IP Group — International investor in impactful innovation

IP Group creates businesses predominantly based on research from universities, research centres and other networks, helping to create, build and support IP-based companies. Since it was launched in the UK, IP Group’s model has evolved to become international, with investment platforms in Australia, New Zealand, the United States and China, with a particular focus on investment in impact and innovation. IP Group invests thematically, primarily in the life sciences, deep tech and renewable sectors, but is increasingly focused on companies with products and services that meaningfully contribute to a sustainable, healthier and tech-enriched future.

IP Group offers liquid public market exposure to impactful private technology and life sciences companies from across the English-speaking world. Its university and investment networks are international, with a deep thematic focus on building market-leading global companies, with the potential to scale above US$1bn in value. The group’s permanent balance sheet capital provides the flexibility to build companies from inception to scale that a traditional fixed fund life GP/LP structure typically lacks, whilst allowing the group to retain influential shareholdings. IP Group has refocused its capital allocation policy to drive returns from its priority companies. The group has delivered a gross internal rate of return (IRR) of 14% since its inception in 2001 to FY21, with management targeting an average gross annual return of 20% over the next five years.

Having taken 15 years to reach maturity, since FY19 IP Group has shown a growing track record of successful exits, having deployed a total of £291m of capital and realised £486m of investments. The group remains well-capitalised, with gross cash falling to £236m at 30 June 2022 (subsequently supplemented by the £105m debt placing) after £52m of capital was deployed in H122. Realisations in FY21 included Oxford Nanopore (initial public offering (IPO)), Inivata, Wave Optics, Hinge Health and Inflowmatix. In H122, despite the increase in the value of First Light Fusion, NAV per share fell by 18% from 167p at 31 December 2021 to 137p at 30 June 2022, largely due to the impact of Oxford Nanopore, whose share price fell from 697p at 31 December 2021 to 276p at 30 June 2022.

As a people-based business, IP Group remains reliant on its senior leadership team (the majority of whom have been with IP Group for over 10 years), its university, research centre and related networks of relationships, as well as its broader team’s market reputation to identify valuable intellectual property (IP) and support the best entrepreneurs to build the next generation of market-leading companies. With a mature portfolio, the company relies on regular realisations to support reinvestment. Realisations are subject to market cycles, the valuations of quoted peers and investor appetite to continue to invest in science-based companies at IPO or by way of a trade sale.

IP Group offers a mature portfolio of late-stage investments and a track record of realisations that has delivered 24% FY19–21 NAV/share growth, as well as a growing third-party fund management business. The current c 50% discount to NAV suggests that investors are still looking backwards to the group’s longer-term track record before the portfolio matured, which has been solid but not spectacular. As the share price recovers, underpinned by a strong investment performance, we would expect this discount to narrow, further lifting investment returns. In the current environment, the group’s strong balance sheet, its mature portfolio of resilient IP-based B2B companies and clear focus on impact investment provides a differentiated proposition. and represents a compelling opportunity for long-term and impact investors. By our calculation, the market is pricing IP Group’s portfolio (ex ONT) at c 29p per share, a 70% discount to its current carrying value.

IP Group’s story began with the signing of a 15-year exclusive agreement between IP2IPO Limited (now a subsidiary of IP Group) and the University of Oxford’s Department of Chemistry in December 2000.

IP Group itself was formed in April 2001 as a subsidiary of UK investment bank Beeson Gregory, with the first spin-outs from Oxford University in 2001. The group listed on AIM in October 2003 and moved to the Official List in June 2006 and is now a constituent of the FTSE 250. IP Group has also completed a number of acquisitions, including Techtran in 2005 (securing rights to University of Leeds IP), Fusion IP in 2014 (broadening the group’s portfolio and securing IP rights from four partner universities) and Parkwalk Advisors (strengthening the group’s third-party fund management offering) and Touchstone Innovations in 2017 (broadening IP Group’s portfolio and securing the rights to Imperial College IP). IP Group employed 104 people on average in FY21.

A more detailed history of the group’s major milestones can be found on IP Group’s website.

IP Group is an investment company initially founded to commercialise ideas from UK universities into businesses, by helping to create, build and support IP-based companies. Early-stage IP-based companies have typically taken 10–15 years to commercialise and mature, so that, despite the age of the business, the maturity of the portfolio has only shown through over the last few years.

Historically, IP Group had exclusive rights to IP spin-outs from 14 UK universities, but those rights have now largely expired (Parkwalk Advisors retains exclusive relationships with Oxford, Cambridge, Bristol and Imperial for their alumni funds). However, the duration and depth of the group’s relationships mean that it remains well-placed to secure preferential rights even without contractual exclusivity. IP Group typically makes five to fifteen new investments each year (FY21: 8, H122: 7).

