Draper Esprit — Europe’s leading pureplay listed VC

Draper Esprit invests in high-growth companies across the UK and Europe, and has built a direct investment portfolio of c 70 companies, including a number of Europe’s leading technology companies, across four technology sectors: consumer, enterprise, hardware and deeptech, and digital health and wellness. Its core portfolio comprises its 15 largest holdings, representing 62% of portfolio value.

The company has a proven track record of delivering successful investments, having deployed c £513m of capital in total since its IPO in 2016 and realised £212m of investments. Its portfolio was valued at £702.4m (gross portfolio value) in its H121 results at 30 September 2020, with a NAV of £714.7m. The group has delivered a 15.1% CAGR NAV/share in FY16–20, reporting 8.1% growth in H121 despite the impact of COVID-19. This compares to HgCapital Trust, which has delivered a 19.1% NAV CAGR over five years (12% over 20 years), Oakley Capital with a 14.4% five-year CAGR and 3i with a 22% five-year CAGR.

The group is well-capitalised, with more than £100m in plc cash (together with a £60m undrawn revolving credit facility) following a successful placing in October 2020 that raised net proceeds of £106.6m. The placing was completed at 555p per share (equivalent to the FY20 NAV), with the latest share price of 766p at a 28% premium to the H121 NAV per share of 600p.

Recent exits include Peak Games, PodPoint and TransferWise, still leaving a portfolio featuring a number of late-stage companies potentially also close to exit (such as Graphcore, UiPath, Revolut and Trustpilot). As the latest example, UiPath’s US$750m Series F funding round in February 2021, valuing UiPath at US$35bn, raises the fair value of Draper Esprit’s stake from £37m to £115m, a 3.1x uplift of £78m or over 50p per share (before carry deductions, FX and costs) to Draper Esprit investors. We expect to see further NAV progress in 2021 from exits from the core portfolio, market conditions permitting, but also, from funding rounds and revaluation across both core and emerging portfolios, despite the continuing challenges of the COVID-19 pandemic.

The following factors help differentiate Draper Esprit from competing investment propositions:

Draper Esprit typically builds long-term stakes in companies, with initial investments often sourced through its network of seed funds investing across Europe. Draper Esprit has a strong track record of cash realisations, with £212m returned since IPO. Having delivered a 20%+ IRR prior to its IPO in 2016, management continues to target a 20% gross annual portfolio return over the cycle, which it appears to be on track to deliver in FY21 (H121: 10.4%), despite the impact of COVID-19.

Draper Esprit has successfully built a robust business, with a broad portfolio of investments, in different segments of the technology sector, across a range of investment stages. However, as a people-based business, the company remains reliant on its nine-strong senior investment team (with over 100 years of combined experience) and the team’s market reputation to attract the best entrepreneurs and invest in the most sought-after businesses. Once invested, the company relies on the efficient recycling of capital, with regular realisations supporting reinvestment. Realisations are dependent on the state of the technology market, the valuations of quoted peers and investor appetite to continue to invest in technology companies at IPO or by way of a trade sale.

Draper Esprit was one of the earliest VCs focused exclusively on the UK and Europe, and has built a strong reputation, with a supporting infrastructure and ecosystem that means it remains one of the leading VCs in Europe today. In FY20, Draper Esprit invested £90m from its own balance sheet. This is expected to increase to c £120m annually following the October 2020 placing (c 70% expected to be committed to Series B+ rounds), with additional third-party capital committed of c £40m from enterprise investment scheme (EIS)/venture capital trusts (VCT). With the launch of the co-investment fund (we anticipate in FY22), fees from which will make fund management a net profit centre, we expect to see continuing NAV appreciation with annual investment continuing to grow over the next three to five years, with regular exits from a growing, balanced portfolio of late-stage businesses. We understand the group is also considering a move to the main market.

Draper Esprit offers an attractive way to access leading, private European technology start-ups, a high-growth asset class that is otherwise largely inaccessible to the public market investor.

