilities

(14.4)

(17.8)

(19.3)

(32.2)

(52.0)

(63.9)

Net Assets

 

 

1,508.5

1,218.2

1,141.9

1,331.9

1,738.1

1,376.1

Minority interests

4.0

3.9

0.5

0.5

(3.1)

(5.6)

Shareholders' equity

 

 

1,504.5

1,214.3

1,141.4

1,331.4

1,735.0

1,370.5

Hard NAV per share (p)

 

 

122.5

115.0

107.8

125.3

167.0

132.9

CASH FLOW

Op Cash Flow before WC and tax

60.3

(75.7)

(72.6)

191.9

460.2

(340.8)

Revaluation of investments held at fair value through P&L

(94.0)

46.1

44.6

(228.0)

(495.4)

309.1

Working capital

10.2

7.8

14.1

(5.9)

30.0

(3.5)

Exceptional & other

1.1

(3.1)

(3.4)

14.5

15.2

9.7

Net operating cash flow

 

 

(22.4)

(24.9)

(17.3)

(27.5)

10.0

(25.5)

Capex

(1.6)

(0.6)

(0.7)

-

(0.2)

(0.3)

Acquisitions/disposals

106.4

(4.8)

(9.3)

(4.5)

(10.1)

(4.6)

Equity financing

109.8

(100.9)

(63.0)

(68.6)

(131.6)

(97.4)

Dividends

-

-

-

-

(15.0)

(12.3)

Other

9.3

29.0

83.2

106.3

124.9

121.1

Net Cash Flow

201.5

(102.2)

(7.1)

5.7

(22.0)

(19.0)

Opening net debt/(cash)

 

 

(97.4)

(222.3)

(121.2)

(112.4)

(203.0)

(270.1)

FX

0.2

(0.1)

0.0

0.0

0.1

0.0

Other non-cash movements

(76.8)

1.2

(1.7)

84.9

89.0

(91.0)

Closing net debt/(cash)

 

 

(222.3)

(121.2)

(112.4)

(203.0)

(270.1)

(160.1)

Source: IP Group accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by IP Group and prepared and issued by Edison, in consideration of a fee payable by IP Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by IP Group and prepared and issued by Edison, in consideration of a fee payable by IP Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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