Molten Ventures — Forward Partners deal completed

Molten Ventures (LSE: GROW)

Last close As at 19/06/2024

GBP4.11

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Market capitalisation

GBP777m

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Research: Financials

Molten Ventures — Forward Partners deal completed

Molten Ventures has recently completed the acquisition of Forward Partners, which allowed Molten to further broaden its portfolio, add a complementary strategy focused on earlier stage companies and potentially provide a pipeline of new core holdings. Furthermore, its recent equity raise gave Molten the funds to pursue new investments in what it currently considers a buyer’s market, with an emphasis on the venture capital (VC) secondary market. In FY24 (to end-March 2024), Molten’s gross portfolio value remained broadly stable on a like-for-like basis (ie excluding the Forward Partners deal and the Seedcamp Fund III secondary investment). Management sees good prospects for realisations in FY25.

Milosz Papst

Written by

Milosz Papst

Director, Financials

molten05

Financials

Molten Ventures

Forward Partners deal completed

Investment trusts
Listed venture capital

2 May 2024

Price

282.5p

Market cap

£534m

NAV*

£1,250m

NAV per share*

661p

Discount to NAV

57.3%

Yield

0.0%

Ordinary shares in issue

189m**

Code/ISIN

GROW

Primary exchange

LSE

AIC sector

N/A

Financial year-end

31 March

52-week high/low

311.8p

208.8p

NAV high/low

780p

661p

Net gearing**

5.7%

*Unaudited estimate as at end-March 2024

**As at end-September 2023

Fund objective

Molten Ventures is a London-based venture capital (VC) firm that invests in the European technology sector. It has a portfolio of 118 investee companies and includes a range of funds (seed, EIS and VCT) within the group, as well as its flagship balance sheet VC fund.

Bull points

Strong position in the European VC landscape coupled with extensive expertise.

Downside protection from deals structured through preference shares.

Wide discount to NAV may prove to be an attractive entry point.

Bear points

Uncertainty around early-stage valuations following the interest rate normalisation and macroeconomic headwinds.

Recent equity raise conducted at discount to NAV may dampen investor sentiment.

Continued low exit activity in the VC markets.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

Molten Ventures is a research client of Edison Investment Research Limited

Molten Ventures has recently completed the acquisition of Forward Partners, which allowed Molten to further broaden its portfolio, add a complementary strategy focused on earlier stage companies and potentially provide a pipeline of new core holdings. Furthermore, its recent equity raise gave Molten the funds to pursue new investments in what it currently considers a buyer’s market, with an emphasis on the venture capital (VC) secondary market. In FY24 (to end-March 2024), Molten’s gross portfolio value remained broadly stable on a like-for-like basis (ie excluding the Forward Partners deal and the Seedcamp Fund III secondary investment). Management sees good prospects for realisations in FY25.

EdisonTV interview with Martin Davis (CEO)

Source: Edison Investment Research

European VC an attractive way to gain tech exposure

Despite the recent weakness in deal activity, European VC offers an expanding pool of opportunities, with deal values growing by 24% pa in 2018–22 (vs 11% for US VC) before declining by 46% in 2023, according to PitchBook data. The long-term growth of the European VC market makes it a compelling route to gaining exposure to the European tech sector, especially given the limited options in European public markets (eg in software-as-a-service), companies staying private for longer and superior historical VC returns versus public markets. PitchBook highlights that the improved regulatory framework for startups has assisted deal activity and capital inflows from outside Europe. That said, average European VC valuations are still below the US market, offering greater value discovery potential.

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 acquisition expands its portfolio into further tech subsectors. Molten’s liquid resources (cash and undrawn credit facility) of £117m at end-March 2024 represent a good balance sheet headroom for new and follow-on investments. Even after accounting for the NAV dilution from the equity raise, Molten’s shares now trade at a discount of c 57% to the end-FY24 NAV estimate of 661p per share.

Acquisition of Forward Partners

Molten recently completed an all-share offer for the issued and to be issued share capital of Forward Partners, a listed VC investment company focused on early-stage tech businesses active in areas such as applied AI, digital marketplaces and eCommerce, among others (see Exhibit 1). Forward Partners held a well-diversified portfolio of 43 active holdings valued at £76.9m at end-June 2023, with the top 15 holdings making up 77.2% of its portfolio value, and well-balanced across Seed, Series A and Series B+ stages.