Draper Esprit is a rapidly scaling market leader in the technology sector, investing in high-growth private companies. It has a growing portfolio of late-stage investments, a track record of exits that has delivered 15.1% FY16–20 NAV/share growth and a roadmap to a self-financing business model through scaling its fund management business (net operating costs already less than 0.2% of NAV). Investors increasingly recognise these credentials, with the company trading at 1.28x H121 NAV. Catalysts for a re-rating include further scaling of the business, a potential listing on the main market, growth in third-party fee income, together with the potential for emerging unicorns to deliver unforeseen material upside through funding rounds, successful exits or IPOs.

Draper Esprit is a VC investment company dual-listed on AIM and Euronext Growth Dublin, with c 40 employees (H121: 33) based in offices in London, Cambridge and Dublin. Founded in 2006 as Esprit Capital, the company was renamed Draper Esprit in 2015, after joining the Draper Venture Network, before listing in June 2016 to become the first European VC to do so.

Draper Esprit’s core focus is on Series A+ funding from its own balance sheet to leading European start-ups, with the majority of capital targeted at later-stage rounds. However, the group comprises a number of historically independent vehicles, investing in UK and European technology companies in markets from seed to late-stage, pre-IPO capital. The other principal businesses within the group include:

Management has also announced plans for a US$400m Series B+ co-investment fund, which we anticipate will be launched in FY22.

Draper Esprit invests in high-growth companies with global ambitions and has built a direct investment portfolio of c 70 companies across four technology segments:

This approach allows the group to access high-growth, emerging themes within the technology sector, including micro-satellites (ICEYE), quantum computing (Riverlane), artificial intelligence/machine learning (Graphcore, UiPath), consumer (smava, Cazoo), digital health (Endomag, Push Doctor) and fintech (Revolut, N26).

Management targets four technology segments in order to provide a degree of diversification across the cycle, with the group able to commit capital to segments with relatively lower valuations, while realising late-stage investments in segments where demand and valuations are higher.

At the end of H121, Draper Esprit’s core portfolio was weighted towards enterprise technology (41% of core portfolio by value) and hardware & deeptech (38% by value), with consumer 21% by value, while digital health and wellness, although a sector of active investment, is not currently represented in the core portfolio (Exhibit 1).

Draper Esprit is looking to identify long-term winners in the European technology sector. Although the group commits funding to seed funds to secure a broad pipeline of future Series A+ investment opportunities, it still allocates the weight of its capital to a relatively small number of core holdings, as well as on opportunistic secondary opportunities.

At H121, the 15 constituents of the core portfolio (Exhibit 7) represented 62% of total portfolio value and on average deliver gross margins of around 60%. Although Draper Esprit does not disclose precise equity stakes in its investees, it held an average equity stake of 9.0% across the core portfolio, with an average fair value of £28.9m as at H121.

In October 2020, Draper Esprit raised £106.6m (net of expenses) from investors, to strengthen its balance sheet and supplement its cash resources, better positioning the group to benefit from the accelerated transition to digital driven by the COVID-19 pandemic. The raise was also a strategic reaction to the recent rapid growth of the European venture capital market.

Management expects the proceeds of the placing to enable the company to accelerate annual investment to £120m, with c 70% of future funds expected to be committed to Series B+ rounds. This allows the group to participate in larger, later-stage rounds and hold its investments closer to maturity, thereby enjoying more of the value uplift ahead of exit. Draper Esprit’s subsequent Series E investment in Graphcore, a core holding, demonstrates the benefits of the strategy.

In parallel with the placing, Draper Esprit also announced plans to launch a US$400m third-party co-investment fund (we assume in FY22) to invest alongside its balance sheet in later-stage growth rounds (Series B+), further increasing the overall size of rounds in which Draper Esprit can participate. The greater influence provided by the additional funding will enhance the group’s ability to lead deals and secure allocation, as well as generating additional income from management fees to cover central costs.

