Augmentum Fintech PLC (AUGM.L) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for making the time to join us today. I'll be speaking for about 20, 25 minutes taking you through our results over the previous year and also talking through where we see the current opportunity, the performance of the portfolio during a challenging macro environment and also where we see the market developing. And then look forward to answering and addressing any questions that you may have as per the mechanism that Neil has just talked you through. But really in summary, if we could take it from the top, one of the benefits of the portfolio is that it is now really well diversified across a number of fintech verticals where we're focused and has shown real resilience and strength across the pandemic period to date. And as at 31st of March, we continue to show NAV growth of 6.5p. And how we think about ongoing performance is at the point in which we deploy our capital, how is that performing in terms of IRR. And in terms of our invested capital since inception, that's developing a IRR of 18% so far to date. And I think increasingly in this market, I think venture capital has come a long way in Europe and the U.K. in particular, over the past decade. It is more competitive. There's more capital, which creates a burgeoning market that develops more opportunity. But our role as one of the few specialists and the only publicly listed fintech fund in the U.K. is that we see and access the very best opportunities in the market. And we remain very selective. And of this huge volume that we see, we do invest in about 0.5% of the opportunities that we look at. So the opportunity set is large. There remains quite a lot of noise in the market, and it's our job as a portfolio manager to really strict through that noise and identify the most exceptional opportunities in the market. And we're still early on in this cycle. I think fintech more than a couple of years ago, for those of you who have invested since day 1, presented a significant opportunity but still was very early in its -- I guess, in its evolution. I think it still remains early, but there is a lot more substance to the story. The market is here to stay. We'll show you the depth of the opportunity, but also how much capital has been deployed over the last couple of years. And I think one trend to really take away is that the accelerated adoption in digitization, where it really positively impacts a lot of the fintech sector, is something that continues to persist. We've seen some exceptional acquisition opportunities across our portfolio in terms of customers and a lot of those customers we expect to stay. And just finally, in terms of the opportunity, one of the things that we wanted to do was to provide this diversified exposure to this emerging asset class, one of the most exciting asset classes developing in the tech space to the public market investors up until now, had very limited opportunity to get exposure to this and continue to do so as well. And I think the following and support from retail as well as institutional investors has been terrific and something that we continue to see to grow. And in terms of where we're, obviously, have hit headlines, I think important that we continue to deploy capital, both within our portfolio, some of the most exceptional companies who are growing, continue to have significant ambition, but also in finding new and exceptional opportunities as well and adding to the portfolio has been pleasing as well. And I think as important of that is that we're having support from other institutional investors, not just venture but growth capital in later stage as well. I think across the portfolio, over GBP 400 million has been raised in equity over the previous period. And I think it's incredibly important that in a market that is competitive, it's growing, that we're seen to be backing some of the most exciting businesses. And I think you can often take some of these awards and list with a pinch of salt. Its not our aspiration to actively be promoting these companies in these lists, but to be recognized often passively and independently. And I think some of the very best and most credible list that exists out there, our portfolio are often featuring quite prominently and in some cases, regarded as the most exciting opportunity in the European fintech ecosystem. And I think as we look at the post year-end March 31 that's quite a long time ago, the portfolio continues to progress, continue to capitalize on opportunities, whether it's interactive investor, acquiring the share center or whether it's Receipt Bank, one of our new investments acquiring Xavier as well. And I think when we look at the kind of post-pandemic opportunity and the platforms have been put in place, you will have noticed the likes of the Bounce Back Scheme, the CBIL Scheme as well that have been put in place. What's been really important for our portfolio where relevant is to be able to capitalize, to collaborate with these government schemes to ensure that their underlying customers can benefit and really allow these businesses to develop further as well. And I think pleasing as well was the full license application of -- for Zopa to become a fully fledged bank, which has been a long and at times somewhat painful process, but I think puts them in a tremendous position going forward to be able to now capitalize on their prowess as one of the top consumer lenders, albeit of a clean balance sheet as well. And I think as importantly, the portfolio has continued to be able to raise, which I think is a real sign of strength. During the last few months and in some cases, really defer the growth opportunities as well, and we can touch on the detail there in some areas. I think one question that