Heliad Equity Partners — Plans to merge with FinLab

Heliad (XETRA: A7A)

Last close As at 23/05/2024

EUR10.80

0.40 (3.85%)

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Heliad Equity Partners — Plans to merge with FinLab

Heliad Equity Partners (HEP) saw a decline in its NAV per share between end-2021 and end-March 2023 of c 48% to €7.35, mostly on the back of the de-ratings of listed holdings (in particular flatexDEGIRO), as well as an NAV dilutive share issue in March 2023. That said, the valuations of HEP’s private holdings have remained largely resilient during recent funding rounds, and Enpal even carried out a new round in Q422 at a significant uplift to its previous valuation. Moreover, flatexDEGIRO’s share price has rebounded by c 32% in the year to date. HEP recently announced its intention to enter into merger negotiations with FinLab (its major shareholder and owner of HEP’s investment manager).

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

Heliad Equity Partners

Potential benefits of a HEP-FinLab merger

Investment companies
Venture capital

15 June 2023

Price

€4.32

Market cap

€56m

NAV*

€94m

NAV per share*

€7.35

Discount to NAV

41.1%

Yield

N/A

Ordinary shares in issue

12.8m

Code/ISIN

HPBK/DE000A0L1NN5

Primary exchange

Frankfurt (Scale)

AIC sector

N/A

*At 31 March 2023.

Fund objective

Heliad Equity Partners aims to invest in market-leading private companies and skilled entrepreneurs across sectors and regions to power their next phase of growth. It acts as a gateway to public equity markets by leveraging its experienced team and strategic partners.

Bull points

Good access to a network of top-tier VC companies and entrepreneurs.

HEP is flexible in that it has no commitments to realise investments within a specified time.

Companies are staying private for longer, allowing VC/PE investors to capture more of the value accretion.

Bear points

HEP is yet to build a track record of successful realisations.

Still high exposure to a single listed holding (flatexDEGIRO).

Potential further weakness in M&A markets would make new fund-raising of portfolio companies more difficult.

Analysts

Milosz Papst

+44 (0)20 3077 5720

Michal Mordel

+44 (0)20 3077 5720

Heliad Equity Partners is a research client of Edison Investment Research Limited

Heliad Equity Partners (HEP) saw a decline in its NAV per share between end-2021 and end-March 2023 of c 48% to €7.35, mostly on the back of the de-ratings of listed holdings (in particular flatexDEGIRO), as well as an NAV dilutive share issue in March 2023. That said, the valuations of HEP’s private holdings have remained largely resilient during recent funding rounds, and Enpal even carried out a new round in Q422 at a significant uplift to its previous valuation. Moreover, flatexDEGIRO’s share price has rebounded by c 32% in the year to date. HEP recently announced its intention to enter into merger negotiations with FinLab (its major shareholder and owner of HEP’s investment manager).

Plans to merge with FinLab

Majority of HEP’s end-March 2023 portfolio value is now in private holdings

Source: Heliad Equity Partners

Why consider HEP now?

HEP aims to provide a convenient way of investing in a diverse set of unlisted growth technology businesses through a listed vehicle. HEP’s portfolio of innovative private businesses may benefit from secular trends such as ongoing business digitalisation (Modifi, InstaFreight, WorkMotion), artificial intelligence (AI)-driven solutions (NewtonX), expansion of e-commerce (Razor Group, Upscale), increasing fintech penetration (Clark) and clean energy (Enpal).

The analyst’s view

A potential merger would bring several benefits to HEP’s shareholders, including: 1) accruing more value from HEP’s holdings and simplifying the structure by combining HEP and its investment manager (therefore removing fees charged to HEP) and 2) creating a listed entity with a broader portfolio, including in particular two key profitable, high-growth private holdings (raisin and Enpal) and flatexDEGIRO. That said, the attractiveness of the merger is dependent on the agreed exchange parity, which will be set in the coming weeks based on the valuation of both companies. Here, we note that HEP is currently trading at a 41% discount to its last reported NAV, broadly in line with the 35–60% listed non-VCT peers. This is likely the result of investors’ anxiety over macroeconomic pressures on valuations and the cash runways of VC and growth-stage businesses. In terms of valuations, we note that only two out of HEP’s seven private holdings in the series A/B bucket and Clark (series C bucket) closed their last funding rounds before Q222. Moreover, a significant part of HEP’s portfolio fair value is supported by liquidation preferences and anti-dilution protection.