Molten’s management highlighted that it sees several high-quality assets in Forward Partners’ portfolio, which may continue outgrowing their respective markets to become market leaders in attractive niches. As a result, Molten believes these assets have the potential to enter its core portfolio in the medium term. These include applied AI businesses such as Robin, OutThink and Apexx, as well as other businesses that have already delivered considerable progress, such as the provider of 3D design software Gravity Sketch and the real-time experience platform Ably, see Exhibit 2. Forward Partners’ top 15 holdings delivered a 12-month weighted average revenue growth in H123 of 133% (144% in 2022).

Exhibit 1: Forward Partners’ portfolio split by sector at end-June 2023

Source: Forward Partners

Exhibit 2: Forward Partners top 15 holdings at end-June 2023

Portfolio company

Sector

Fair value (£m)

MOIC*

Ownership

Gravity Sketch

Other tech – 3D design software

9.8

5.1x

11–15%

Robin

Applied AI – legaltech

8.2

4.9x

16–25%

Spoke

E–commerce (D2C)

5.8

2.3x

11–15%

OutThink

Applied AI – cybersecurity

5.3

3.4x

16–25%

Ably

Other tech – real-time experience platform

4.5

2.6x

6–10%

Makers

Marketplace – software training

3.7

2.5x

>25%

Apexx

Applied AI – payments platform

3.4

1.5x

6–10%

Juno

Applied AI – legaltech

2.9

1.2x

16–25%

Snaptrip

Marketplace – UK cottage holidays

2.6

4.2x

16–25%

Breedr

Marketplace – livestock

2.3

1.6x

11–15%

KoruKids

Marketplace – childcare

2.3

1.1x

6–10%

Counting Up

Othet tech – SME banking app

2.2

2.1x

6–10%

Up Learn

Applied AI – smart learning platform

2.2

1.8x

11–15%

SpotQA_Virtuoso

Applied AI – software testing

2.2

1.7x

16–25%

Plyable

Other tech – precision moulding

2.0

1.8x

16–25%

Remaining portfolio

-

17.5

-

-

Total portfolio value

-

76.9

-

-

Source: Forward Partners. Note: *Multiple of invested capital defined as fair value at end-June 2023 divided by invested amount.

Forward Partners: Complementary to Molten’s core strategy

Importantly, Forward Partners’ focus on early-stage investments (it initially invests between c £200k and £2m at pre-seed and seed stage) complements Molten’s core strategy, its ‘sweet spot’ being post-A series, in particular series B and C investments (see Exhibit 3). Therefore, it provides a broader pipeline of early-stage assets for follow-on investments, on top of Molten’s seed fund-of-fund programme and the Earlybird partnership. From Forward Partners’ perspective, the transaction (together with Molten’s recent equity raise, see below) will provide further capital support to its portfolio companies. It is worth noting that Molten has been a shareholder of Forward Partners since its IPO (holding a c 1.5% stake in the business before the acquisition) and that Forward Partners’ CEO and founder (Nic Brisbourne) was previously a partner at Molten. Molten’s management believes that the latter resulted in the similar investment processes of both entities, which should facilitate the business combination process. Moreover, Forward Partners was in the past part of Molten’s seed fund-of-fund programme, and therefore Molten’s management is familiar with the former’s portfolio holdings.

Exhibit 3: Overview of investment vehicles within the Molten group

Source: Molten Ventures

Exchange ratio accounting for wide discounts on both sides

Shareholders of Forward Partners were offered one Molten share in exchange for every nine Forward Partners shares. Based on Molten’s closing price on 24 November 2023, this translated into 31.1p per Forward Partners share, a 6.6% premium to the three-month volume-weighted average price. Both Molten Ventures and Forward Partners were trading at significant discounts to the last reported NAV of 62% and 50% respectively at 24 November. Forward Partners’ NAV per share declined from 104p at end-December 2021 to 67.0p at end-June 2023 (though we note that it had gone up significantly in 2021 from 83.3p at end-December 2020 on a pro forma basis). Following the successful offer, and after reflecting Molten’s equity fund-raise in December 2023, the pro forma ownership of the enlarged group is as follows: earlier Molten shareholders (81%), investors participating in the recent equity raise (11.2%) and former shareholders of Forward Partners (7.8%).