investors often ask us is, when you raise that capital, how quickly can you deploy it? We do not want significant cash drag. And I think since IPO, we always talked about deploying our initial capital within that 12- to 18-month period, which we did. And then in our equity issue last summer, very clearly looking to be able to put that capital to work. And we very much are focused on that. We talked earlier about identifying exceptional opportunities, but also having a very significant pipeline of opportunities as well, which we continue to refine and work through as well. So I think at the point in which we raise capital, we have this healthy tension of what we regard as compelling real opportunity to be able to put that capital to work. And that very much is an our ambition of the fund as we continue to look to grow the trust to capitalize on this developing asset class. And as you can see, in terms of how we have been deploying that, it has been a steady increase. We continue to make progress. We believe there's significant potential ahead within the portfolio and often in venture capital, a lot of the opportunity takes time to gestate. We're backing at times very early businesses that hold lots of potential, but still quite immature in their development and of course, riddle with risk at times as well. And it's our job to be making sure we're balancing that with the portfolio. And we'll talk to you how the portfolio is spread across the different stages of development, which we define as Series A down to pre-IPO as well. But I think what is pleasing is that we continue to make that progress despite the fact that there is significant growth still to come across many of the portfolio. And here, really, you see how that progress has been made over the previous year. The green is really where you're seeing the uplift and the orange is where you're seeing a reduction. And I think they're touching on kind of many positives across the portfolio, clearly, interactive investor and Tide and BullionVault businesses that have made great strides in the past 12 months, continue to attract a lot of interest, continue to grow considerably in particular, in a post-COVID environment, there was a lot of demand for the trading platform. So you will see, in particular, the likes of interactive and BullionVault progressing very effectively. I think just to note that not everything always goes to plan. And I think the challenge there, the biggest kind of detractor from the portfolio has been the funding around the Zopa, as I said earlier. The opportunity ahead of it, I think, is quite exciting. I think the challenge for them was raising that regulatory capital, a very significant amount of regulatory capital at an extraordinarily difficult time for them late last year. They have that regulatory capital. The raising of the GBP 140 million was an important milestone that allowed them to push forward. But we have to realize a significant reduction in valuation in order to get that deal over the line. But we think there is a good opportunity to grow from there as well. And I think we're not actively focused on seeking positive headlines. We'd rather our work and our underlying portfolio does the talking. I think what has been a pleasantly surprising has been the amount of coverage that we've got from very credible publications, both that appeal to the retail investor, but also to the institutional investor as well. I think it's a really important feature for us to let our portfolio performance do the talking, but also for us to be on the front foot where we do have the opportunity to speak with relevant commentators or press. And for our investors, I think they want us to be able to punch above our weight. And also, when it does come to an exceptional company, we should be very much at the front of the queue. We want our founder community in the European fintech ecosystem to want to take money from Augmentum about others. And I think it's incredibly important that we maintain that profile and get the balance right there as well. And in the portfolio, as I've touched upon, what is key for us as a manager is to give that diversification, not just across stage but across the underlying asset classes within fintech as well. And I think we're very pleased to have that diversification. We have focused heavily on the disruption in the underlying banking space, and particulary in the SME but also looking at a huge opportunity in wealth and asset management as well. It is an industry that's taken time to disrupt. We have backed some quite innovative and differentiated players in that space, but we're seeing increasing opportunity across that area and certainly something where we will be looking to deploy further capital over the coming 12 to 18 months as well. And that's something which we call fintech enablers, really perhaps we should call it infrastructure or the rails, those businesses that are underpinning not just the growth in fintech, but also underpinning some of the challenges and solving some of the problems of incumbent financial services companies as well. Those that have built on legacy, technology stacks and are struggling in some ways to compete with those very competitors that we're helping to fund on the right-hand side here as well. And I think there has been a sea change approach amongst the financial institutions and legacy players who see these enablers as very credible partners, technology solutions to perhaps propositions that they thought they could solve themselves. And I think there was a far greater level of engagement in the marketplace and certainly an area where we're spending increasing time and effort and focus, not just with the portfolio companies, but with other opportunities where we would like to get increased exposure. But