Welcome to this discussion about IP Group, the London-listed venture investor which operates in the UK and Australia. I'm Paul Bryant, the financials analyst at Equity Development. We initiated coverage of IP Group earlier this year. It's a really interesting business and hopefully this discussion today will help investors and potential investors deepen their understanding of the business.
I'm joined today by Greg Smith, the CEO, and David Baynes, chief financial and operating officer. Greg, starting with you, it's the 25th anniversary of the group. So, great time to discuss the then and now. Can you talk us through why IP Group was originally set up, how the VC and funding environment has changed over that time, and how the group has adapted?
The origin story, if you like, was this recognition that the UK has got some unique capabilities in fundamental research, science and technology. And if you look back over the history at a number of technologies that have become huge commercial successes and have really changed the lives of many hundreds of millions of people globally, ranging from things in systems and technology right the way through to healthcare and novel drugs. And there's lots of examples that we can talk about. But the observation was while we are exceptional at science, we comparatively had been bad at turning that science into commercial application where the investors, particularly from the UK, had benefited from the long-term value that had been created from that research that had effectively been funded by the taxpayer and the government. And so, in its simplest form, IP Group was set up as an arbitrage between our exceptional science and technology and our sort of reasonably world-leading capital markets and the success rate here in the UK versus the equivalent success rate in the US.
We've become, and I think IP Group could credibly say we played a very big part in this, we've become really, really good in the UK at starting and beginning to scale science and technology businesses based around that fundamental research. And so, we have an incredibly active early-stage venture scene here in the UK. We've played a big role in that. We, you know, we were definitely one of the first, but we've given rise to some specialist vehicles that invest in the private vehicles that have messed around Oxford and Cambridge and other places in the country. We've done things like EIS investing in the UK, which has offered a tax advantage way for getting extra capital into the sector. We've got quite good incentives for founders in terms of tax-efficient share options and things. So, we've become really good at that stage of investing, and IP Group is very well positioned in that early bit. And we can talk later about Parkwalk and our EIS fund management capability.
The bit that has been recognized, you know, with success comes then, okay, so what, you know, what's next? What else do we need to be exceptional at? And I think the last 5 years plus has been focused on this question of, well, if we can create these businesses and we have the right conditions to create them, can we then scale them into globally significant businesses that have been born here, have scaled here, and a good proportion of the economic value has remained here in the UK. And that's the bit that is the next phase of opportunity both for IP Group and indeed for the UK, I think. And so, that shift we've sort of lived and breathed. And I think with some of the changes that are coming up are around pension capital in the UK being more directed towards this sort of growth economy, some of the ways that we're thinking about industrial strategy in the UK, and also I think our relevance on the world stage as some of these technologies become kind of geopolitically highly relevant. I think those are the conditions that we now see. So it's no longer a question of can we sort of create companies from innovation, it's become can we scale companies from innovation?
So that's what you do, how the group's involved, but can you translate that to why IP Group becomes an attractive investment for shareholders?
Yeah, I think in its simplest form, we offer retail and institutional investors access to an asset class that is otherwise very difficult to get exposure to and we do so in a diversified and a liquid way through the PLC shares. It offers people exposure to some of the biggest megatrends in the world and if you add up the three megatrends that we invest across — deep tech, clean tech, and health tech — you get to about a 10 trillion opportunity by 2030. So we're clearly playing in some very big economic areas, but it's exposure to things like AI, healthcare and genomics, next-generation computing. So it's some of the, you know, the very big value drivers for the economy of the future.
So there's the underlying growth in the portfolio which should translate to NAV per share increase and hopefully therefore share price. There's the potential for our discount to our NAV to unwind somewhat which adds a little bit of tailwind to the investment case. And I think the third factor is we've been quite successful in recent years at adding additional pools of capital under management and so that will provide some income and greater firepower for us to invest in the best companies. And so those also provide sort of an incremental tailwind to the NAV per share growth.
Got you. Yeah. So there's just very, very few routes into investing into those types of markets. You've touched on how you deploy capital. So, you do it two ways. You use your own balance sheet, so what you call permanent capital, and then also third-party capital. Let's take those one at a time though, starting with balance sheet capital. Tell us the rationale for that financial mechanism. Why is that more attractive to investee companies? More attractive to shareholders? And why is it so different to the traditional venture capital fund?
