IP Group — Remaining on track despite tough markets

IP Group (LSE: IPO)

Last close As at 20/05/2024

GBP0.51

−0.20 (−0.39%)

Market capitalisation

GBP543m

More on this equity

Research: TMT

IP Group — Remaining on track despite tough markets

IP Group’s private portfolio valuations remained broadly stable in H123, with its c 4.1% NAV decline in total return (TR) terms mostly due to a de rating of listed holdings (Oxford Nanopore, ONT, in particular) and FX headwinds, though subsequently largely offset by a rebound in quoted holdings to date. IP Group’s holding-level liquidity remains firm and 84% of its direct portfolio holdings have a cash runway of 12 months or more. IP Group shares continue to trade at a wide 53% discount to NAV.

Milosz Papst

Written by

Milosz Papst

Director, Financials

TMT

IP Group

Remaining on track despite tough markets

Investment companies
Listed venture capital

2 August 2023

Price

60.0p

Market cap

£622m

NAV*

£1,314m

NAV per share*

126.7p

Discount to NAV

52.6%

Yield

2.1%

Ordinary shares in issue

1.04bn

Code/ISIN

IPO/GB00B128J450

Primary exchange

LSE

AIC sector

N/A

Financial year-end

31 December

52-week high/low

88.1p

52.0p

NAV high/low

136.7p

126.7p

Net cash to NAV*

8.5%

*As at end-June 2023

Fund objective

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

Bull points

Provides unique exposure to impactful university spinouts based on management’s extensive deal origination network and strong relationships with top universities.

Diverse portfolio across life sciences, deeptech and cleantech, nurtured over 15+ years with several potential catalysts on the horizon.

Trading at a wide discount to NAV.

Bear points

IP Group is yet to build a solid track record of NAV total returns.

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

Continued tough macroeconomic conditions may put further pressure on cash runways of portfolio companies.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

IP Group is a research client of Edison Investment Research Limited

IP Group’s private portfolio valuations remained broadly stable in H123, with its c 4.1% NAV decline in total return (TR) terms mostly due to a derating of listed holdings (Oxford Nanopore, ONT, in particular) and FX headwinds, though subsequently largely offset by a rebound in quoted holdings to date. IP Group’s holding-level liquidity remains firm and 84% of its direct portfolio holdings have a cash runway of 12 months or more. IP Group shares continue to trade at a wide 53% discount to NAV.

IP Group’s portfolio by cash runway at end-June 2023

Source: IP Group. Note: Direct holdings with IP Group’s investment holding value above £4m

Holding-level liquidity and cash runways remain solid

IP Group maintains a strong holding-level balance sheet, with gross cash and deposits at end-June 2023 of £250m or c 19% of NAV (£111.7m net of borrowings) and total gross liquidity including listed holdings of over £450m. Moreover, most of its direct portfolio holdings with and investment value above £4m have a good cash runway, with 33% by value (including ONT) funded to profitability and only 16% requiring funding before H224. Therefore, IP Group continues to pay out dividends, with the latest final payout of 0.76p in June. IP Group collected £32.2m of gross cash proceeds in H123, primarily from the second tranche of consideration for the sale of WaveOptics.

Continued operational progress across the portfolio

Management’s outlook for the clinical trial progress across IP Group’s Life Sciences portfolio (c 46% of total portfolio value including ONT) remains stable versus May 2023 when we published our life sciences deep dive. Twelve companies have ongoing clinical trials at present and seven companies are targeting key clinical milestones over the next 12–18 months. Most notably, Istesso’s Phase IIb trial for MBS2320 in rheumatoid arthritis remains on track and the company recently received approval to start an additional Phase II trial in idiopathic pulmonary fibrosis in H223. We also note that ONT’s Life Sciences Research Tools revenue grew by 22% in H123, broadly in line with its FY23 guidance of 16–30%.

Major deeptech holdings (Featurespace, Garrison, Ultraleap, 10% of IP Group’s total portfolio value) continued to grow revenues by a double-digit rate in H123. Within the cleantech portfolio, Hysata (which develops a new type of breakthrough hydrogen electrolyser, 2.5% of total portfolio value) has been a standout performer, achieving a key milestone several months ahead of schedule.

Private valuations still quite resilient

Following a 2% NAV TR decline in H222, private valuations continued to be on average broadly stable in H123, with the fair value of IP Group’s private holdings (including LP investments) down only marginally by around £4m excluding FX in H123. Key positive valuation contributors include Hysata (£9.2m valuation gain), revalued by c 49% on the back of strong technical progress, Centessa Pharmaceuticals (£6.2m), whose share price doubled in H123, and Istesso (£3.1m). Major negative contributors (apart from ONT, £27.8m loss) include the North American Platform (£9.1m loss) and Athenex (£6.5m realised loss), which went into administration.

Moreover, IP Group booked a £5.2m mark-down on its Oxehealth holding following a recent down round. That said, we note that 72% and 14% of the 14 new funding rounds across IP Group’s portfolio in H123 were up rounds and flat rounds, respectively (broadly in line with the 72% and 10% for European venture capital rounds in Q123 according to PitchBook, respectively). Total funds raised by IP Group’s portfolio companies in H123 stood at around £300m (vs £350m in H122), including a £42m funding round completed by Quantum Motion – the largest ever single investment in a quantum computing startup in the UK. IP Group invested around £59.8m during the period, including a £15m convertible loan note investment in Istesso and £6.6m across the North American platform, as well as £4.7m in Hysata.

Management highlighted that the Series C funding round of First Light Fusion (on the back of its recent successful achievement of nuclear fusion) is somewhat behind schedule due to the continued unfavourable macroeconomic environment. That said, IP Group sees good interest in the fund-raise and expects it to close this year. Meanwhile, First Light Fusion signed in June 2023 an agreement with the UK Atomic Energy Authority’s Centre for Fusion Energy to construct Machine 4 (its ‘gain demonstrator’ and the building block for a pilot plant) on the Culham campus. The holding’s fair value remained unchanged in H123 at £114.5m at end-June 2023 with an estimated valuation range (based on inputs from a third-party valuer) of £62.1–123.5m. It is therefore IP Group’s second-largest holding (after ONT), representing 9.0% of total portfolio value.

We note that, overall, only 15% of IP Group’s portfolio is valued based on a funding round completed more than 12 months ago, with 21% based on more recent funding rounds and c 24% derived from an adjusted financing price based on past performance (see below). We also note that four of the top 20 holdings (c 20% of portfolio value) were valued by a third-party specialist at endJune 2023: First Light Fusion (adjusted funding – upwards), Featurespace (revenue multiple), Hinge Health (adjusted funding – downwards) and Ultraleap (adjusted funding – downwards).

Exhibit 1: IP Group’s portfolio by valuation method

Source: IP Group

General disclaimer and copyright

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

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

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

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

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

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

Australia

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

New Zealand

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

United Kingdom

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

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

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

United States

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

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

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

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

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

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

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

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

Australia

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

New Zealand

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

United Kingdom

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

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

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

United States

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

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

More on IP Group

View All

Latest from the TMT sector

View All TMT content

Research: TMT

discoverIE Group — Adding power-over-ethernet capability

discoverIE has announced its first acquisition this fiscal year, buying Silver Telecom Limited (Silvertel), a designer and manufacturer of power-over-ethernet (PoE) solutions, for £21m in cash. UK-based but with an international customer base, the deal follows the group strategy to expand outside of Europe. On completion (expected by the end of H124), the deal should be immediately accretive to EPS and operating margins.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free