Share exchange offer to be presented to AGMs in H223

On 26 May, HEP announced that FinLab’s executive board has communicated its intention to negotiate an agreement to merge HEP (as the transferring legal entity) into FinLab (as the acquiring legal entity). HEP shareholders would receive new FinLab shares in exchange for their holdings in HEP (with the exchange ratio to be set in the coming weeks). In response, HEP communicated its intention to enter the merger negotiations. Upon successful conclusion of the negotiations, the agreement will be presented to the AGMs of both companies, presumably in H223.

Between 2003 (inception) and 2020, FinLab was a self-managed German venture capital investor and start-up incubator specialising in fintech companies, with Deposit Solutions (now renamed raisin) being one of its major success stories (see our previous research on FinLab for details). FinLab still holds a portfolio of fintech businesses (see the company’s website for details), and fully-owns Patriarch Multi-Manager, which develops fund of funds solutions and asset management strategies for independent financial advisors, selecting managers for each mandate. The company has been a major shareholder of HEP with a current stake of 44.5%, and also fully owns HEP’s investment manager (Heliad Management). Both entities also have a common major shareholder (Bernd Förtsch), who holds a 75% stake in FinLab and a c 22% direct stake in HEP. For that reason, we believe that FinLab and HEP are likely to go ahead with the merger.

Advantages to HEP shareholders: Lower costs, more diverse portfolio and a simplified structure

We think there are several advantages of a potential merger for HEP’s shareholders (subject to an attractive exchange ratio). First, HEP’s fee structure currently includes a 1.25–1.75% management fee and a 20% performance fee paid to Heliad Management (see our HEP initiation note for details) on a portfolio with a still high share of flatexDEGIRO (currently c 40% of HEP’s total portfolio value). Heliad Management has a limited contribution to flatexDEGIRO’s performance, and its shares are also available to investors directly in the public stock market (without the additional fees). A merger would therefore allow HEP’s shareholders to accrue more value from HEP’s portfolio. Some of the savings for HEP’s shareholders stemming from the elimination of the management fee at group level will be offset by the additional operating costs of FinLab. That said, based on a discussion with HEP’s management, we understand that it still expects cost savings of several hundred thousand euro (mid- to high-single digit) from the merger (excluding the impact of eliminating the performance fee). Furthermore, the merger would result in a more transparent setup for HEP’s shareholders: a plain public limited company, versus the current GP/LP relationship between HEP and Heliad Management.

Secondly, the transaction would broaden the investment portfolio to which HEP’s existing shareholders are exposed. Most notably, HEP’s two core private holdings after the merger (with c €50m of combined fair value) will be raisin (a pan-European deposit marketplace) and Enpal (a provider of photovoltaics leasing solutions), both profitable, high-growth businesses which recently completed their series D funding rounds despite the challenging market backdrop. The combined value of HEP’s and FinLab’s holdings is in excess of €150m, so a merger would result in an improved market relevance of the combined entity. Moreover, flatexDEGIRO should have a moderately lower share in the combined portfolio versus the current HEP portfolio. Finally, the merger would also provide HEP’s shareholders with exposure to the recurring fee income of FinLab’s asset management holdings, most notably Patriarch Multi-Manager.

Fair values of private holdings generally holding up

HEP’s NAV per share declined by 50% in FY22 to €7.17, primarily due to a 54% fall in the share price of its stake in the listed flatexDEGIRO, which, together with other minor listed holdings, represented c 71% of HEP’s financial assets at end-2021. Most of these investment losses are unrealised, though the company also booked c €3.4m of realised loss in FY22 from the sale of its listed holdings Elumeo and Magforce and part of its flatexDEGIRO stake (578,880 shares, ie a c 0.5% stake); the flatexDEGIRO sale was through exercising the put option it had entered into as part of a collar transaction (HEP currently holds a c 5% stake in flatexDEGIRO). The silver lining is that the share of the flatexDEGIRO stake in HEP’s portfolio value declined to c 38% at end-March 2023, which is less than the aggregate value of all its major private holdings (57% of portfolio value), making HEP, to a greater extent, a growth equity play (in line with its strategy).

The company also booked c €2.8m of net unrealised revaluation gains from its private holdings, which we believe was largely driven by Enpal (a c €7.7m uplift for HEP, according to our calculations) and FINN, partly offset by the write-down of, among others, Klarna and Celsius. We discussed major developments across HEP’s portfolio companies in FY22 in our initiation note, October update note and March update note. These included, among others, successful funding rounds for FINN (Q222), Enpal (Q422) and Razor Group (Q422). HEP’s major new investments in 2022 included: NewtonX (in Q122), a B2B AI-driven knowledge business connecting companies with professionals to provide support in critical business decision-making; FINN (Q122), a car subscription platform in the United States and Europe; and WorkMotion (Q222), an HR management platform.