Since launch, IP Group’s model has evolved to become international, with investment platforms based on university ecosystems in Australia, New Zealand, the United States as well as a China-based fund soon to be launched, with a particular focus on investment in impact and innovation. IP Group invests thematically, primarily in the life sciences, deep tech and renewable sectors but is increasingly focused on companies with products and services that meaningfully contribute to a sustainable, healthier and tech-enriched future.

IP Group acquired Touchstone Innovations in 2017 in a share for share merger, whereby Touchstone shareholders received c 34% of the enlarged group, valuing the acquisition at £500.5m. Certain portfolio company valuations were subsequently written down. However, as at FY21 year end, investments that came through Touchstone represented 50% of the group’s top 20 investments, though only one of IP Group’s top five holdings (Featurespace).

As can be seen in Exhibit 3, IP Group’s five-year NAV per share track record was disrupted by asset write-downs following the Touchstone acquisition and related £207m placing, contributing to falls in NAV per share in each of 2018 (8% fall) and 2019 (6% fall). NAV/share has subsequently resumed growth in FY20 and FY21, with average growth for FY19–21 of 24%. Reflecting market falls in H122, particularly affecting the value of Oxford Nanopore, the latest H122 NAV/share of 137p represents an 18% reduction from the FY21 year-end figure of 167p.

The most important event for IP Group in 2021 was the IPO of Oxford Nanopore. IP Group was a founding shareholder of Oxford Nanopore in 2005 and held a 14.4% stake in the company in the run up to its IPO, with a carrying value of £359m as at 30 June 2021, ahead of the flotation. Oracle Corporation became a cornerstone investor for the IPO, committing £150m, with the IPO successfully launched on 30 September 2021 at 425p per share (a market cap of £3.5bn). IP Group realised £84m through selling down shares at IPO, but retained 82m shares or 10% of the company. The shares traded up to 613p (£5.05bn) on the first day of trading and were valued at 698p (£572m) as at 31 December 2021), but since then have fallen back, and currently trade at 287p (£2.37bn), over 30% below the IPO price. As at 30 June 2022, IP Group’s holding in Oxford Nanopore was valued at £226m, or 22p per share, representing 17% of NAV, down from 33% at 31 December 2021.

Greg Smith was appointed CEO in FY21, taking over from Alan Aubrey. Greg had previously been group CFO for 10 years, with shareholders supporting an evolutionary rather than a revolutionary strategy for the next phase of IP Group’s growth.

The group’s emerging strategy is very much to continue what it does well, investing in early-stage science-based businesses out of ecosystems based around university, research centre and other networks, but also to refocus on impact. Impact has always been at the heart of IP Group’s model, but this is now set out more clearly with the group’s evolving purpose to contribute to a better future through the impact of science and technology-based businesses.

To support these goals, on 22 June 2022, IP Group announced that it had rebranded its cleantech business as Kiko Ventures. IP Group plans to invest approximately £200m through the Kiko Ventures platform over the next five years, into both new and existing cleantech companies.

The group is increasingly focusing on its priority list, which it believes it can build into companies worth more than US$1bn within the next three to five years. Management has identified a number of these investee companies, in addition to the three unicorns already created (Oxford Nanopore, Ceres Power and Hinge Health) and its ambition is to grow and support another five businesses to values in excess of US$1bn, with at least one worth more than US$10bn within the next five years, through the increased allocation of resources and capital to these opportunities to accelerate their development.

Management believes that this change of strategy will help IP Group deliver gross returns of more than 20% over the next five years as its priority companies accelerate.

IP Group has invested in c 400 companies over its lifetime. Following exits and attrition, the UK portfolio includes 164 companies (including its ‘de minimis’ holdings), together with 14 holdings through its Australia and New Zealand platform. The 29 companies in its US portfolio are no longer included in IP Group’s reporting, having been deconsolidated in the FY21 accounts.

IP Group sub-divides its portfolio based on size of holding (as at 30 June 2022):

Management has also recently identified a subset of investments considered priority holdings:

We provide a breakdown of IP Group’s portfolio in Exhibit 6. As well as direct equity investments, the total portfolio includes direct debt investments and includes IP Group’s interests in its limited partnership (LP) funds, most significantly the US platform.

Together the top 20 holdings represent 61% of H122 net assets, and including the focus portfolio (top 52) represent 75% of H122 NAV. As mentioned earlier, by virtue of its long-term investment model where start-ups take a number of years to mature and achieve commerciality, IP Group retains a long tail of smaller holdings, but in general IP Group management spends limited time on these smaller holdings, concentrating on the focus portfolio and other priority assets.

The impact of the Touchstone acquisition can be seen in FY17, with NAV rising 88% to £1.33bn, but NAV per share holding steady at 125p. The impact of the acquisition continued to be felt in FY18 and FY19, with portfolio fair value and NAV falling over those two years as IP Group integrated the two portfolios and revalued certain investments. FY19 was the year that IP Group’s portfolio reached maturity, the first year when realisations exceeded investment, with net realisations of just over 1% of initial portfolio fair value. This trend has continued into FY20 and FY21, with net realisations of 12% and 9%, respectively, contributing to gross portfolio returns of 25% and 36%.

