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Questor: this little-known Aim firm has built a tech portfolio of fast-growing stocks. Buy
Questor share tip: Draper Esprit’s approach of investing in unlisted early-stage businesses seems to be paying off
The irony about private equity in 2019 is that many of the firms that used to raid the public markets for choice assets have now listed their own shares.
The not-so-private Blackstone, Carlyle and KKR have had strong runs on Wall Street, helped by ditching partnership structures and converting to corporations so that tracker funds can more easily invest in them.
Firms in Europe are no different. EQT, the Swedish buyout house, has made a stellar start to listed life, with its shares soaring since September.
The granddaddy of them all, 3i, used to look like an anomaly on the stock market but perhaps it was just setting a trend.
Either way, investors who have followed chief executive Simon Borrows’ time at the helm, including this column, have done exceptionally well. It would seem the common complaint that private investors are excluded from the chance to enjoy chunky private equity returns is no longer relevant.
Up to a point. Those looking for high-risk, high-reward returns of earlier-stage investing that the big buyout houses are less likely to get involved in still need to shop around.
Many start-ups that would otherwise have listed their shares to raise capital are staying private for longer because they can source funds easily. If they finally go public, private investors have often missed the best of the gains.
Draper Esprit is one firm that attempts to solve this problem. It listed on Aim three years ago as an investor in privately owned, mainly digital companies.
Its portfolio, worth £683m today, includes stakes in microchip maker Graphcore, analytics provider RavenPack, reviews site Trustpilot and Transferwise, an online money transfer service.
It has been growing at a clip. Draper boasts a decade-long record of making net returns of at least 20pc. In the latest half year the gross value of its portfolio rose by 15pc, mainly because of upward revisions to the fair value of its stakes.
Company followers at broker Peel Hunt acknowledge that the increase is lower than in the previous two halves but they expect reassuring growth in net asset value of around 10pc in the half, compared with 8pc a year ago.
Draper’s core portfolio is well spread. Representing 70pc of total value, these 18 firms are more mature but still growing fast. The house broker, Numis, assumes £60m of investment every year and roughly the same raised from realisations.
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There are signs the company is maturing too. Last week it was announced that Simon Cook, the chief executive, would switch to become chief investment officer, with the arrival of Martin Davis, former Kames Capital chief, as his successor.
With so much going on, it is a surprise that the shares have trended down since summer last year.
There could be several reasons. Draper Esprit was criticised for departing from its stated model of direct investment when it teamed up with Earlybird, a venture investor that offered it a route to expand across Europe, especially into Germany and Austria. But that move appears to have been vindicated.
The decision to invest in some of Earlybird’s funds, paid for by a £100m placing in January at 530p a share, gave it holdings in software robotics developer UiPath, Peak Games and loan comparison platform Smava. The trio did much to drive the portfolio’s appreciation in the last financial year.
More broadly, the implosion of Neil Woodford’s empire is enough to give any investor in “portfolio” companies pause for thought. Trading in private firms will always be less liquid than taking stakes in listed entities but Draper appears a long way from a cash crunch with £126m of investment capacity available.
A net asset value of 575p is expected to be confirmed when half-year results are published on Nov 26, suggesting that a 16pc discount has opened up. The stock trades on just 4.2 times this year’s forecast earnings and is not keeping up with events.
Questor says: buy
Ticker: GROW
Share price at close: 469p
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