Holding-level liquidity bolstered by recent equity raise

Improved firepower for new investments from equity raise

In December, Molten completed an institutional placing via an accelerated book build, raising c £55.4m (net of fees) to bolster its firepower for new follow-on direct investments and secondary investments. As part of this fund-raising, Molten received a £20.8m investment from BlackRock (previously a c 70% shareholder of Forward Partners), as well as £10m from British Patient Capital. The institutional placing was accompanied by a £2.4m retail offering via PrimaryBid and an offer of up to 1,401,843 shares made available to the Forward Partners’ shareholders unable to participate in the placing. The combined institutional and retail fund-raising represent c 13.9% of Molten’s previous issued share capital. As a result of the equity raise and business combination with Forward Partners, Molten’s total liquidity (including cash and undrawn credit facility) reached £117m at end-March 2024, or c 8.5% of gross portfolio value. A further £66m is available for investment within Molten’s EIS/VCTs.

Ready to exploit buying opportunities in the softer VC markets

We note that the equity issue was conducted at price of 270.0p, which was a minor 3% discount to the closing price at the time of the announcement on 24 November, but a significant 63% discount to Molten’s then last reported NAV at end-September 2023 of 735p. We calculate that this resulted in a c 7.7% dilution of end-September 2023 NAV. That said, Molten’s management believes that a share issue at a discount to NAV is now justified as it seeks to seize attractive new investment opportunities (especially in secondary markets), which may only be available for a certain time (as Molten’s management already sees some signs of stabilisation in VC valuations).

Between its IPO in 2016 and end-2023, Molten has completed three major secondary transactions (Seedcamp, Earlybird and Earlybird Digital East) for £90m in aggregate at an average 19% discount to NAV, realising a 2.5x total return (defined as total value to paid-in capital, TVPI). Molten’s management believes its team has a good ability to convert these returns into cash (see the distributed to paid-in capital ratio in the Exhibit 4). While the discount to NAV at which Molten issued shares is much wider than the average discount at which it was historically able to acquire assets in the secondary market, we note that the current particularly tough environment for VC deals (see below) may potentially offer more attractive opportunities than in previous years. In 2023, the average discount in the VC secondaries market in 2023 was 32%, according to Jefferies. We note that the net asset values to which this discount was applied may have already seen meaningful downward adjustment since the 2021 peak. Molten will still have to be very disciplined in selecting these new investments to offset the dilutive impact of the share issue and deliver on its recently reiterated fair value growth target of 20% through the cycle.

In February 2024, the company announced the acquisition of a 19% secondary position in Seedcamp Fund III for €8.5m. This is a 2016 vintage fund with more than 80% of value held in six mature assets: the neobank Revolut (which Molten already has in its direct portfolio); Pleo (enterprise software); Grover (technology rental); WeFox (Insurtech); Thriva (healthcare tech); and Curve (payments technology). Molten did not disclose the discount/premium to NAV at which it acquired the secondary position.

Exhibit 4: Molten’s secondary investments track record

 

3i*

Seedcamp

Earlybird

Earlybird Digital East

Total post-IPO track record

Transaction date

Sep-09

Nov-17

Feb-19

Feb-19

-

Number of assets

23

41

10

11

62

Cash price (£m)

70

18

55

17

90

Discount to NAV

20%

27%

20%

5%

19%

Distributions (£m)

126

36

99

74

210

Total return (TVPI)**

1.5x

2.0x

2.0x

4.7x

2.5x

Cash return (DPI)***

1.5x

2.0x

1.8x

4.3x

2.3x

Source: Molten Ventures. Note: *Secondary investment completed before Molten’s IPO, **total value to paid-in capital ratio, ***distributed to paid-in capital ratio.

Solid cash runway across most of Molten’s portfolio

Some of the newly raised capital may be spent on follow-on investments in the enlarged portfolio (ie after the acquisition of Forward Partners). In this context, we note that at end-March 2024, over 90% of Molten’s core portfolio (representing c 62% of its gross portfolio value at end-September 2023, last reported data) has a cash runway of more than 12 months, and over 50% of the core portfolio had a cash runway of more than 24 months (based on existing budgets). Molten’s management earlier reaffirmed during its investor webinar in March 2024 that it is on track to be below the £20m of funding requirements across its portfolio for FY24. We also note that more than 70% of Forward Partners’ top 15 holdings had a cash runway of at least 18 months at end-June 2023 or were funded through to profitability, according to Forward Partners’ management as at 21 September 2023. This may allow Molten to focus more on follow-on investments to fuel further growth of its most promising businesses rather than topping up companies that have run out of cash. Molten may also carry out selective new investments in early-stage companies by capitalising Forward Partners’ investment strategy and expertise.