IP Group has delivered a gross IRR over its 20-year life to FY21 of over 14% and a five-year NAV CAGR FY16–21 of 20%, but a corresponding five-year NAV per share CAGR of only 6%, with the difference principally reflecting the share dilution from the Touchstone acquisition. More recently, the group has recorded a two-year NAV per share CAGR of 24% FY19–21, closely in line with NAV growth of 23% over the period.

IP Group builds deal flow through its network of relationships, its broader ecosystem and through the team’s reputation in the market. Its team of specialists has the experience and sector knowledge to dig deep in its due diligence to help identify good investments from attractive marketing. IP Group will only invest where it feels it has a competitive edge (such as strong relationships, better understanding of the science) and where management can leverage its broader ecosystem to add value to the potential investee company.

IP Group invests in the very earliest stage of spin-outs from universities, research centres and related networks, with a low level of initial investment, usually only a few hundred thousand pounds, often alongside university funds. From there, IP Group nurtures and supports the investment to refine the proposition and build a team to exploit the IP.

In very general terms, IP Group takes a large initial stake of up to 50% of the equity at the outset, with IP Group’s shareholding then steadily falling through subsequent funding rounds. IP Group is the largest shareholder in many of its companies, including Oxford Nanopore (10.0%), Featurespace (19.5%), Istesso (56.5%) and First Light Fusion (27.5%), with levels of dilution increasing as the company raises progressively larger rounds.

IP Group has typically committed up to £1–3m to an individual funding round. However, by exception the group has significantly exceeded this level, with investments into Oxford Nanopore of £18.7m in 2021 and £14m in 2016 as part of larger funding rounds. More recently, with the focus on its priority list, IP Group is concentrating its capital commitments and has invested £10m into Istesso and £9.5m into Bramble in H122. We expect this trend of larger commitments to priority assets to continue.

Over multiple rounds, IP Group’s commitments to an individual company can add up to over £20m (eg Featurespace, Ieso, Autifony, Diurnal, PsiOxus and Athenex). IP Group also provided almost £50m to Oxford Science Enterprises which it co-founded by way of a plc-level fund-raising (much of this investment has now been realised) and the group’s commitment to Oxford Nanopore reached over £74m in total, with realisations to date totalling £106m.

The group’s purpose is to generate capital appreciation in a liquid, quoted vehicle with dividends as a small but growing component of total shareholder returns. Management reserves a minority proportion of any cash realisation to supplement returns to shareholders through the most appropriate mechanism, including share buybacks. We estimate that total returns, including dividends, will represent approximately 20% of exits in a given year.

The group is primarily equity funded but also uses debt. In parallel with its H122 results, the group announced that it had agreed to issue £120m of long-dated private loan notes to London-based institutional investors at an average fixed rate of 5.25%. The loan notes will be used to repay £15m of the shorter-dated of the group’s European Investment Bank (EIB) debt, providing the group with additional liquidity of £105m and additional flexibility to manage the timing of realisations and exits. Management has stated that the group is unlikely ever to exceed 10% of gross assets (H122: £1.6bn) in debt.

IP Group’s capital allocation policy is intended to ensure that it allocates appropriate resources to its most promising investments, including its priority companies (those with the potential to become unicorns), which the group hopes to accelerate over the next three to five years, as well as its most disruptive start-ups.

Alongside attractive financial returns, IP Group also aims to provide impact. In this context, impact means investment in companies with products and services that meaningfully contribute to a sustainable, healthier and tech-enriched future.

Over the four years to 31 December 2021, IP Group committed £340m of capital to its portfolio companies, with funds managed by Parkwalk Advisors committing a further £40m – a total of £380m. Over this same period, IP Group’s portfolio raised over £4.6bn in capital, meaning that IP Group (including Parkwalk) committed only approximately 8% of overall capital, although this percentage is far higher for smaller, earlier-stage portfolio companies.

As can be seen in Exhibit 10, as the total capital raised annually has increased, IP Group’s proportion of overall investment has fallen from 17% in 2018 to 4% in 2021. The majority of this additional capital has come from strategic investors, EIS investors, universities and institutional investors.

IP Group’s ability to leverage third-party capital from its partners, co-investors and investor network to support its portfolio is a major strength of its model and a factor that undoubtedly attracts companies to IP Group.

As an early-stage investor, IP Group competes with a variety of other investors, ranging from local angel investors, seed funds, venture capital firms as well as special purpose permanent capital vehicles, including Oxford Science Enterprises (OSE) and Cambridge Innovation Capital (CIC), both of which it co-founded and in which it now holds minority stakes. Rather than competition, more accurately the relationship might be described as ‘co-opetition’, with funds often collaborating to co-invest in specific opportunities. As such, the list of co-investors in IP Group’s portfolio (Exhibit 11) includes many of the group’s closest competitors.

