Description

VEF AB – VEFAB SS  - SEK   4.49 …

VEF AB owns a collection of growth stage private FinTech companies in emerging markets.  Think of these as a diverse collection of FinTech VC investments, where you don’t have to pay a mgmt fee or carry.  Of interest is the largest holding is well on its way to becoming a 10 bagger and may justify the entire NAV with a near term IPO.

They are in emerging markets with friendly regulators, which historically have less bank competition and less financing access for small and medium sized businesses than in developed markets.  

It is in a corporate structure where salaries and opex run sub ~1%, and management has an incentive structure that could lead to a max of 5% total dilution, contingent on delivering the max criteria in NAV per share growth annually.

At Q2, it is a US$404m book value, with portfolio holdings valued at last financing if in the past year, or after 1 year at mark-to-model, which has proved conservative as future financings have walked up the book value.

Overnight they are placing an additional 207.3m shares (25% or about US$100m), which will increase the share count from 834.5m to 1,041.8m total post-offering. Their existing cash plus half of the share proceeds will be used for taking their pro-ratas on next rounds in portfolio companies, of which they have identified approximately $55m coming, and the other half for potential new investments.  Post-offering book value will be around US$500m. 

The shares are coming at a discount to last trade of SEK 4.49 and will be priced at or close to book value of SEK 4.24 per share (factoring in FX and a $3m gain from sale since last quarter).  So it should be low or no premium, and the last I heard on price talk was SEK 4.27, but final pricing and allocations will be disclosed on Wednesday in the am.

Key holders are Ruane Cunniff (26%), Libra (18%), Wellington (12%), and Fidelity (12%). The CEO David Nangle has 2.2%.  All are taking at least their pro-rata and these key holders and mgmt/board members have agreed to either 90 or 180 day lock up, but passive non-affiliated investors won’t have restriction.  In addition, the company agreed to no additional dilution for 180 days, subject to some caveats.  The key holders have also been making their own investments in the private rounds of VEF portfolio companies, separately from VEF, along side Softbank and other key venture investors.  

The valuations in the portfolio are typically 9x to 11x sales for FinTechs with torrid sales growth, which never sits well among value types, but is a reality of the current growth landscape and has shown duration.  Yes, that’s interest rate and stimulus fueled, but rates have been held low worldwide for more than a decade.  The very fast growth rates with a multi-year growth runway can turn a Price/Sales multiple into an EBITDA multiple rather quickly. 

The emerging market nature of these FinTechs also allows the portfolio companies a less competitive environ to play a fast growing role in financial inclusion by providing services to un- or underserved consumers and small and mid sized businesses.  Plus they are spreading access to financial services at fair and affordable terms to the un or under banked with loans to low income people and to SMEs.  Historically, many emerging markets have a banking oligopoly that caters to large enterprises and governments but ignores other participants, or charges them outrageously high fees and rates.  These banks are “old world”, “asleep at the wheel”, and allowing “innovation to come in around them” noted the VEF CEO.  

The VEF portfolio is concentrated where the regulators are welcoming to new innovations and want greater access to financial services for all citizens.  Country allocations are Brazil (54%), Mexico (20%), and India (8%)… 18% Other is widely diversified.

Here's a list of the top 15 holdings, and note that the top two, Creditas (in Brazil) and Konfio (in Mexico) represent a combined 61% of the $404m NAV, at valuations of $169m and $75.4m respectively.

Of particular interest is that Creditas, of which they own 9.8% equal to 42% of NAV or $169m, was valued at $1.75B at last financing when it had a forward sales rate of ~$200m.  Now they’ve engaged GS and envision going public with a forward sales rate of $400m.  At 10x sales that would be a $4B IPO, and the 9.8% owned would almost equal the entire current NAV. 

Some hot FinTech IPOs such as Wise PLC are trading at 18x sales, which isn’t inconceivable for fast growing Creditas assuming the buoyant financing environ lasts a while.  Creditas is a true disruptor.  Brazilians have easy access to some of the world’s worst interest rates.  Creditas is cutting interest rates by 80-90% from the normal 100-400% per annum typically charged by Brazilian unsecured consumer lenders and credit card providers.  They are reducing the debt burden on consumers by offering loans at affordable terms. And, as they grow will likely be able to reduce their own cost of capital.

It's a similar situation at Konfio, of which they own 10.6% equal to 19% of NAV or $75.4m. Konfio provides credit and a growing breath of fin services to SMEs that usually have no formal access to credit and are often first-time users of formal financial services.  Similar to Square, they are helping SMEs with a wide range of services from payments to ERP systems to credit cards to loans. 

Like so many emerging FinTechs, they utilize AI assisted analytics with full bank account access and  transparency to provide services where the “old world” banks never bother to tread.

Here’s an interesting interview with CEO David Nangle from June 26^th, 2021.  

And, an interview with Sergio Furio, the founder and CEO who runs Creditas from Sept 4^th, 2020, and another interview from 2018.

I think VEF makes a nice addition to a payments/FinTech basket by adding emerging markets exposure (with catalyst) in a world where the US is becoming a less dominant portion of the landscape.

Catalyst

IPO of key holdings such as Creditas and Konfio... Sales or realizations on other holdings. 

Continued growth and financings of portfolio companies.