March 24:
Most of my previous sentiments remain, although I'd make the following updates to my observations:
1 I'm pretty sure Soul Patts sold down some of their holding.
2) I'm not so sure that some of the valuations are conservative anymore
3) The portfolio is even more poorly diversified, due to some exits and Site Minder (SDR) doing so well.
Point 3 is starting to annoy me. Most of todays NTA update involved a stock pitch for Site Minder (SDR).
The value of SDR is now almost 50% of BTI's SP or 33% of BTI's post taxNTA.
I have no opinion on SDR, it seems like a great business and Bailador seem to think it will continue to do well, and I hope it does. The problem is that shareholders aren't paying Bailador to manage a listed equity portfolio. Management seems to be doing some serious mental gymnastics to justify holding SDR at its current weighting.
IF I was to be very cynical, I'd say they want to avoid to whopping tax liability that will result in a lower NTA and resultant management fees.
Management - I'm not paying you 1.75% and 20% to sit a third of the portfolio in a listed stock . If it was 5, 10 or even 15% then I would be satisfied. This needs to be sorted out, otherwise it's clear to me that this needs to trade at least a 20% discount to NTA.
I can tolerate the cash holding on the basis that management are being patient and the market is still a bit too hot.
March 23: A lot has been said about BTI so I'll keep this briefish.
BTI is currently trading at a price equal to the cash and listed investments it holds. The other 26% of reported Pre Tax NTA are private companies. It's worth noting that in order to realise these investments BTI would incur a big bill to the tax man, bringing NTA below $1.50.
I think the current SP is about right, making the following observations:
1) Management appear to be skilled, however market conditions have been very rewarding to the kind of investment strategy that BTI employs.
2) Management have made a point of having conservative valuations for private investments. Now that the market has lost its froth it's unclear whether this is still the case.
3) The portfolio is currently poorly diversified .
4) Management fees are high. 1.75% of NTA and 17.5% over an 8% hurdle.
5) Souls have crept up on the share register. I can see how BTI would be valuable to Souls and think a takeover is possible.
6) I think the dividend policy is to pay out 4% of NTA p.a
The bottom line is that without a takeover offer, I don't see great value at the current SP. I'm not sure what probability to assign to a takeover and what sort of timeline is reasonable to assume.
With the valuation for Mosh scheduled for December I was doing some a bit of research on any recent updates for the company and came across this AFR headline.
https://www.afr.com/street-talk/men-s-health-player-mosh-set-to-appoint-an-adviser-20231213-p5er6r
I don't have access to view the article, but potentially there could be another potential exit for BTI in the near future. Currently Mosh only represents around 3% of the BTI portfolio ($7.5m at current carrying value) so there likely wouldn't be any significant impact on the NTA.
@NewbieHK has posted the results, but just wanted to add a few thoughts on Bailador's latest full year.
As co-founder Paul Wilson told us when we met with him last year (see here), the financials are always going to be both lumpy and a little messy given the non-cash revaluations as well as the occasional disposals and acquisitions.
But assuming you take their disclosed valuations for unlisted investments at face value (and I think they have a good track-record of conservatism) the NTA is probably one of the better metrics to track. On this front, we saw a modest 4.4% decline (although when adjusted for cash dividends it was up 2.5%).
There's some nuance needed here too due to the fact that it was the listed company investments that dragged the NTA lower -- and this is mostly a function of what SiteMinder shares did over the financial year. Unlisted investments actually did really well -- gaining 28%, and the value uplift is entirely based on recent 3rd party transactions (ie not just the opinion of a valuer, but based on real world transactions)
This slide shows it well:
So when you account for where we sit at present, NTA is up (modestly) from June 30 last year, even excluding dividends:
At any rate, this is, and always has been, a "bet" on management's ability to find and invest in early stage tech. And I think they have great form.
This slide speaks volumes:
An IRR of 23.2% is nothing to sneeze at. Yes, they benefitted from the exuberance in the tech space, but as they highlight they were sensible enough to capitalise on this opportunity (I wish I had been better at that!!) and now have a solid war chest of $104m.
