I ran into a Eureka Report subscriber at a bar in the middle of the Yarra River (that’s right, right in the middle of the river) a couple of Fridays ago. He had just came from an AGM and was mulling it over with a Melbourne Bitter.I of course was mulling over another week of LIC analysis.
He told me he had been enjoying my pieces and following along with some of the stock calls and was happy so far. But he was a bit unsure about my last call, “that start up tech one”. The tech one was Bailador Technology Investments (BTI). It does not focus on speculative start ups, but unlisted late stage technology companies. Late stage means they are existing businesses and not just ideas. They are real businesses with real revenue who are looking for capital to move to the next level.
For those who have followed Bailador since it was brought into the LIC model portfolio, you would have seen it has been a mostly enjoyable experience. The share price was $1.01 when we made our purchase. The net tangible assets value of the LIC were and still are $1.16.
At the time of writing the share price was sitting at $1.17 ($1.16 today) but has been on a roller coaster ride recently reaching as high as $1.30. Right now I am not surprised to see the Bailador share price rise and fall by four or five per cent each day and on the back of no news about the underlying companies or from Bailador itself.
I spoke with co founder David Kirk last week to get his thoughts on the price movement. There were two key reasons for the sudden increase: More coverage and no more outstanding options.
On the coverage front, a broker made Bailador its top pick for alternative LICs and the $20 million buy in of Washington H. Soul Pattinson attracted a lot of media attention as well. On top of this, you have Kirk as the front man talking to anyone who will listen. Effective communication of your philosophy and methods, especially when there is no other LIC out there doing what you do, is essential. It cannot be measured - but the ones who do it right get rewarded by investors.
When it comes to the options no longer being in play, what this does is remove another investment option for those wanting to benefit from the underlying company. Having that secondary market there (BTIO) lagged on the head stock (BTI).
Kirk mentioned the team always anticipated trading at a premium due to the unique nature of the offering. Kirk compared the business model to two UK listed investment companies that both invest in innovative start ups, IP Group and Imperial Innovations. These groups were born out of the concept of working with universities from London, Cambridge and Oxford and monetising the best tech and scientific ideas. These two groups are known for trading above the value of the underlying portfolios.
Towards the end of my conversation with Kirk, he mentioned something that caught my interest. Now there is greater publicity around Bailador, more private businesses that are looking for capital to take the business to the next level are aware of this LIC. These are larger, expansion stage businesses that are right in the sweet spot for the Bailador team.
The proportion of high quality opportunities knocking on the team’s door has increased. This puts Bailador in a prime position as it can pick and choose businesses that fit the mould perfectly for them. Ones where the team’s experience and contacts can help push the partnering company to the next level.
It is almost a John West case now: It’s the ones Bailador rejects that makes them the best. With the new found publicity and with the additional $38.4m in cash I anticipate to see the Bailador team taking advantage of the new opportunities.
We remain happy holders of Bailador Technology Investments and would consider adding further to the position at the right price. I suspect we might get our chance once recent memory of the publicity fades and if there are no new deals in the short term to keep the attention of some of the more impatient investors. This is always a risk, if investors don’t see any news flow for quite a while, the NTA looks stagnant due to the conservative valuation nature of the underlying holdings and some weakness in the share price could appear. If it does we will happily add to the position.
For the time being Bailador Technology Investments remains a hold. We will add to our position at a five per cent discount.