HEP recently published its NAV update as at end-March 2023, posting an increase in total portfolio value by 2.8% between end-January 2023 (last previous reported figures) and end-March 2023. This was the result of a 3.6% increase in the fair value of the series A/B bucket and a 9.7% increase in the fair value of Burnhard (formerly Springlane), though we note that in both cases it reflects an increase in holdings from a follow-on investment rather than a valuation uplift. Moreover, HEP’s portfolio value was assisted by a 2.1% rise in the value of its stake in flatexDEGIRO. That said, HEP’s NAV per share fell by 5.7% versus end-January 2023 (up c 3% vs end-2022) as a result of the new share issue completed at a discount to NAV (as discussed in our previous note).

Major developments across HEP’s private holdings since our previous update note include Razor Group’s acquisition of Stryze Group, a competitor in the aggregator space. The deal involved Upper90 (an investor in e-commerce aggregation) taking an additional equity investment in Razor Group, bringing the company’s series C round to a close at €80m.

Exhibit 1: HEP’s NAV breakdown at end-March 2023

Company

Business profile

Round of investment

Latest valuation event

Investment amount
(€m)

Fair value
at end-March 2023 (€m)

Fair value
at end-January 2023 (€m)

Change*
(%)

Klarna

Fintech – e-commerce payment solutions platform

Pre-IPO

Q222

1.6

0.2

0.2

-

Clark

Fintech – tech-driven customer-centric insurance advisor

Series C

-

12.6

20.2

20.2

-

Enpal

Green energy – photovoltaics leasing

Q422

Razor Group

D2C – global consumer holding that acquires and scales Amazon e-commerce merchants

Series B

Q422

30.7

28.7

27.7

3.6

Modifi

Supply chain – digital trade finance solution for SMEs

Q123

InstaFreight

Supply chain – digital B2B logistics company combining transport management and freight forwarding

-

NewtonX

Artificial intelligence – B2B AI-driven knowledge business connecting companies with professionals to provide support in critical business decision-making

-

FINN

Mobility – car subscription platform in US and Europe

Q222

WorkMotion

HR tech – HR management platform

-

Upscalio

D2C – company investing in brands that sell on ecommerce marketplaces, eg Amazon or Flipkart in India

Series A

-

Burnhard**

D2C – creator of a community as well as products and brands for people with an interest in food

Seed

Q123

10.1

11.4

10.4

9.7

flatexDEGIRO

Leading European online broker with more than two million customers in 18 countries

Listed

N/A

9.4

40.9

40.0

2.1

tonies

D2C – tech-driven audio direct-to-customer brand

N/A

3.0

1.5

1.7

(13.9)

Other

-

-

-

3.5

3.7

8.1

Total portfolio

106.4

103.9

2.8

Other net liabilities

12.2

16.4

(25.6)

Total net asset value

94.2

87.5

8.1

NAV/share

7.35

7.80

(5.7)

Source: HEP. Note: *The change also reflects new and follow-on investments, as well as realisations. **Formerly Springlane.

FlatexDEGIRO reporting Q123 net customer account growth at twice the rate of its peers

FlatexDEGIRO recently announced its Q123 results, which on a year-on-year comparison reflect the normalisation from an environment with exceptionally high retail investor activity following the pandemic outbreak but before the war in Ukraine. That said, the company experienced a sequential pick-up in activity, which was at least partly attributable to the usual seasonal pattern (Q1 being normally a particularly strong quarter).

The company saw gross client additions of 112k in Q123 (vs 185k in Q122 and 86k in Q422). Net of 13k churn (representing a 2% annualised churn rate, which is below management’s standard assumption of 34%), the company added c 100,000 new customers. This translated into a 4.2% year-to-date net customer account growth versus an average 2.1% for its peers (Avanza, Nordnet and Fineco), according to flatexDEGIRO’s management. This is line with management’s target of growing at a rate 1.52.0x its peers. Q123 gross cash inflows from clients stood at €3.2bn (and net cash flows amounted to €1.7bn), with flatexDEGIRO’s assets under custody reaching a record-high level of €45.1m in Q123 (vs €43.1m in Q122). This was despite the turmoil in the US banking sector. The number of settled transactions came in at 16.3m in Q123, down 25% y-o-y but up 19% qoq. As a result, flatexDEGIRO’s adjusted revenue (including commission and interest income) was down 17% yoy to €98m but up 12% q-o-q, with a commission per transaction of €4.17 in Q123 versus €4.26 in Q122 and €3.90 in Q422 (with FY23 guidance at €4.25).