I'll come at it from two sides, because obviously we also managed private capital alongside the balance sheet. So, on the balance sheet side, the intent is that we are able to offer investee companies a meaningful, often cornerstone investor into more than one financing round, which is quite tricky to do if you are managing a 10-year fund with a 5-year investment period. Maybe you could do one or two stages of investment. And often for deep tech investing, you might need to be in three or four funding rounds to be able to make a difference. So, from an investee company point of view, they know that a first check from IP Group, if they hit their milestones, if the commercial case still holds, if the economic opportunity remains as it was or is even improved, we can be there as a supportive shareholder along the way.
Now, from a shareholder point of view, obviously that's important the other way around. The watchouts are making sure that we don't use permanent capital as a means to continue investing in things beyond when the economic case is fully valid. And it's part of the reason why we felt it was important to put out some quite stretching targets around generating cash and realizations from our portfolio. So, we said we'd do 250 million over a 3-year period. We're making good progress to that, but I think it was partly my intent was to signal to the markets that just because we have permanent patient capital, it doesn't mean that we're not impatient in exiting from our positions and recycling them into new pools.
I understand. But I suppose there's also an angle there that if you need to delay an exit by a year or two for economic reasons, you can do that. Whereas a fund at the end of its lifespan couldn't.
Yeah. So you also manage third-party capital. Tell us a bit about what that is and how it fits into the model.
The first bit of our private capital is our specialist EIS fund manager Parkwalk. We are multi-award-winning as an investment management house. The brand is very well known with wealth advisers and crucially with universities. So we partner with universities in the UK to manage small pools of early-stage capital and that allows us to invest in a pretty capital-efficient way into a broad set of spin-out companies from some of the leading institutions in the UK. So we manage a fund with Oxford, with Cambridge, with Imperial. We work with a group called Northern Gritstone to cover four of the universities in the north of England. And so we see and we are the most active investor in university spin-outs in the UK. And we try to put a lot of that activity under our Parkwalk brand.
So that's the first pool and for shareholders that offers differentiated access, a complementary diversified pool of early-stage capital, management fees and if we're good, performance fees. Then the slightly later stage, so sort of series B and beyond as companies are hitting their kind of commercial point of risk rather than technical risk. That's back to this sort of scale-up opportunity that I talked about. We've managed money for one of the big superannuation funds in Australia for the last 5 years, Hostplus, and we're just in the process of launching. We announced earlier this year that we're launching one of the first DC products for UK pension savers with Aberdeen, and by the end of this year we'll have the first portfolio up and running. But we think we're pretty much first movers in the whole space that was generated by things like Mansion House.
And I think that offers a really interesting opportunity because there are a number of companies, as I said earlier, that have done the initial bit and the ecosystem in the UK is very good. There's actually a huge pool of these kind of ripe investment opportunities. And so if we can get meaningful capital at that scale-up stage, then that can offer some very attractive returns. Same principle for our shareholders, that means management fees and performance fees.
Got you. So that's bigger checks into later-stage companies scaling up, isn't it?
That's definitely the end.
Yeah, and it's getting the whole flywheel going. You know, the idea is that if we can get this right both at an IP Group level and at a national level, we can have a number of companies. It won't be all of them because there'll still be very sensible reasons for selling a company when it reaches a hundred million valuation or a billion valuation, but there will be a few that will be able to go the journey further. They'll go another step.
And often that can be when you create the real value, and that will be companies that we have exposure to on our balance sheet that will be hopefully supercharged by this scale-up capital that comes in maybe alongside the balance sheet. And for a few companies, we'll be able to deliver extra outsized returns, which will benefit our shareholders.
Specific funds, tax-incentivized funds, for making early stage, often slightly riskier, investments. They've got relationships with some of the finest universities in the country, in fact obviously some of the finest ones in the world, Oxford, Cambridge, Imperial, etc. And as part of that, they often run a number of different annual funds, in particular some alumni funds. So the alumni funds work but if you've been an alumni of Oxford, Cambridge, which you may have been, then you would quite regularly get a notification from someone like Parkwalk saying, 'Would you like to make an investment in these areas?' And they raise a fund every year. I think one nine, ten, and nine Oxford and ten Cambridge. And every year they raise more money, which then is effectively allocated to the tech transfer office of that university. And then they are really seeding all the spin-out opportunities. So that way, through Parkwalk, we are getting to see some of the best spin-outs out of the best universities in the world every year. We also have a relationship with Northern Gritstone and other universities as well. So we're getting to see a very good slice of the UK market.