The revaluation in tech stocks hasn't been fun, but the silver lining is that things are now a lot cheaper for someone looking to make investments -- like Bailador (and many of us!). In fact, according to their presentation, average tech multiples are 28% below their 5-year average (still, this is with an average EV/revenue multiple of 7.8x which still seems up there, but is perhaps not unreasonable for fast growing, early stage companies. In the results announcement Paul called this "more reasonable", rather than cheap)
All up, their portfolio companies appear to be making genuine progress, they have a strong balance sheet and shares remain about 20% below their (post-tax) NTA.
I find some comfort in knowing that Soul Patts is a major shareholder too.
I'm taking a small position on SM today and will look to buy some in real life when I get some spare cash.
Some notes from today's meeting. First off, thanks to @Duffshot38 for the suggestion -- I found Paul to be very knowledgeable and definitely aligned with a lot of my investing philosophy.
Since listing in late 2014, the share price has gone from around $1 to $1.32. Add in a special dividend and you get an average annualised return of around 7% per annum. That's pretty ordinary, but at the same time there seems to be a big disconnect with what the company itself has done.
As I noted in the meeting today, net tangible assets have compounded at over 20% per annum over the period. That may be understated given the conservative way in which they ascribe the carrying value of their assets.
Indeed, as Paul said, shares are trading at a 20% odd discount to NTA on a per share basis, and likely a lot more given how they track this figure. Of course, LIC's will always talk a good game here, but as Paul said they have a 100% strike rate in terms of exits occurring at valuations that were far higher than the carrying value.
With 10 holdings in the portfolio, they are extremely concentrated and -- given they research 100's of companies each year -- very selective. They hold equity stakes of between 10-40% and also take an active role in these businesses, as either directors or advisors.
Paul was very candid on those investments that didn't work out (eg viastream), and how the carrying value of these were quickly written down when it was apparent the investment thesis wasn't working out.
I also liked how they seemed to be very mindful of cash burn for their investments, and how adverse they were to relying on ongoing capital injections to sustain operations.
It was also good to see both Paul and his co-founder each buying a further $500k worth of stock each a couple of weeks ago -- and AFTER they disclosed they (very successful) exit from Instaclustr.
At the end of the day, this is a bet on management, and whether they can continue to find, invest and exit from private companies. But they do certainly seem to have great form here (although, at the same time, there could be a good bit of 'key man' risk). It's also a great way to get exposure to early stage, private tech companies, and still have all the liquidity of an ASX company.
It's also hard not to notice the seemingly large discount to NTA. That being said, there's no law of nature that says these valuation gaps should close, and even if they do it can take a long time. Also worth noting that the financials are going to be very lumpy, and will depend on transaction events in the underlying companies for them to record revenue. From a cash perspective, it's going to be especially lumpy.
Here's what their free cash flow looks like since 2016 (using data from S&P) -- it'll be even better when the current half is reported, but the point to note is that it can and will go backwards for a while if they don't manage to get any successful exists from their portfolio companies. When they put some profits back to work, we'll see a big drop in FCF too.
To the uninformed, there'll be periods where it'll look like the business is doing nothing, even if their portfolio companies are genuinely improving their intrinsic value. In other words, things like revenue and cash flows aren't going to be particularly informative metrics in isolation -- as Paul said, NTA is the figure to watch. And one needs to have some trust that that is based on reasonable valuations.
Remember that their investments are very illiquid. And getting them away at good valuations will depend a lot on what current market conditions are like.
Investors in Bailador need to be cognizant of these factors, and as such I'd suggest you need a long term focus. Much of the market will likely miss a lot of the nuance for a company like this.
Valuing the company is also tricky -- unless we're able to individually value the component companies accurately, which we can't.
So, again, a lot depends on the faith and trust you have in management. With Paul and David holding over 10% stake in the business, it does provide some good alignment.
Overview of Bailador:
Bailador is an LIC focusing on investing in private information technology and media companies. It is run by David Kirk (previous Fairfax CEO and All Blacks captain) and Paul Wilson (experienced in private equity).