In the UK, as well as OSE and CIC, which both focus on a single university ecosystem, the closest businesses to IP Group might be Mercia Asset Management (MAM.L), a broad-based investor focused on UK regional investment (although of a smaller scale than IP Group), and Northern Gritstone, a private fund launched last year to provide a similar role to IP Group, but specifically working with universities in the Midlands and the north of England. We also understand that a similar fund based around the University of Birmingham may be in the offing.

IP Group’s scale and international footprint differentiate it as an early-stage investor, combining the expertise to identify promising IP, the support to develop that IP into a business and the funding and experience to develop that start-up into a market-leading commercial enterprise.

IP Group follows the International Private Equity and Venture Capital Valuation (IPEV) Guidelines, which set out best practice where private investments are reported at ‘fair value’. Its conclusions are then independently reviewed by its auditor, KPMG, with details of the review process set out on page 151 of IP Group’s FY21 report and accounts.

Management seeks to use observable market data as the primary basis for determining fair value, where appropriate. Other valuation methods include market-derived valuations adjusted to reflect considerations including technical, financial, market and sales measures; discounted cash flows; and price-earnings multiples. Management also uses third-party independent valuation specialists as part of the valuation process, which provide a broader market perspective and independent challenge to support carrying values.

Typically, where a funding round has been completed in the last 12 months, management uses this as the carrying value, but where there has been third-party funding invested and a material change of circumstances, or the last funding round is more than 12 months old, management applies a multiples-based valuation. Updating the valuation from the basis of historical funding rounds offers a more up-to-date view of fair value, but still leaves NAV as a significantly trailing indicator for a high-growth portfolio. IP Group’s overall valuation approach for its unquoted portfolio was assessed as ‘mildly cautious’ by KPMG for both FY20 and FY21.

The overall prudence of management’s valuation approach can be assessed through whether the group makes realised gains on disposal. IP Group’s conservative carrying values are validated by recent data showing that realisations in each of FY20 (£191m) and FY21 (£213m) were 77% and 62% higher than the respective carrying values of those assets in the prior year.

Of IP Group’s top 20 holdings, representing 61% of H122 NAV, the vast majority (16 of 20 by number and 90% by value) are valued either based on a recent funding round or their quoted share price. Only one (Istesso) is valued based on a DCF approach, with Garrison Technology valued based on a revenue multiple and the two remaining holdings (Hysata and OSE) valued based on the anticipated (impending) rounds, both of which have subsequently been announced.

IP Group invests across three principal sectors, life sciences, deep tech and cleantech. Following the acquisition of Touchstone in 2017, which significantly boosted the life sciences portfolio, IP Group remains life sciences led. As can be seen in Exhibit 13, life sciences remains the largest sector by value, even when the strategic segment (principally Oxford Nanopore) is broken out separately.

IP Group’s life sciences, deep tech and cleantech segments all share common characteristics that differentiate them from more general investment sectors. Each sector takes scientific knowledge with the potential to solve or address a challenge, supports and commercialises it to create a healthier future, improve lifestyles with breakthrough technologies or address climate challenges.

Thematically, the life sciences team invests in understanding disease, focusing on disease cure and prevention rather than simply treating symptoms, thereby helping to create healthier, rather than just longer, lives.

Companies that exemplify this approach are Istesso (reprogramming cells to treat autoimmunity), PsiOxus (reconditioning tumours to enhance cancer immunotherapy) and Genomics (redirecting patient behaviour to mitigate the risk of, for example, cardiovascular disease).

In FY21, the life sciences portfolio saw a second year of strong growth with an uplift of £78.1m (FY20: £85.1m). The largest contributions came from Hinge Health (£32m), Inivata (£31m) and Athenex/Kuur (£11m). Reflecting management’s more focused investment approach, there were also write-downs totalling £24m, as support for a number of companies was curtailed.

The deep tech team targets differentiated, defensible innovations with a strong value proposition and the potential to disrupt a multibillion-dollar global market. These are assets that IP Group believes will enable digital resilience, create prosperity and enable new capabilities.

Thematic focus areas include cybercrime and fintech (Featurespace and Garrison), next-generation networks (AccelerComm), human-machine interface (Ultraleap and WaveOptics) and neuromorphic and quantum computing (Oxford Quantum Circuits and Quantum Motion).

Deep tech had a strong year in FY21, delivering uplifts of £72.4m (FY20: £6.6m), including realisations from WaveOptics (£29.5m), Perpetuum and Inflowmatix (£4.9m). The valuation uplift included contributions from WaveOptics, Ultraleap, Featurespace and SaltPay, the latter of which tripled in value during the year to £24.6m.

IP Group has rebranded its cleantech business, now called Kiko Ventures, a platform fully owned and funded by IP Group. Management has indicated that IP Group intends to invest £200m via Kiko Ventures over the next five years, into both existing and new cleantech companies.