Funds from the placing will allow Draper Esprit to continue to support existing seed funds within the portfolio, as well as invest in further European funds. In particular, in the placing announcement, Draper Esprit confirmed an intention to invest in the next Earlybird fund targeting Series A investments in Germany and the DACH region.

Draper Esprit is a member of the Draper Venture Network (DVN), an international organisation of independent venture funds. Membership helps Draper Esprit to support its companies to expand beyond Europe, as well as cooperating on investment diligence, marketing intelligence, corporate relationships and co-investments. As a global network, membership of DVN enables Draper Esprit’s portfolio companies to access markets worldwide, with partners in Asia, the US and the Middle East. Draper Esprit joined DVN in 2015.

In October 2017, Draper Esprit launched a fund-of-funds strategy focused on seed investment. By investing in seed funds, Draper Esprit is able to identify and secure a broad pipeline of attractive early-stage investment opportunities ahead of its core Series A and B investment rounds. Draper Esprit has now invested in 22 seed funds across Europe, which have collectively invested in more than 350 portfolio companies and raised £1.1bn in aggregate.

As well as its strategic value, Draper Esprit’s investment in Earlybird has already delivered a threefold return on investment (ROI), including exits such as Peak Games. As at 30 September 2020, Draper Esprit had invested a total of £116m in Earlybird, with a residual valuation at that date of £153m. As part of its October 2020 placing, Draper Esprit confirmed an intention to invest in the next Earlybird EB VII fund, targeting Series A investments in Germany and Europe.

In July 2018, Draper Esprit formed a strategic partnership with Earlybird Digital West to share deal flow, talent and resources. Earlybird invests from seed to Series A, with offices in Berlin, Munich and Istanbul. The partnership with Earlybird not only gives Draper Esprit’s platform greater reach and scale, but also offers access to a larger pipeline of deals and a larger pool of specialist investment expertise. Investing in secondary investments through its fund-of-funds strategy, deepens the group’s market insight as well as providing access to the best early-stage companies, extending the group’s geographic footprint.

Draper Esprit initially took a 56.5% stake in Earlybird’s EB VI fund for £16m in July 2018, guaranteeing to invest a further £15m a year until 2022. In January 2019, Draper Esprit also acquired a 27% interest in Earlybird’s EB IV fund for c £55m, together with a 5% interest in its Digital East Fund for £16m. These investments have allowed Draper Esprit to acquire holdings in Earlybird portfolio companies through direct investment in later-stage funding rounds for, eg smava, Peak Games (exited in H121), Nfon, B2X, Socialbakers and UiPath.

Draper Esprit has an experienced management team, with the core investment team having helped establish the firm as one of Europe’s leading VCs from its foundation in 2006. The CEO, Martin Davis, was appointed in 2019, complementing the deep venture capital expertise within the firm with fund management and broader financial services expertise, particularly relevant to the next stage of development for the group. The CFO, Ben Wilkinson, is an experienced public market CFO who joined the group in 2016 and was appointed to the board in 2019.

Exhibit 4 shows total European VC investment by year, broken down by round size. This highlights that the overall value of VC funding is rising each year, but also in 2019 and 2020, that more capital is being allocated to later-stage rounds with increasing numbers of the larger round sizes.

As part of its strategy to deliver sustainable growth, Draper Esprit invests incrementally, building value over time, with its seed funds investing small amounts in early-stage seed companies and Draper Esprit making initial direct investments at Series A, while reserving more capital for later-stage rounds (broadly a 30/70 Series A/Series B+ split).

Draper Esprit builds deal flow through its network of relationships, its broader ecosystem and through the team’s reputation in the market. Its team of specialists has the experience and sector knowledge to dig deep in its due diligence to help identify good investments from attractive marketing. Draper Esprit will only invest where it feels it has a competitive edge and where management can leverage its broader ecosystem to add value to the potential investee company.

