Augmentum Fintech: Fintech on a wide discount

AUGM’s portfolio of fintech businesses trades on a wide discount…by Thomas McMahon

Overview

Augmentum Fintech (AUGM) is a venture capital investor which specialises in early-stage fintech businesses. It owns a highly concentrated portfolio of 27 businesses operating across areas from digital banking and digital infrastructure to online platforms and trading areas. The largest holding, small business bank Tide, makes up almost 25% of the portfolio, and the top ten are c. 78% of the NAV by value.

Tim Levene leads the experienced management team, which concentrates on the series A stage for new investments, looking to help companies scale up into profitability from a stage when they have a proven product or service for the first time. He targets an internal rate of return (IRR) of 20% for the portfolio over the long run.

The portfolio has delivered £100m of exits over its life (the current NAV is c. £270m), with a combined IRR of 38%. NAV total returns have dipped in recent years, as we discuss under Performance. In this time, the market has worried about the carrying value of private investments and the prospect for them to be realised, while high interest rates have led to greater risk aversion. AUGM’s shares have traded out to a wide discount, which sits at 43% at the time of writing.

Last year saw some small exits above carrying value, as well as good operational performance from the largest positions in the portfolio. Tim argues the window for IPOs is opening up, highlighting some successful flotations in the US. This might mean the prospect of an exit from AUGM’s largest holdings might be growing.

Analyst’s View

Growth capital is one of those areas of the investment trust sector that has suffered the biggest impact on discounts due to the sharp rise in rates over 2022. We think it makes sense to reassess the prospects for the discounts in light of the cutting cycle currently underway. In our view, there is the potential for the discount to narrow significantly if further rate cuts come through, and we note that investors do not need NAV to grow to generate high share price gains when a wide discount narrows.

However, we think it will likely need large exits from the portfolio to really restore confidence, in particular due to how concentrated AUGM’s portfolio is. The good operational performance of Tide and Zopa is promising in that regard, although exits will require greater risk appetite and interest in the sector from new investors. Low rates may help bring that through over time, although the positive impact will have to be balanced against any economic weakness that might lead to rate cuts.

It’s important to stress that AUGM does not use gearing to invest. Unlike many trusts on wide discounts, there is no debt-fuelled volatility to take into account. AUGM has healthy cash balances to support follow-on investments and has generated enough cash to be able to make new investments in recent years despite the sluggish exit market.

Bull

Bear

• Dependent on market conditions for exits
• Board not keen on buybacks, and portfolio requires cash
• High concentration risk

See the full research on AUGM here >

_Disclaimer

_{Disclosure – Independent Investment Research}

_{This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.}