this isn't the total universe of fintech, there are other areas where we continue to look at closely, whether it's insurtech, whether it's decentralized finance, these are areas as a team we continue to develop our hypotheses, but also spend a lot of time with a number of companies where one reason or another, it hasn't been the right time for us to deploy capital. But you will -- you should expect us as a manager to be building out not just within these categories, but also in new categories as well. And as importantly, is making sure we're getting that portfolio balance right in terms of evolution and the weight of our capital is not just geared towards one particular area. Yes, we recognize that we want to back exceptional early-stage businesses that have hugely significant potential in attacking very developed markets with significant revenue pools that perhaps haven't been disrupted as much as other areas. But these businesses can take time to gestate. As I said earlier, they can be risky, not all of them will deliver knockout returns, but we're looking for exceptional opportunities there. At the same time, we recognize that our investors want us to see -- want to kind of witness realizations within a tighter time period. So over the next couple of years, our ambition as well is to look to work with our portfolio companies that are more mature, profitable, still growing, still have exciting prospects but look to realize those investments and deliver realized returns to our investors as well. And so it's important that when we look about -- that when we look at our portfolio construction, we're continuing to make sure we get the balance right. And I think we're quite happy to have the weight of capital closer to the exit door, but the number of companies in the portfolio during that -- are just still during that gestation period and still earlier. Over the next 3 to 4 years, we'll move across the cycle into the mid and to the later stage as well. And a question I get asked more often than not is how has the portfolio performed during the pandemic, both until the end of March, but beyond as well? And I think this is just really a snapshot of how we're seeing the portfolio in the first half of last year versus the first half of this year. And I think across the board, what we can say is that the portfolio companies have managed the pandemic and the challenges that it's brought exceptionally well. I would say, as a majority of the portfolio, they have continued to trade strongly and in some cases, exceptionally well. I've alluded to both interactive investor and BullionVault businesses that have grown tremendously during the last few months. But also, there are some businesses that are really coming of the age. If I highlight the likes of Farewill, which is one of the first businesses to digitize the wills and probate business, in particular, it is a challenging subject to discuss and there's been an industry that has been beset by lack of technology and lack of disruption and innovation, and I think they're doing an exceptional and extraordinary job and really bringing some much needed change to that industry, seeing some significant growth in year-on-year to give you a sense, that business has grown over 800%. And then perhaps highlighting a business that if you look here, Habito, which is a digital mortgage platform, it is what we would regard as an impacted sector during COVID, but they have seen record revenues in the last couple of months. And why is that? It is because it has a classic example of a business benefiting from consumer behavior shifting where consumers that perhaps have been a southern demographic to shift to digital propositions, albeit that they are more convenient and more transparent and often and most likely cheaper are now being forced to do that. And I think as they've seen the benefit of these digital platforms, they are now unlikely to shift back to how they were perhaps behaving and interacting with financial services in the past. And I think they would be -- Habito would be a great example of a business eating market share from traditional platforms as well. And of course, not everything can perform as exceptionally as some of the others. We have Zopa, which I've alluded to Iwoca, which is an SME lending business has immediately shifted to how can we, one, manage the challenges of an SME lending book that is in some distress. And I think they've done an exceptional job in helping cure the book in the last kind of 4 or 5 months but also adapting the product set to effectively change and appeal to a different environment. And you would have seen the launch of the Bounce Back Scheme, which competed with their core products. And so they have continued to evolve and develop new product sets. I think the beauty of being a digital-first proposition is that it can be adaptable and nimble and also being accredited themselves to issue CBILS as well. So as I've said, I think for the majority of the portfolio, they continue to kind of build and develop and to grow perhaps at the expense of the competition. And those -- there have been challenges that have really come through some very challenging times and put themselves in a strong position to capitalize going forward as well. I won't touch in any detail, and this is available on the website. But I just wanted to, in the last 4 or 5 minutes, just talk about where we've come and the opportunity ahead as well. We're now regarded as one of the most active fintech investors in Europe. Recently actually in the past couple of weeks, there was a piece of analysis done that had us in the top 4 or 5 fintech investors across Europe in terms of quality of companies that we -- actually not subjective, but it's nice to be recognized and talked about in those