Continued rebound in M&A/IPO deal activity may support VC

Last year, deteriorating macroeconomic conditions, along with a de-rating of public equity markets and a normalisation of monetary policy after the ultra-low interest rate environment of previous years, have had an impact on both deal volumes and valuations in the VC market, given that VC-backed companies are long-duration assets and therefore more sensitive to a changing rate environment. As a result, VC markets were soft, with longer due diligence processes extending deal timelines (with time needed to complete a fund-raise now being around 3–6 months) and limiting exit activity. Because of this, Molten’s management has been initiating discussions around the next funding rounds of its portfolio companies earlier than in previous years.

European VC deal value declined sharply by c 46% y-o-y to €57.1bn in 2023 (with venture growth hit the hardest). That said, it is still higher than the levels seen before the exceptionally strong 2021/22 period (see Exhibit 5). European VC fund-raising stood at €17.2bn in 2023 compared to €28.2bn in 2022. PitchBook highlights that 2023 was the worst year in terms of European VC exits since 2013, with an exit value of just €11.8bn compared to €40.4bn in 2022 (see Exhibit 6). That said, we note some tentative signs of revival in the IPO markets (as illustrated by the listings of Arm, Reddit, Klaviyo and Instacart) as well as in private M&A markets. Reuters recently indicated that, 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. The recovery is assisted by stabilising interest rates and improving equity markets. Molten’s CEO also noted corporates’ emphasis on tech expenditures (eg on cybersecurity, operational efficiencies and supply chain innovation) as a potential tailwind going forward.

Moreover, recent fund-raising volumes, coupled with cautious capital deployment in 2023, left VC funds with a significant amount of dry powder (c €45bn as indicated by PitchBook in its 2023 European Private Capital Outlook: H1 follow-up report), which may support deal activity in 2024. Molten’s management highlighted in the FY24 trading update that FY25 is showing promise of delivering a more normalised level of realisations and expects divestment proceeds to be meaningfully higher than in the last two financial years. On 29 April, NASDAQ-listed Hologic announced it has signed a definitive agreement to acquire Endomag, one of Molten’s core portfolio holdings.

Exhibit 5: European VC deal value and count

Exhibit 6: European VC exit value

Source: PitchBook. Note: *Data as at 31 December 2023.

Source: PitchBook. Note: *Data as at 31 December 2023.

Exhibit 5: European VC deal value and count

Source: PitchBook. Note: *Data as at 31 December 2023.

Exhibit 6: European VC exit value

Source: PitchBook. Note: *Data as at 31 December 2023.

Given the weak exit environment and limited holding-level liquid resources before the fundraise, Molten focused on cash preservation and remained cautious in terms of new investments in the last financial year, with £17m deployed in H124 to end-September 2023 (below its £33m realisations in the period), with a further £35m invested by its managed EIS and VCT co-investment funds. Only £4m was invested in five new (£2m) and seven follow-on (£2m) investments in H124, with the remaining £13m deployed through fund of funds (£8m) and Earlybird (£5m). Molten also committed to four new seed funds via its fund-of-funds programme, bringing the overall fund-of-funds portfolio to 79 funds. Together with the acquisition of Forward Partners (£25m net of cash acquired) and the £8.5m secondary purchase of a position in Seedcamp Fund III (see below), Molten’s total FY24 investments stood at c £65m. A further £37m was invested in FY24 by the Molten-managed EIS and VCT co-investment strategies. In 2023, Molten launched its Irish fund, grew its VCT/EIS, and completed the first syndication of its fund-of-funds programme. Future third-party capital initiatives include an Eastern European fund, a climate fund and a secondary fund.

The FY24 investments compare with £39m of total cash proceeds from realisations in FY24, of which £33m in H124. The latter included £17m from the sale of direct investments, including the final exit from Trustpilot, which resulted in total realisation proceeds of £121m. A further £16m was realised from Earlybird and fund-of-funds. We understand that the H124 realisations also included c £13m proceeds from a secondary sale of 10% of Molten’s Earlybird Fund VI investment, as announced earlier.

Underlying gross portfolio value stable ex-FX in FY24

Molten’s gross portfolio value (based on unaudited figures) reached £1,377m at end-March 2024 (vs £1,299m at end-March 2023), with the increase mostly driven by the Forward Partners acquisition and the Seedcamp Fund III secondary investment. Excluding the impact of these two transactions, Molten’s gross portfolio value remained broadly stable at constant currency in FY24 after rebounding from the H124 decline of 3.7%. Molten recognised a £24m negative fx impact from the weakening US dollar and euro during FY24. Molten reported a preliminary NAV per share of 661p at end-March 2024, which represents a c 15.3% decline from the end of March 2023 and includes the dilutive impact from Molten’s recent share issue.