What is Northern Gritstone?
Northern Gritstone is an organization similar to IP Group, but actually set up dedicated to servicing those kind of top northern universities. Manchester, Sheffield, Leeds. They've been a great organization. They've been going about three or four years. And very much in the kind of style and mode of IP Group. So on to the original question. So that's a key sourcing engine now for the balance sheet. Well, the business is really in three parts. I'm sure you agree we've already spoken about this. There's sourcing engine, which is Parkwalk.
And then appropriate assets can then be invested in from the balance sheet where our core cash is. You know, we currently have about 250 million pounds of cash and about a billion pounds of assets. So, and then that's augmented by the third stage, where we are raising third-party scale-up capital. So this is the capital for later stage in the journey, which we're then raising from people like pension funds to augment the investment. And that means you're having kind of dedicated appropriate capital to each stage of the journey. And that's how we do it. So we source a lot from Parkwalk. We do also source and having been obviously in the ecosystem for a very long time, it's our 25th year. So we know both a lot of entrepreneurs, we know a lot of academics, but we're fairly well networked. So we're not exclusively Parkwalk, but we do find that there's a high proportion of our balance sheet is invested in something that has originated from the university, about 90%.
There must be a bit of a network effect because you announced the investment in Matter Machine last week and we picked up that one of the founders of Oxford Nanopore is involved in that. Maybe you can tell us a bit about it. Yeah.
No, that's exactly right. So that's a classic case where you got a relationship with an entrepreneur. We work, you know, we've had a brilliant relationship with Nanopore way through from being involved from its incorporation in a pub in Oxford all the way up to its IPO and beyond. And Gordon was with us nearly all that journey. I think he was in that famous pub where it was first incorporated. So it makes sense Gordon when he left the business recently about 6-8 months ago. He's already got interested in new interesting areas and we're backing him again. And that's, you know, brilliant to be able to back some really world-leading entrepreneurs like that.
Okay. Shareholders will want to know that who do you compete with typically when sourcing investment?
That's a really interesting point. It, you know, it's not really the right word I'd say at the beginning. It's more like who do you try and collaborate with? Actually, you know, when you're really sourcing very early stage investment like this, you know, it's a very specialist and some might say quite a risky game. And actually you're not sort of sharp elbowing other venture capitalists in the corridors of a university.
What you're really doing is you're finding world-leading firms who are using our expertise and experience to build an investment enterprise which you then cornerstone and then bring in new investors alongside you. So it doesn't at that early stage. What happens is they grow and they get more competitive obviously, but here's the good news. We're already in them and we already have a cornerstone investment and therefore, we're not trying to fight our way in at a high price.
Let's explore how that works in practice. Maybe look at what's today your largest investment. I'll just call it the Pfizer royalties at the minute.
Tell us the origin story of that, how that came about, and then how it's progressed to where it is today, yeah.
Extraordinary asset. And I won't go on for too long cuz I could go on this subject. But I mean, we bought a mythical Touchstone, which had before been called Imperial Innovations. So, what that business was doing, which was a listed company like ourselves, that was really doing what we do for many universities for one. It really became the tech transfer office for Imperial College. And it wasn't just interfacing with that transfer office and finding ideas. It was doing the job. So, you actually employed about 40 people we took over just working on that. Part of that, they spun out companies. Part of that, they did life sciences as well.
After we bought Touchstone, that agreement came to a natural end. And when it came to an end, we then had to negotiate a sort of deal to determine it. And in simple terms, we agreed that we would keep what we call the active patents, a patent where we either were about to or had sort of done a licensing deal. And the other ones we actually chose to give back cuz we weren't going to have 40 people working for us. As part of that process, we had identified this very interesting patent family, which at the time was set up in a company called Zai Hip. And we licensed this intellectual property in Zai Hip. And so, we'd identified the opportunity in the patent, and we secured it as part of that termination agreement, which was reasonable cuz we'd been working on it for about 8 years as an organization.
And anyway, that then went the path of many a spin-out. Zai Hip started developing it. It then got bought by a company called Metzera, which it was then interesting on the, you know, the old getting more interesting, but it's still an early stage spin-out. And then they did something clever. They listed on Nasdaq.