The characteristics of the companies that Bailador likes to invest in are listed below (from their website):
- 2-6 years of operation
- Run by the Founders
- Proven business model with attractive KPIs
- Ability to generate repeat revenue
- International revenue generation
- Huge market opportunity
- Require capital to grasp this opportunity
- Important verticals within the technology sector: eCommerce, subscription-based internet businesses, online marketplaces, software, SaaS, high value data, online education, telecommunication applications and services.
"Bailador typically invests $2-10M of equity into an investee company. They target minority investments alongside highly motivated founders and management who have best-in-class technology or business systems." They typically don't invest without board representation.
Main Thesis:
When starting out my investing journey about 3 years ago I did look into BTI, however, at that stage only Siteminder had made significant gains and represented a large part of the NTA. Given I was only at the stage of investing in ETFs didn't know the risks in BTI so put it on the to watch list. The recent Strawman interview reminded me to take another look.
Bailador's list of characteristics and the point in which they invest I think is key to Bailador's success. They do not buy an idea or concept company. They buy a company with real traction in the market in which it operates. However, the target companies aren't large enough for public markets (or even large private equity), they require capital to grow and also need some experienced investors to assist with how to grow the business, Bailador fills this void. Bailador seems to have found a very nice sweet spot to invest in these growing companies.
Bailador has consistently shown that they are conservative in their valuations of the companies they hold and in recent times have been able to realise some of their investments to cash or companies held are now marked to market through IPOs. BTI has a consistent record of always having third-party valuation events that come in at or above the current carrying value. Therefore, the monthly NTA presented to shareholders is a conservative number and potentially provides investors with hidden value yet to be uncovered.
The downside risk of investment at this point in time is very small. The company is currently heavily backed by cash after realisations. See image below for a breakdown of NTA from the May 22 NTA update. I think investing at this point of time is the prefect time to buy BTI given markets have significantly reduced the valuations of tech companies that BTI likes to buy. Having a large amount of cash available in this market means BTI can buy the new additions to the portfolio at lower valuations. Additionally, BTI is trading at a 15% discount to the conservative post-tax NTA and more than 25% discount to the pre-tax NTA.
Bailador's valuations are somewhat conservative for the sector they operate in. Especially given the early stages of many of the companies they purchase I would expect the EV/revenue multiple to be higher than the average but this is not the case. See image below from 1HFY22 presentation:
General Notes:
- Companies held are predominately based in Australia but some holdings are based overseas.
- Stats from 1HFY22 presentation:
- Portfolio revenue $341m with 43% growth
- 66% gross margin
- 91% recurring revenue
- Management fees are expensive. 1.75% of pre-tax NTA and compound performance hurdle of 8%.
Positives:
- Large margin of safety given the cash backing, discount to NTA and conservative valuations of companies held.
- Plans to provide a 4% fully franked dividend based on pre-tax NTA.
- Currently many smaller investments $20 mil or less. Besides for recent additions to the portfolio all have had positive revaluations. Recent additions have yet to be revalued.
- Chart appears to have positive sediment.
- Very conservative NTA valuations which are validated by 3rd party transactions. As of 1HFY22 there had been 29 3rd party valuations and these all came in at or above BTI carrying value. This shows the NTA is likely under the real market value and a lagging indicator of actual value of all investments.
- BTI is trading at a significant discount to NTA. May 22 NTAs:
- Pre tax $2.01
- Post tax $1.70 - 15% discount to NTA.
- Management of the LIC have skin in the game:
- David Kirk owns around 6.2% of the company.
- Paul Wilson owns around 2.8% of the company.
Risks:
- Key person risk - David Kirk and Paul Wilson.
- Next round of companies BTI invests in are unsuccessful.
- Current market conditions result in cash realisations for BTI becoming hard execute.
- Potential for little insight into the companies that Bailador holds due to the commercial in confidence agreements that are likely especially given the board positions.
- Current weak capital availability limits short term valuations from increasing.
- The lag factor in valuation. This has shown to be very much on the conservative side but this potentially supresses the short term valuations and could have a shock downgrade.
- High fees eat away at performance.
When to get out:
- It is clear the current investments aren't working out.
- Trim if there is a significant premium to NTA (unless justified due to conservative nature of valuations).
- Key person risks eventuate.