Meanwhile, Molten’s portfolio performance remains resilient according to the management, with a good balance between growth (even if at a slower pace) and capital efficiency (with very limited exceptions). The value-weighted average revenue growth across Molten’s core portfolio in the calendar year 2023 reached 63% (above previous management guidance of 57%). At the time of the H124 results, Molten’s management expected the average revenue growth in 2024 to reach 50%.

Exhibit 7: Molten’s historical NAV per share TR in sterling terms

Source: Molten Ventures, Edison Investment Research. Note: *Since IPO in June 2016.

Valuations: Most funding rounds are still up rounds

We acknowledge that a persistent weak macroeconomic environment may put further pressure on the valuations of VC-backed companies as they approach the end of their cash runway and must return to the market for fresh funding during a less favourable market environment. This is illustrated by the pick-up in the share of down rounds in 2023 to 21% compared to 14% in 2022. This is still below the 26% seen in 2013 and 2014, and Molten’s CEO acknowledged that we may have not reached the bottom of the current cycle yet.

Exhibit 8: Share of European VC deal count by up/flat/down rounds

Source: PitchBook

That said, in the 12 months to end-September 2023 (last available data), Molten’s portfolio companies raised £467m of capital (vs £2bn in the 12 months to end-September 2022), with over 85% of the funding rounds being flat or up rounds. Moreover, we note that Molten adopts a relatively conservative approach to portfolio valuation. Around 45% of its total portfolio at end-September 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. 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 33% to 73% of its holdings valued based on the calibrated last funding round (vs 65% and 35% at end-March 2023 and 83% and 27% at end-September 2022, respectively; see Exhibits 9 and 10). Another 38% of the portfolio was valued using market comparables (up from 34% at end-March 2023 and 27% at end-September 2022), at a weighted average multiple of 7.4x versus 8.4x at end-March 2023 and 7.2x at end-September 2022.

In the context of Molten’s valuations, it is worth noting that, following the completion of the recently announced business combination of Vivup and Perkbox, Molten will exit its investment in the latter (which is a holding outside of its core portfolio) at a valuation modestly above its last carrying value. Furthermore, the recently announced Endomag deal (see above) also values the business at a modest uplift to its £35m carrying value.

Exhibit 9: Molten’s portfolio by valuation method at end-September 2023

Exhibit 10: Discount applied to last funding round valuations at end-September 2023

Source: Molten Ventures

Source: Molten Ventures

Exhibit 9: Molten’s portfolio by valuation method at end-September 2023

Source: Molten Ventures

Exhibit 10: Discount applied to last funding round valuations at end-September 2023

Source: Molten Ventures

Multiple layers of fair values validation

During the recent capital markets day (CMD), Molten’s CFO summarised the company’s approach to portfolio valuations (see video below). Molten’s valuation process is carried out every six months by the finance team, based on inputs from the investment team; each one is subject to review by an external auditor (PwC) and the audit risk and valuation committee of Molten’s independent board. A further review is conducted by independent valuation specialists dependent on corporate activity. For instance, providers of Molten’s debt facility (JPMorgan and HSBC) have the right to request a validatory check by a third-party valuer. Moreover, Rule 29 of the UK Takeover Code requires an external valuation review (independent from Molten’s auditor), which for the purpose of the currently ongoing Forward Partners deal was carried out by Deloitte. Molten’s CFO also highlighted the downside protection achieved by investing via preference shares (97% of Molten’s portfolio at end-September 2023) and the fact that Molten normally has a seat on the investee’s boards.

It is also worth noting that 97% of Molten’s investments at end-September 2023 were structured via preference shares and therefore include downside protections such as liquidation preferences (c 46% of its portfolio by fair value at end-September 2023 was valued at levels triggering the preference stack protection). Based on our discussion with Molten’s management, we understand that around 75% of Forward Partners’ current investments also has some form of downside protection.

Appendix

At its recent CMD, Molten Ventures highlighted the emphasis it puts on helping its portfolio companies to continue innovating while preserving cash. It also helps them shape their fundamentals to allow them to raise new capital at least at previous funding round valuation. Below we included the recordings of Molten’s CMD presentations covering a corporate update, valuations and AI.

Exhibit 11: Company update presentation by CEO Martin Davis

Source: Molten Ventures 2024 capital markets day

Exhibit 12: Valuations presentation by Ben Wilkinson

Source: Molten Ventures 2024 capital markets day

Exhibit 13: AI presentation by Nicola McClafferty

Source: Molten Ventures 2024 capital markets day

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20 Red Lion Street

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United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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