terms and something that we continue to -- hope we'll continue to feature on. And secondly, as an asset class, I think one of the attractions that we've seen when we talked to those investors that have come on board and invested in venture capital and fintech for the first time has been the underlying performance. Venture capital over the past decade has outperformed public equities. And I think if you are going to focus on any specialist area within venture, then fintech is clearly one of those areas that is the most attractive. And I think we look at this in terms of performance of fintech relative to the rest of adventure and it is the strongest performing area there. So I think investing both in venture and fintech has proven today to be a strong asset class and one which we think has got significant opportunities ahead as well. And what does that mean? Well, yes, I think when we first launched back in 2018, we were talking about this is an asset class that is very early and continue to develop. And you can see that in the weight of capital that has been invested over the past couple of years, and you'll continue to see that over the year, we're going through right now. But yes, when you look at the penetration of what we would regard disruptors in an enormous market, a $10 trillion opportunity. It is still very early. If you transpose that chart across every other industry, most industries would see significant double digits penetration. And I think therein lies the opportunity. One, the genie is out of the bottle. This is no longer what we would regard as all hype, there is significant substance to this underlying industry. It's here to stay, but there is a long way ahead. For those investors that worry, have I missed the boat? Well, certainly, the boat has left the port, but it's only very early in its journey. And I think that is where we're particularly excited that we've built a strong brand. We've got strong building blocks, but we're excited of what the future holds, and we look forward to continue to work with our shareholders to capitalize on that opportunity. And finally, so what does that future opportunity mean? Well, of course, we continue to want to back the very best companies in the portfolio, continue to help them grow but also to capitalize on some of those areas that we're particularly excited about, both within the sectors where we have exposure already, but also in some other areas, which I discussed earlier in the likes of insurtech. And I think for us, when we look at this, there should always be a multiple of the amount of capital that we have available. We want that healthy tension in the investment team. We want to make sure that the exceptional opportunities rise to the top. But it's incumbent upon us as an investment team to make sure that we're seeing almost everything in the market that we can. We need to make sure that we have coverage, we need to make sure that we continue to build the relationships with the founders, the founder community across the fintech space across all of Europe as well. And I think what we have built over the last 2.5 years is a very significant watch list as well, which is incredibly important that we continue to manage that, nurture it and be able to capitalize on those opportunities that we think are ready for our investment. They come at the right time and where we believe we can add value as an investment team. So I will pause there. And hopefully, Neil, that was exactly 25 minutes and see if any questions have come through.

Perfect. Thank you very much, Tim. We've got a couple of questions coming through. First question about the IRR. You say that the IRR of 18% on invested capital has been achieved. How does that sit versus your expectations in the budget that you set?

Yes. I mean it's a good question. I think one needs to have some caveats around that. Ultimately, the true test of us as a fund will be delivering that delivered realizations. And I think high teens, low 20s are absolutely kind of venture returns and we absolutely aspire to be delivering those types of returns to investors. As a team, our minimum hurdle for us as an incentive is 10%. But when we look at any new opportunities, our baseline in terms of how we analyze, we're looking for a minimum IRR of 30%. Of course, we love to be able to achieve that, but that would be an exceptional performance. We think our investors would be happy. And I know having spoken to plenty of them, if we could deliver them high teens or low 20s, that certainly would be something that they would be happy with. But yes, we aspire to deliver the best possible returns, but there comes a balancing act of making sure we can balance the risk over time as well.

Okay. And another question from the same source actually. It's about dividends, which of the companies we've invested in currently pay dividends?

Well, that would be a rarity, I would say, in venture. The -- we're looking to back businesses that are growing. And we want to make sure we're reinvesting where possible into that growth. But we do have a business that is paying a dividend, that would be BullionVault. That is a business that continues to generate strong profitability, has a very strong balance sheet. And in the absence of us being able to capitalize on further growth by investing in further growth, then it does pay out 70% to 80% of dividends. But for us as a fund, it is all about growth. It is investing in growth. I think by the time the business is delivering dividends, then we should be looking at saying, well, can we be reinvesting our capital into a higher growth proposition. And I think that's why what investors would be looking for us to do.

Another question, Tim is, are there any new disruptors to have emerged from the COVID lockdown period?