Thematic focus areas include renewable electricity and alternative fuels (Bramble Energy – fuel cells, Hysata – high efficiency electrolyser), mobility and transport (Oxbotica – universal autonomy software), land use, greenhouse gas capture/removal and storage (C-Capture – transforming carbon capture) and climate risk and change management (Mixergy – decarbonised home energy), as well as food and agriculture.

The cleantech portfolio saw uplifts of £30.9m in FY21, primarily due to First Light Fusion, which completed a financing on strong technical progress. Post year end, Bramble Energy, a fuel cell business, also made significant advances, completing a substantial funding round in early FY22.

Parkwalk had funds under management (FUM) at 31 December 2021 of £388m (FY20: £350m) including alumni funds managed in conjunction with the universities of Oxford, Cambridge, Bristol and Imperial College London.

Parkwalk strengthens IP Group’s relationships with these universities. Parkwalk and IP Group have separate investment teams and mandates, and although they share insight and co-invest, this is the exception rather than the rule. Parkwalk’s managed funds deliver a regular fee income to the group, responsible for £7.9m (FY20: £5.1m) of the group’s £13.9m (FY20: £6.2m) of third-party fee income in FY21 and £3.7m in H122. The management of third-party funds is an important element of IP Group’s business model, adding insight and enhancing the group’s market presence, with the management fees helping to defray the group’s operating costs.

In total, the group managed or advised over £540m in third-party capital across its Parkwalk and Australasian business units as at 31 December 2021. The group is also launching a further fund management platform for China, through a joint venture with China Everbright. The platform is awaiting regulatory permissions but management anticipates a first close in H222. The rationale behind the Chinese platform is to provide the capital and expertise to support IP Group companies to effectively access the Chinese market.

Management has indicated that it intends to grow its third-party fund management business. As FUM scales, net operating costs are expected to continue to decline as a percentage of NAV.

IP Group’s North American platform was established to replicate IP Group’s IP-based investment approach through partnerships with US universities. The fund builds early-stage companies, based on technology emerging from US universities and national laboratories, including the universities of Pennsylvania, Yale, Princeton, Columbia, Johns Hopkins and Washington. The scale of the US markets and research output suggests that the opportunity and capital requirement could be substantially larger than for the UK market and management believes that North America represents a significant growth opportunity for the group.

The fund had 29 investments in total worth nearly US$200m as at 31 December 2021, following net portfolio gains of £7.9m in FY21. The platform secured US$59m in new capital in 2021, including US$10m from IP Group. As a result, IP Group holds 58% of the platform equity, but with a minority of board seats, the holding was deconsolidated in IP Group’s FY21 accounts. Key events in FY21 included MOBILion’s US$60m crossover funding in July 2021. In H122, Carisma Therapeutics (novel cancer immunotherapies) signed an agreement with Moderna, which included a US$45m cash investment and a US$35m convertible note. Aptatek BioSciences (in-home health monitoring solutions for chronic disease) also completed a strategic funding round from Canterbury Scientific.

IP Group Inc. is now structured as a separate management company, which employs the US team directly. IP Group pays 58% of total platform costs of c US$6m pro rata to its holding in the general partner/limited partner (GP/LP) fund structure.

In 2017, IP Group signed commercialisation agreements with nine universities, eight of which are in Australia and one in New Zealand. The group committed to invest at least A$200m over a 10-year period to fund investments in IP-based spin-outs.

IP Group continues to work with Hostplus, one of Australia’s largest superannuation funds with over A$73bn in FUM, through the IP Group Hostplus Innovation Fund. Hostplus has now committed A$210m (c £110m) following its latest A$75m commitment in H122.

The Australia and New Zealand portfolio now comprises 14 investments and delivered fair value uplifts of A$14.6m in FY21 against an opening portfolio of A$12.9m, with A$19.3m of capital invested over the year. Notable events in H122 included an oversubscribed A$43m series A funding round for Hysata, developer of a novel capillary-fed electrolyser, which has demonstrated cell performance at 98% energy efficiency, a significant step change in efficiency that exceeds the 2050 IRENA target.

The IPO of Oxford Nanopore in September 2021 represented a key milestone for IP Group. Not only was this the realisation of a ‘unicorn’, for an investment first made by IP Group in 2005, but it also marked the transition from one management team to another. Greg Smith stepped up from CFO to become CEO and David Baynes moved from COO to become chief financial and operating officer (CFOO).

Both Greg and David have considerable executive and finance experience, as well as extensive experience within IP Group. Greg Smith joined IP Group in 2008, becoming CFO in 2011, and David Baynes, having previously been CEO of Fusion IP (which he co-founded in 2004), joined as COO in 2014, with the acquisition of Fusion IP by IP Group.