Operationally, the group has established an internal dual-platform investment process, with roles divided between partnership and platform teams. The teams work closely with one another; the partnership team members are the deal makers, focused on deal execution, portfolio companies and their founders, while the platform team provides the support functions, assisting with deal flow and collaborating with the entrepreneur community, other investors and the wider ecosystem.

The partnership team is made up of experienced investors – founders, CEOs, start-up advisors, private equity and investment bankers, with experience stretching back over 20 years. The team engages, supports and invests in entrepreneurs, focusing on securing new investments as well as supporting existing portfolio companies. To strengthen its offering, the group has recently added a new senior partner to its investment team, Will Turner (ex Vitruvian), as well as principal-level hires Christoph Hornung (ex-Rocket Internet) and Inga Deakin (ex-Touchstone Innovations).

The platform team has been established to support the entrepreneur community, other investors and the wider ecosystem. This starts from the early seed stage, while companies are developing their propositions, through to companies preparing for exit. The team run events and offers specific training for portfolio companies, including trend spotting, panel discussions and focused networking to support its companies.

When Draper Esprit invests, it offers more than money. It is an active investor that typically takes a seat on the board of its portfolio companies (together with significant investor rights), to deliver support and guidance as the company grows and scales. Throughout the diligence process, as well as post-investment, Draper Esprit seeks to build and maintain strong relationships with portfolio company management teams to become the company’s preferred investment partner.

Draper Esprit targets private European technology companies with the potential to become market leaders. The investment team meets thousands of companies each year, of which it invests in only c 15–30, including follow-on investments.

Draper Esprit sources investment opportunities through three principal channels:

Together, these channels deliver a strong pipeline of deals to ensure Draper Esprit has a market-wide view of the investment landscape.

In October 2017, Draper Esprit launched a fund-of-funds strategy focused on seed investment. By investing in seed funds, Draper Esprit is able to identify and secure a pipeline of attractive early-stage opportunities ahead of core Series A and B investment rounds, benefiting from the expertise of sector-specific funds and effectively expanding its sourcing network across Europe. This strategy also helps Draper Esprit identify and invest in emerging investment trends ahead of its competition.

In return, the seed funds receive additional capital to deploy in their core markets, and a direct and deep relationship with Draper Esprit, helping to ensure that promising investee companies have a natural port of call as they develop, scale up and need later-stage capital.

Draper Esprit has now invested in 22 seed funds across Europe, committing £41m to be invested over five to 10 years. The funds have invested in more than 350 portfolio companies and have raised £1.1bn. In total, £17m of commitments have been drawn down, of which £3.2m was drawn in H121.

Draper Esprit follows the International Private Equity and Venture Capital Valuation (IPEV) Guidelines, as well as the IPEV Board’s Special Valuation Guidance issued on 31 March 2020 in response to the COVID-19 crisis, which together set out best practice where private investments are reported at ‘fair value’.

Typically, where a funding round has been completed in the last 12 months, management uses this as the carrying value, but where there has been third-party funding invested and a material change of circumstances, or the last funding round is more than 12 months old, management applies a multiples-based valuation. Updating the valuation from the basis of historical funding rounds arguably offers a better view of fair value, but still leaves NAV as a significantly trailing indicator for a high-growth portfolio. Since March 2020, Draper Esprit has updated its company valuations using revised forecasts to reflect the anticipated impact of COVID-19. Its portfolio is diversified across sectors and geographies, with the core portfolio held at conservative valuations based on realistic growth projections and captive market size.

As of H121, six (40%) of Draper Esprit’s core holdings are valued on the basis of peer multiples and nine (60%) are based on last valuation rounds. However, this balance will vary over time depending on the frequency of funding rounds and the maturity of the portfolio.