Exhibit 2: flatexDEGIRO’s gross customer additions (k)

Exhibit 3: flatexDEGIRO’s adjusted revenue (m)

Source: flatexDEGIRO

Source: flatexDEGIRO

Exhibit 2: flatexDEGIRO’s gross customer additions (k)

Source: flatexDEGIRO

Exhibit 3: flatexDEGIRO’s adjusted revenue (m)

Source: flatexDEGIRO

The company raised its margin loan rates at DEGIRO and flatex by 100bp from January 2023, with further increases planned for July 2023. Furthermore, it raised the commissions at DEGIRO for US and local trades in Spain, Portugal, Italy and France to €1 (on top of a €1 handling fee, raised from €0.50 in September 2022), effective mid-May 2023. flatexDEGIRO’s EBITDA, adjusted for share-based payments, reached €30m in Q123 (vs €55m in Q122 and €39m in Q422) and reflected, among others: (1) higher marketing expenses in Q123 of €17.2m (in line with expectations of spending 4050% of the annual budget in the quarter), (2) a one-off tax-incentivised inflation compensation payment to its employees at €3.3m and (3) a fine from the local watchdog (BaFin) of €1.1m. The company’s CET-1 ratio stood at 19.9% (vs a regulatory requirement of 15.6%), with potential to increase upon resolving the relevant BaFin findings to 28%.

Management remains confident that the company can deliver the guidance for the year for adjusted revenue of c €380m (vs €369m in FY22), a moderate increase in adjusted EBITDA and adjusted EBT margin to more than 40% and more than 30%, respectively (vs 39.3% and 29.6% in FY22, respectively). Management also highlighted that the company is on track with the processing of findings of the local watchdog (BaFin, see our previous note for details). The company has made progress with respect to DEGIRO’s margin loan process and management expects all other BaFin findings to be resolved within the next 1218 months (in line with previously targeted timelines). Management proposed to appoint another supervisory board member (bringing the total number to five members), which was approved during the latest AGM, as well as another management board member (a chief human resources officer).

Funding update

HEP’s total available resources of c €14.7m at end-2022 consisted of cash and equivalents (€4.6m), the undrawn part of its €23m credit line with UniCredit Bank (€14.2m) and the undrawn part of the €7.5m loan provided in February 2022 by FinLab, HEP’s major shareholder (c €1.3m). Both the FinLab loan and the UniCredit Bank credit line were classified as current liabilities, therefore due before end-2023. To avoid a further increase of net gearing (which at end-2022 stood at 16% of total assets), HEP issued 1.6m shares at €4.40 in March 2023 (out of 1.8m on offer, translating into an 88% subscription rate), which translated into capital proceeds of €7.0m (out of up to €8m planned). We understand that HEP used at least part of the proceeds for follow-on investments in Burnhard (formerly Springlane) and Modifi.

Based on our discussion with management, we understand that the portfolio is overall well-funded at this stage. That said, management has not provided any details on the cash runway across its private portfolio or the extent of cash support it expects HEP will have to provide to any of its portfolio holdings, which we think could provide further reassurance to investors. However, we note that most of its holdings (by count) raised capital in Q222 or later.

Peer group comparison

HEP’s NAV performance is below the peer average over the last one-, three- and five-year periods due to the recent significant decrease in flatexDEGIRO’s share price, which also affects the long-term results. HEP’s ongoing charges ratio is higher than peers and it does not intend to pay dividends for now, contrary to venture capital trusts (VCTs), which normally distribute dividends on a regular basis.

HEP currently trades at a 41% discount to NAV, wider than the peer group average of 22%. However, we note that VCTs tend to trade at a much narrower discount than some of the other peers (with HEP having the narrowest discount among them, see Exhibit 4). For illustrative purposes, if we applied the current average peer discount to HEP’s NAV at end-March 2023 (adjusted for the subsequent movement in flatexDEGIRO’s share price), we would arrive at a fair value per share of €5.90. Based on a peer group excluding VCTs, we arrive at €4.00 per share.