The senior leadership team comprises 12 people, including Greg and David, the heads of each of IP Group’s business lines, as well as regional leaders and operational heads of department. Most of the senior team has been with IP Group for over 10 years, critical in a business that has been built around fostering long-term relationships with universities, research centres and their related academic networks. Management profiles can be found on IP Group’s website. IP Group had an average of 104 employees in FY21 (FY20: 103), falling to 96 staff at year end, following the deconsolidation of the US investment platform in November 2021 (see page 13).

With a strong track record of investment returns that are closely aligned with social purpose, impact has always been integral to IP Group. The group contributes to a better future for people and the planet, through its investments in early-stage science and technology companies that have the potential to significantly impact society for the better.

IP Group integrates ESG using a bottom-up approach, looking at each deal individually, using a dual lens of potential positive impact to the world, incorporating sustainability factors / ESG materiality, as well as financial metrics. IP Group is committed to supporting the goals of the energy transition, as set out at COP26, both operationally and through its various portfolio companies, with its cleantech group (Kiko Ventures) leading on ground-breaking initiatives around climate change mitigation and adaptation.

IP Group also supports and participates in a number of industry-wide initiatives, such as the ESG Data Convergence Initiative, that seeks to create a critical mass of meaningful, performance based, comparable ESG data from private companies.

IP Group has recently tightened its focus around ESG, responsible investing and impact. Building on the recommendations of the materiality assessment study carried out in 2020, details of which can be found in the 2022 ESG report, management is working to strengthen its overall ESG approach and strategy, and has recently hired a head of ESG to lead this strategy.

Further details can be found in IP Group’s FY21 annual report and accounts, on its ESG and Responsible Investment webpage, with copies of the group’s reports, including its latest 2022 ESG report, available on its ESG and responsible investment reporting page.

Investors have committed £10.9bn into around 3,200 UK university spinouts over the past decade, according to latest research from Beauhurst (Equity investment into UK Spinouts 2022). After UK investors (c 2,500 deals), US investors have been the most active investors by far, involved in 378 deals, with the Netherlands (37 deals) and China (33 deals) ranked third and fourth.

In 2021, £2.54bn was invested in UK university spinouts, compared to £405m in 2012, a more than fivefold increase over the decade. Over the period, average deal sizes increased markedly, from just under £2m in 2012 to £6.5m in 2021. Foreign investor interest in UK university spinout deals more than trebled in 2021, with international backers participating in 40% of 2021 deals (2020: 20%). We also note the government’s recent £1.4bn ‘Global Britain’ investment fund, intended to help encourage overseas investment in key knowledge intensive companies.

According to Beauhurst data, IP Group’s fund management business, Parkwalk Advisors, was the single biggest investor into UK spinouts in 2021, with 31 deals, followed by Scottish Enterprise and the UK Government’s £1.14bn Future Fund, designed to help fund fast-growth companies through the COVID-19 pandemic. IP Group itself was the fourth most prolific investor with 14 deals, taking IP Group’s total count to 45 deals.

Of the more than 3,000 investment deals over the past decade, 166 have realised an exit, with 134 (81%) exiting by way of M&A and 32 (19%) listing. Oxford Nanopore leads the way in the sector with the largest exit to date following its £3.4bn IPO in September 2021.

In terms of M&A, US acquirors hold the top ranking, accounting for more exits than UK companies, with Japanese acquirors in a distant third place.

The one in five ratio underlines the fact that IP Group (and deep tech investors in general) are not reliant on the IPO market for exits, but see building relationships with strategic investors as critical to the success of their investments on their path to a likely trade sale.

A summary of the principal risk factors relating to IP Group is set out below:

IP Group’s H122 interim results were in line with guidance given at the end of May. Management reported an NAV per share of 136.7p, an 18% fall over the six months since FY21 year-end that reflects broader market declines. The reduced NAV was largely driven by falls in the quoted portfolio, principally Oxford Nanopore (87% of £395m decline), with the value of the private portfolio rising by £104m to partially offset the quoted decline.

IP Group invested £52m in H122 across 22 new and existing investments (H121: £71m, 42; FY21: £107m, 67), with £2m of realisations (H121: £112m; FY21: £214m), resulting in net investment of £50m (H121: net realisations of £41m; FY21: net realisations of £107m). Given the market backdrop, management is anticipating reduced levels of cash realisations in FY22, with investment lower than originally envisaged.

Several of IP Group’s lead assets showed continuing progress in H122, with Istesso preparing to commence a Phase IIb trial for its lead drug MBS2320 in rheumatoid arthritis (the trial commenced at the end of August 2022 on an expected two-year timeline), and First Light Fusion achieving first fusion, externally validated by the UK Atomic Energy Authority. After the period end, another portfolio company, Hysata, raised A$43m (£24m) to help develop a pilot manufacturing facility for low-cost green hydrogen. IP Group committed £11m to the funding round, split between IP Group Australia and Kiko Ventures, its cleantech platform. On completion, IP Group's stake is valued at £19m, a net gain of £8m (0.8p per share). In August, Diurnal received a cash offer from Neurocrine Biosciences, valuing IP Group’s 29% holding at £14m and the company at approximately £48m.