A participation exemption effectively removes the tax on Draper Esprit’s investment gains when it exits an investment held through its Ireland-based fund structure. The exemption allows an Ireland-based company (Draper Esprit (Ireland) Limited) to sell interests in trading companies free of tax where they are resident in Ireland, the EU or a country that has concluded a tax treaty with Ireland (eg the UK) and where the disposing company holds or has held at least 5% of the ordinary share capital and economic interest in the subsidiary company for 12 months, beginning not more than two years before the disposal. The latter time condition allows Draper Esprit to sell down a stake in an investee company tax efficiently to below 5% on a gradual basis. Where Draper Esprit’s stake in an investee company remains below 5%, the investment is held through the UK holding company.

Draper Esprit’s three largest investments, Trustpilot, Graphcore and UiPath, together represented 46% of the core portfolio fair value as at 30 September 2020. Coverage in the financial press suggests that these three late-stage businesses, in particular, are actively considering their exit options, including by way of IPO. However, we would note that an IPO is always subject to prevailing market conditions and typically only a small minority of a VC’s portfolio will complete an IPO, with the vast majority (80%+ over the cycle) exiting by way of a trade sale. Both Graphcore (Series E round, December 2020, US$2.8bn valuation) and UiPath (Series F round, February 2021, US$35bn valuation, 3x uplift, £78m increase in fair value) have recently completed funding rounds, extending their cash runways and increasing their strategic flexibility as to when to exit.

In October, the group raised £110m of additional capital (£106.6m net of costs) in an oversubscribed placing to new and existing investors at a price of 555p per share (equivalent to the FY20 NAV per share). In an investment update in January 2021, the group confirmed that it had made 11 investments in H221 to date, deploying a further £56m (H121: £32m) of the £106.6m raised in October. Investments have included a mix of new and existing companies, across investment stages and sectors.

Notable H221 investments have included:

The group has also confirmed an investment in telemedicine company Push Doctor and, most recently, an investment in a quantum computing company, Riverlane.

Whereas many of its competitors are still investing in their portfolio, Draper Esprit has managed to realise investments since 2017, as well as continuing to invest in its portfolio in every period since IPO. The steady cadence of exits provides investors with comfort that the value of late-stage businesses will be realised and reinvested in new opportunities to build future value. Although there is no specific target, over the cycle, the group expects to realise c 10% of portfolio value a year.

In H121, Draper Esprit realised investments of £105.6m with a final exit from Peak Games (acquired through Earlybird) and TransferWise, as well as partial disposals of UiPath (acquired through Earlybird). This figure includes the release of escrow proceeds from the disposals of Clavis and PodPoint from prior periods. In total, Draper Esprit has now realised c £212m of value from its portfolio with the vast majority of exits delivering attractive multiples of the amount invested (Exhibit 8), with an average money multiple of c 3.0x.

Exhibit 8 also underlines Draper Esprit’s approach to supporting all its portfolio companies to exit, even those that underperform. As a rule of thumb, the group expects 30% of its investments to deliver strong returns, 60% to deliver returns of 0.5–2.0x money invested and only 10% to be write-offs. This approach is more entrepreneur-friendly than the typical US VC model, which swiftly sifts potential winners from losers and aggressively cuts underperforming investments.

Looking at Draper Esprit’s track record in terms of gross portfolio return (the increase in gross portfolio value, together with net realisations) highlights a positive return in every period since IPO, with a return of 10.4% in H121. It is notable that, as the portfolio has grown and matured, returns and growth, although still strong, have slowed (FY17: 49.4% to FY20: 9.8%). The growth in portfolio value has also driven a rising NAV per share, again with a positive return in every 12-month period since IPO, leading to a 15.1% CAGR over the period FY16–20.

Draper Esprit is committed to building and developing its ESG approach over time and has already taken meaningful steps across multiple areas of its business. The group intends to use its platform to encourage and promote its values (through its responsible investment and sustainability policy) across its portfolio, as well as applying ESG considerations to develop best-in class technology companies and achieve strong investment returns.