Exhibit 4: Peer group comparison at 14 June 2023* in sterling terms

 

Market cap (£m)

NAV TR
1-year

NAV TR
3-year

NAV TR
5-year

Discount
(ex-par)

Ongoing
charge (%)

Perf. fee

Net gearing

Dividend
yield (%)

Heliad Equity Partners

55

(41.2)

(7.4)

(31.2)

(39.3)

4.7

Yes

113

0.0

Albion Enterprise VCT

107

4.9

40.4

52.5

(5.0)

2.5

Yes

100

5.4

Kings Arms Yard VCT

95

(0.9)

42.8

35.5

(6.7)

2.4

Yes

100

10.9

Northern 2 VCT

108

0.3

47.3

33.1

(7.5)

2.3

Yes

100

6.6

FinLab

48

(44.2)

(36.1)

(11.8)

(35.1)

0.2

No

100

0.0

British Smaller Companies VCT2

99

9.5

66.3

65.1

(5.8)

2.0

Yes

100

0.1

ProVen Growth and Income VCT

169

(11.1)

21.8

9.9

(6.9)

2.4

Yes

100

9.2

Augmentum Fintech

160

9.1

38.1

N/A

(34.5)

1.7

Yes

100

0.0

Vostok Emerging Finance

182

(37.2)

43.0

50.7

(34.7)

1.3

Yes

114

0.0

Molten Ventures

374

(16.8)

40.5

87.4

(60.3)

2.2

Yes

107

0.0

Average (excl. HEP)

149

(9.6)

33.8

40.3

(21.8)

1.9

N/A

102

3.6

HEP’s rank in sector

9

9

9

9

9

10

N/A

9

6

Source: Morningstar, Edison Investment Research. Note: TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared). *12-month performance based on latest available ex-par NAV: end-March 2023, except for Augmentum Fintech (end-September 2022) and Northern 2 VCT (end-December 2022).

Scenario analysis

We believe that forecasting the results of an investment company like HEP is very difficult (if not impossible), as these depend on a number of parameters relating to its existing investments, such as holding period, realised multiple of invested capital (MOIC) and prospective new investment activity. Moreover, HEP’s future earnings will also depend on flatexDEGIRO’s share price performance and realisation path. Having said that, we have updated our scenario analysis, which we included in our latest update note (our detailed assumptions are discussed in the initiation note published in July 2022); see Exhibit 5. The analysis below does not reflect the effects of a merger with FinLab. We note that the year-on-year EPS decline assumed in FY24 is largely due to a high base effect from FY23 related to the recent share price appreciation of flatexDEGIRO (leading to a significant revaluation gain for HEP).

Exhibit 5: HEP’s prospective NAV total return under different scenarios

FY21

FY22

FY23e

FY24e

FY25e

FY26e

FY27e

Average MOIC at 2.5x, flatexDEGIRO share price at average sell-side target price

EPS (diluted, €)

1.67

(7.00)

1.07

0.68

0.94

1.18

1.49

IFRS NAV per share (€)

14.15

7.15

7.82

8.50

9.43

10.62

12.10

NAV TR

 

(49%)

9%

9%

11%

13%

14%

Average MOIC at 3.0x, flatexDEGIRO share price at average sell-side target price

EPS (diluted, €)

1.67

(7.00)

1.28

0.98

1.36

1.78

2.31

IFRS NAV per share (€)

14.15

7.15

8.01

9.00

10.35

12.13

14.45

NAV TR

 

(49%)

12%

12%

15%

17%

19%

Average MOIC at 2.0x, flatexDEGIRO share price flat

EPS (diluted, €)

1.67

(7.00)

0.83

0.20

0.39

0.52

0.67

IFRS NAV per share (€)

14.15

7.15

7.59

7.78

8.17

8.69

9.37

NAV TR

 

(49%)

6%

3%

5%

6%

8%

Source: HEP, Edison Investment Research

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United Kingdom

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Lithium Power International — Lower risk, higher reward

After a sharp correction in H222 and H123, lithium prices have recently enjoyed a healthy bounce back, providing support to lithium equities. However, Lithium Power International’s (LPI’s) shares continue to be held back by the political uncertainty in Chile. Acknowledging the initial market scepticism, we believe that the recent introduction of a Chilean national lithium policy establishes a clearer path to production for new projects. Based on our model, LPI’s share price implies a net present value (NPV) discount rate of more than 40%, which we believe is an overly conservative risking for the Maricunga project, which is at a final investment decision stage, even allowing for the Chilean regulatory uncertainty.

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