To reassure investors over its portfolio valuations, management secured external valuations for five of its top 20 holdings at 30 June 2022 (First Light Fusion, Featurespace, Hinge Health, Ultraleap and PsiOxus), with valuations for the majority of the remainder being based off recent or forthcoming funding rounds.

As part of management’s IR initiatives, recordings of the H122 interim results and other recent presentations are available on the Investor Meet Company website.

FY21 was a record year for IP Group. Portfolio fair value as at 31 December 2021 rose to £1.45bn (FY20: £1.16bn), with realisations of £213m and investments of £104m. This led to a net portfolio return (portfolio fair value less net investment) of 31% (FY20: 23%).

Along with the FY21 net fair value gain of £495m (FY20: £228m), IP Group also recorded fee income from advisory services, fund management, licensing and royalties of £13.6m (FY20: £6.2m), with Parkwalk fund management fees contributing £7.9m of this figure. This drove a rise in revenue for FY21 of 117% to £509m, from £234m in FY20. As a result of the increase in fee income, net overheads fell from £21.6m in FY20 to £19.5m in FY21, representing 1.6% and 1.1% of NAV, respectively.

Administrative costs rose to £53.0m in FY21 (FY20: £46.6m), with combined carried interest and share-based payment charges rising by 15% to £19.8m in FY21 (FY20: £17.2m). IP Group reported PBT of £455m (FY20: £186m) and PAT of £449m (after a 1.2% tax charge), a rise of 142% from £185m in FY20. The low tax charge is because IP Group benefits from unused tax losses totalling £264.4m in FY21 (2020: £267.1m).

Carry balances accrue to management teams (including IP Group employees) based on the portfolio fair value at period end. In FY21, carry was accrued at 3.5% of net portfolio gains (£497m) and represented 2.3% of portfolio fair value at the end of FY21 (FY20: 1.7%).

Net assets increased by £407m (31%) in FY21 to £1.74bn (FY20: £1.33bn), broadly reflecting profit after tax (FY21: £449m), less dividend payments (FY21: £15m), less the cost of share repurchases (£27m).

IP Group remains in a strong position to support its portfolio as well as to invest in new businesses, with gross cash and deposits of £236m at 30 June 2022 (FY21: £322m) and net cash of £192m (FY21: £270m), reflecting £44m of outstanding EIB debt at 30 June 2022. After the period end, management agreed terms on a £120m debt private placement at an average interest rate of 5.25%, providing £105m of increased liquidity after the repayment of £15m of short-dated EIB debt. IP Group will draw down 50% of the loan notes in December 2022, with the remainder to be drawn in June 2023.

Included in the group’s gross cash is restricted cash, the majority of which relates to six months of interest and debt repayments for the group’s EIB debt facilities (H122: £8.5m, FY21: £9.4m), with the balance relating to capital requirements for its regulated entities.

Growth in portfolio fair value is irregular and the timing of realisations and exits can be hard to predict. Given this variability, there is no easily defined revenue and profitability trend for investment companies and so businesses like IP Group are typically valued at a premium or discount to NAV rather than on a profit multiple.

Consequently, the principal value driver for IP Group is the increase in value of its investment portfolio (FY21: 27% growth year-on-year, five-year CAGR FY16–21 of 20%). This in turn is driven by a combination of realisations, funding rounds involving third-party investors at higher values as well as revenue growth in the underlying portfolio businesses, driving increased peer multiples-based valuations.

As can be seen in Exhibit 22, over the last five years IP Group’s share price has moved from a premium to a discount, with that discount today starting to climb back from its recent lows, although still well below its average value over the period of 0.84x.

IP Group’s H122 NAV per share was 136.7p. If portfolio fair value, net assets and NAV/share were each to grow at an average of 20% over the five years H122–27, in line with management’s target, this would imply the following targets for H127: portfolio fair value of £3.1bn (H122: £1.3bn), net assets of £3.5bn (H122: £1.4bn) and NAV/share of 340p (H122: 137p). If the share price discount to NAV were to close (which we would expect after a period of prolonged strong performance) to the group’s average discount to NAV of 0.84x from 0.51x currently, then this would further boost returns to an average annual return of over 30% for shareholders investing at today’s share price levels.

Management is aiming to create more unicorns, companies with a valuation of US$1bn+. As such, we have looked at what this might mean for IP Group as a theoretical exercise (Exhibit 25), although the creation of additional unicorns will depend critically on market conditions and portfolio companies executing on their strategic plans.