In a recent ESG report, Berenberg concluded that of the group’s portfolio, 35 firms (57% of NAV) meet the criteria for Berenberg’s Sustainable Development Goals (SDG) framework. In this context, with 45%+ being considered high, the report included a recommendation to investors to consider Draper Esprit as a constituent for their ESG portfolios.

Draper Esprit’s dedicated ESG working group is set to establish board-approved ESG KPIs, with further details set to be announced along with Draper Esprit’s FY21 results in June 2021. Draper Esprit’s detailed ESG policy is available on its website.

Despite having built a small number of global tech companies such as SAP and Nokia, the European technology sector has lagged the US and Chinese technology sectors for the past decade. Relative to both markets, Europe has few tech champions and a paucity of technology exposure on the public markets. Exhibit 10 illustrates the dominance of the US public markets in all tech segments except games and digital marketing.

The US-Europe divide is highlighted by the fact that the US tech sector is now worth more than the sum of the entire European stock markets in aggregate. While the European VC market is expanding rapidly, since 1995, US$1.2tn of VC funding has been raised in the US vs US$200bn in Europe, a difference of a factor of six. In 2019, Europe accounted for 16% of US$237bn of global VC funding, with the US and Asia together representing almost five times this amount (source: Can Europe be the most entrepreneurial continent? Index Ventures, October 2020).

European technology companies are remaining private for longer, with investment round sizes steadily increasing, limiting the public investment opportunity. Meanwhile, COVID-19 has accelerated the transition to digital and a significant shift to online activity is evident in everything from video games to online medical consultations, to a global surge in online shopping. As well as a direct impact on the way people lead their lives, this transition has significant secondary impacts, with large increases in supporting services such as online payments, fraud detection and security, cloud banking and more general cloud infrastructure to support home working.

There are three key factors behind this issue:

Having identified this policy and capital failure, governments across Europe have been looking to put the building blocks in place to close this funding gap with the US.

Exhibit 12 highlights that, despite progress made to date and increasing European round sizes, US round sizes remain significantly larger than European rounds. This may be partly explained by a more competitive ecosystem in the US, offering more companies and better investment opportunities, but it also highlights the value divide between the US and Europe that has been steadily drawing more money into the European market. Exhibit 13 tracks the increase in committed capital on a quarterly basis, also highlighting the pause in investment in Q220 due to COVID-19, and subsequent rebound in Q320.

Over the last five to 10 years, the foundations have been laid for European tech to flourish. UK and EU governments have launched industrial strategies, providing targeted government support to SMEs, to foster innovation and create employment (Exhibit 11). Alongside this, the amount of capital targeting private investment opportunities has grown exponentially, leading to ever greater numbers of technology unicorns (private businesses valued at more than US$1bn) across the UK and Europe, as well as ‘soonicorns’ (start-ups with the potential to become unicorns).

Supported by governments, private capital is now available in Europe in large quantities, increasingly sourced from patient, supportive investors who understand the challenges of building world-leading technology companies. This has fostered a wave of European entrepreneurs able to grow their businesses and retain ownership, without needing to sell them to overseas companies to secure the capital they need to grow. With the maturing of the European market and with valuations remaining lower than in the US, the European investment opportunity is compelling, drawing in increasing amounts of US and international investment, alongside European capital.

However, this progress still remains difficult to see in the public markets. SaaS-based business models and digitalisation mean that start-ups are far more capital efficient than they have been in the past. When coupled with better access to private capital in Europe, companies have not needed to list in order to access the capital required to drive growth. This means that companies are able to stay private for longer, avoiding the cost, governance issues and short-termism that can be found on the public markets, allowing private company investors (and entrepreneurs) to retain far more of the value created by Europe’s successful start-ups.

Draper Esprit, together with its listed venture capital and private equity peers, provides an attractive way to access leading European technology companies and participate in the value they create through a diversified holding company, offering attractive liquidity to investors.

