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Waiting for long-term investors to catch on
With valuations in the technology sector having been substantially reset, following a buoyant 2021, we think it is time to take a fresh look at the direct technology investment sector. This is a broad group of companies and investment trusts that offer meaningful exposure to high-growth private technology companies. As quoted companies, they each offer a differentiated proposition, but with many common characteristics. All are UK-listed, with liquid investment vehicles and mature and diversified portfolios, and all operate established models with a proven track record. The shares of a number of these companies trade at a material discount to NAV despite being well-funded at both the parent company and portfolio level. As the medium-term prospects appear bright, we believe this represents a compelling opportunity for long-term and impact investors.
Cash-rich sector able to weather the storm
The European technology market remains robust and, despite concerns around inflation, the rotation out of technology and the war in Ukraine, Europe offers a deeper investment pipeline than ever before as success has built on success, with investors and entrepreneurs reinvesting from successful exits. This presents a great opportunity for the European ecosystem to catch-up with the United States over the next three to five years. Following the buoyant funding environment in 2021, portfolio companies are generally fully funded, with the parent funds themselves also cash-rich following a year of record exits, realisations and fund-raisings. This leaves the sector well-placed to see out a temporary dip in valuations and potentially even to benefit from reduced valuations for future investments.
Different flavours of impact investor
The reasons we like the direct tech investors is that each offers differentiated exposure to the private company technology sector in the UK and Europe. As recognised by governments across Europe and around the world, these are impact investors that foster innovation, create employment and drive economic growth – fully aligned with the direction of government policy. We also see the majority of their portfolios aligned with ESG goals. As yet, there has been no obvious rotation into the sector from impact funds, but we believe this may be just a matter of time.
Medium-term trends remain strongly supportive
Over the last six to nine months, discounts to net asset value (NAV) have widened (currently 0.8–1.0x historical NAV), driven by the rotation out of tech and concerns over the sustainability of what many investors saw as top-of-the-market valuations in 2021, compounded more recently by the impact of the Ukraine war and growing inflation concerns. However, with much of the froth already taken off valuations (the various special purpose acquisition companies and IPOs in 2021 are all trading materially below issue price: Exscientia, UiPath, Deliveroo, Trustpilot, Babylon Health, Cazoo and Oxford Nanopore) and the sector well capitalised, with portfolios continuing to show strong operational growth, we see no reason why European private technology returns should not hold up in the medium to long term. Rather, we believe, that the long-term investor should buy on share price weakness, confident that the medium-term trends for the sector remain intact.