First of all, we have normalised the valuation of Oxford Nanopore. Were Oxford Nanopore to be valued at its IPO price (£4.25), IP Group would see an uplift of £123m (12p per share). Secondly, we have looked at the valuation uplift that IP Group would enjoy if Istesso, First Light Fusion and Featurespace were each to be valued at £1bn, with IP Group seeing valuation uplifts of £468m (45p per share), £161m (16p per share) and £130m (13p per share), respectively (assuming no dilution of IP Group’s current holdings).

Collectively, these events would lead to a 62% rise in NAV to £2,296m (222p per share) from the H122 NAV of £1,414m.

We have also considered what the current share implies for the valuation of IP Group’s portfolio, excluding Oxford Nanopore. At 30 June 2022, IP Group’s stake in Oxford Nanopore was worth c 22p per share, with net cash of £192m, or c 19p per share. If we subtract these amounts from the H122 NAV per share of 137p, we calculate a NAV for the remaining portfolio of 96p per share. If we similarly adjust the latest share price (12 September 2022: 69.85p) by 22p for ONT and 19p for net cash, we calculate that the market is pricing IP Group’s remaining portfolio at c 29p per share, a 70% discount to its current carrying value.

IP Group’s H122 NAV per share of 136.7p represented an 18% fall over the six months since FY21 year-end (FY21: 167p), reflecting broader market declines. However, there are a number of factors that suggest IP Group’s future prospects may be brighter than its medium-term track record would indicate: (1) the acquisition of Touchstone and its impact on IP Group’s five-year track record will be gradually removed over the next two to three years; (2) the growing maturity of IP Group’s portfolio as reflected in net realisations from the portfolio since FY19 and the 24% FY19–21 NAV/share CAGR; and (3) management’s more disciplined capital allocation policy and focus on its priority holdings, leading to target average gross returns of 20% from FY22–26, which we believe would be likely to drive average annual NAV/share returns over this period in excess of 30%.

IP Group’s management has indicated that it is looking to build its third-party funds business, which should increase fee income as FUM increase, providing a relatively stable and predictable income stream to offset operational costs.

Research carried out by Marco Bigelli and Fabio Manuzzi (The Valuation of Asset Management Firms, 2019) found that the average value of asset management firms was 3% of assets under management (AUM) based on average annual fees of 1% of AUM, with higher valuations significantly positively correlated to higher fees percentages.

By our calculation, IP Group derives management fees of £7.9m on £540m of FUM, indicating average fees of c 1.5%, meaningfully above the average benchmark noted in the analysis above. On this basis, we would propose to reflect the value of the group’s fee-earning funds business at 4% of FUM. With FUM of £540m, this implies a valuation for the funds business of £22m, or 2p per share, on top of the H122 NAV of 137p.

We set out below the quoted peer group for IP Group, including companies with different business models, focused on investing in private companies, both technology and life sciences.

The peers can be placed into four groups:

The peer group is currently trading at an average of 0.69x NAV, but with a wide range, stretching from 0.38–1.01x NAV. The market has been marking down companies with a perceived higher consumer exposure, those with a higher portfolio exposure to quoted equity and those with more limited cash reserves to see them through the downturn.

IP Group has a strong cash position (gross cash of £236m, with an additional £105m of liquidity from the private debt placement) and a ‘deep tech’ portfolio whose valuations should prove resilient to further market weakness. Other than Oxford Nanopore, IP Group’s exposure to quoted equity is limited. With IP Group’s current price of 69.85p versus its H122 NAV/share of 137p, which factors in the majority of recent market downside, IP Group’s shares are currently trading at a c 25% discount to the peer group average.

The 70% discount to carrying value of the portfolio ex-ONT (discussed above) illustrates the degree of downside currently priced into IP Group’s shares. With potential for over 30% annualised returns if management can deliver on its targeted average gross annual returns of 20% to FY26, IP Group looks attractive at current valuations over a medium-term horizon.

IP Group’s peers have been under pressure over the course of 2021, with investors marking down fund manager valuations to record levels of discount, even when NAVs have been struck recently and therefore reflect a relatively current view of valuations. As can be seen in the valuation table (Exhibit 25, peers trade at a wide range of discounts to NAV, with investors allowing for further falls in portfolio valuations, in some cases, of a further 50% (or more) from latest carrying values, even where investment companies are well funded.

In our view, this approach can only be justified where:

In all scenarios, we expect the IPO window to remain closed for much of 2022. This is not an unusual occurrence through the investment cycle and we would note that, historically, only c 20% of IP commercialisation companies have exited by way of an IPO, with the vast majority preferring a trade exit to a strategic buyer.

As such, we believe that the level of negativity implied by current valuations is potentially overdone:

IP Group is increasingly focusing on its top priority companies, with management’s ambition to grow and support another five businesses to values in excess of US$1bn and at least one worth more than US$10bn within the next five years. Management has identified at least five of these opportunities, in addition to the three unicorns already created (Oxford Nanopore, Ceres Power and Hinge Health), three of which are summarised below. Management plans to allocate more resources and capital to these opportunities to accelerate their development over the next few years.