Investing in unlisted tech firms may sound risky right now – but this trust is an exception

Last week, we highlighted some of the big bargains that are currently available across “private equity” trusts. In a similar vein, we believe Augmentum Fintech, a specialist private equity trust which invests in unlisted “disruptive” early stage financial services companies, has become too difficult to ignore on a discount of 30pc.

For some of our readers, alarm bells may well be ringing at the sound of a trust that invests in unlisted fast-growing technology companies. And understandably so. The valuations of listed “growth” stocks have tumbled since the start of the year because their potential future earnings are worth less in an inflationary environment.

As a result, investors are concerned that the valuations of the private companies held in Augmentum’s portfolio will be revised downwards, causing the trust’s net asset value (NAV) to fall. This helps to explain why the fund trades on a 30pc discount to its assets.

While these concerns may be relevant for competitors such as Chrysalis Investments, which also invests in British unquoted companies, Questor believes they are not warranted. Augmentum’s discount looks far too wide and recent share price weakness looks unjustified.

We first tipped this trust back in January 2019, when the shares were trading at 98.4p, and we flagged it again as a buy in March of this year at 117.5p, after what proved to be the first leg of the sell-off in listed growth stocks. The timing of our tip in March initially looked pretty good and by early May it had recovered to 138p.

However, things took a turn for the worse in late June after its share price slid to a fresh low of 87p. To be fair, it was a tough month for stock markets in general: global shares fell 9pc and the S&P 500 entered bear market territory, down 20pc since the start of the year. Since then, Augmentum’s shares have made up some ground and trade at 109.3p today.

There is an important distinction to be made between Augmentum and competitors such as Chrysalis, which wrote up some of the valuations of the companies in their portfolio last year when market conditions were buoyant. Augmentum, by comparison, has taken a more conservative approach and kept a large portion of its investments valued at cost. This means a material decline in Augmentum’s NAV is less likely because company valuations were not written up in the first place.

“The underlying valuations are very conservative and the companies in the portfolio are in good shape,” explains Daniel Lockyer, a fund manager at Hawksmoor Investment Management.

“It feels like the current discount of 30pc assumes that the NAV is going to fall by much more than it is likely to.”

There appears to be a big disconnect between Augmentum’s share price and the performance of its underlying companies. Over the year to the end of March, its NAV grew by 19pc, while its top 10 investments recorded average year-on-year revenue growth of 96pc and typically have 17 months’ worth of cash to support their growth plans.

Questor believes there is much to feel positive about when it comes to Augmentum’s portfolio, which includes Tide, a bank for small businesses, and Onfido, which provides fraud prevention software. Fintech businesses owned by the trust continue to gain market share and to grow their revenues, as consumers and businesses reassess their relationships with banks and other financial services firms. They offer a fresh perspective, cutting-edge technology and the ability to digitise archaic and time-consuming processes.

Augmentum also recently banked £42.8m from its stake in interactive investor, the investment platform, which was sold to asset manager Abrdn. This represents a return of 11 times the money they invested. This brings the fund’s cash pile up to £61m, which is available to take advantage of new opportunities and to top up existing ones. However, the management team, led by Tim Levene, will only do this at sensible valuations.

“We think this trust offers good value,” Mr Lockyer concludes.

Questor agrees. This is one to buy for the long term. It may take time for the market to realise that Augmentum’s NAV is resilient, but hopefully our patience will pay off.

Questor says: buy

Ticker: AUGM

Share price at close: 109.3p

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