Over the course of 2020, technology valuations have followed a markedly different trajectory to many other traditional sectors. The COVID-19 pandemic has driven an acceleration of the digital economy as consumers and companies have all been forced to embrace new, online ways of working. This trend is particularly well captured by the performance of the BVP Nasdaq Emerging Cloud Index, an index of pure US SaaS (Software-as-a-Service) businesses (Exhibit 16).

Given the wide range of quoted SaaS stocks in the US and the paucity in the UK and Europe, it is necessary to look to the US to get a sense of where global SaaS valuations are heading. In the simplest terms, the SaaS index doubled over the course of 2020, reaching 2.7x (almost tripling from) its low point on 16 March 2020.

At the start of 2021, SaaS and technology valuations more generally remain elevated, with no obvious trigger for a large-scale revaluation of the sector. With a flurry of IPOs in H220, first in the US and then the UK, more technology IPOs are likely to follow in 2021 so long as market conditions persist. Market commentary around US IPOs includes Affirm (consumer lending fintech) and Roblox (online games), which delayed their listings in 2020, as well as Coinbase, which would make it the first cryptocurrency exchange to list, together with a range of other tech companies.

Before its US$750m Series F funding round in February 2021, Draper Esprit’s investee company UiPath (robotic process automation) had also confirmed it was considering a US IPO in H121. However, following this latest funding round (at a valuation of US$35bn, a more than 3x uplift over six months on the US$10.2bn valuation for its July 2020 funding round), the company has extended its cash runway, offering management increased flexibility to choose the optimal time to exit.

Among others, Deliveroo (consumer food delivery platform), Darktrace (AI for cybersecurity) and Trustpilot (Draper Esprit investee company – consumer reviews) are each widely reported to be considering a London listing, buoyed by the successful listing of the UK’s largest tech IPO, THG, in Q420, now valued at close to £8bn. Following its latest US$222m fund-raise in December 2020, Graphcore (Draper Esprit investee company – chip-based accelerators for AI and machine learning) is valued at US$2.8bn. The company has confirmed that it is considering an IPO but, having closed its latest funding round, now sees an IPO in 2021 as unlikely.

A summary of the principal risk factors relating to Draper Esprit is set out below:

Gross portfolio value (GPV) as at 30 September 2020 was £702.4m (FY20: £702.9m), with realisations made of £105.6m and investments of £32.3m, together with a fair value movement of £72.7m (including foreign exchange movement). The fair value of carry liabilities (H121: £51.4m) as well as deferred tax (£6.6m) is then netted off to generate the net investment value of £644.8m (FY20: £657.3m), held as a financial asset on the balance sheet. The portfolio net fair value gain (H121: £56.4m, FY20: £40.8m) is then reflected as revenue in the P&L.

The deferred tax provision (H121: £6.6m) relates to capital gains for portfolio companies where less than 5% of the equity is owned. Carry balances (H121: £51.4m) are accrued to management teams (including Draper Esprit employees) based on the GPV at period end. Carry was accrued at 14.9% of fair value gains in H121 and represented 7.3% of GPV at end H121 (FY20: 5.8%).

Net assets increased by £55.1m (8.4%) in H121 to £714.7m (FY20: £659.6m), principally reflecting the portfolio net fair value gain (H121: £56.4m).

Draper Esprit remains in a strong position to invest in technology businesses with £62.1m of plc cash at H121 period end, including £2.3m of restricted cash. In H121, the cash balance increased by £28.0m (FY20: £34.1m), primarily as a result of net realisations of £73.3m, less repayment of the revolving credit facility (RCF) of £45.0m. In June 2020, the group extended its three-year RCF with Silicon Valley Bank (SVB) and Investec by 12 months to June 2023 and increased the amount from £50m to £60m (undrawn as at period end).

Post period end, the group raised proceeds of £106.6m (net of fees) in a placing in October 2020 and subsequently deployed a further £56m by 31 December 2020. On this basis, allowing for c £3.7m of additional operating costs (assuming three months of operating costs at the same rate as H121: £7.3m), we estimate that Draper Esprit has total available plc funds of c £109m in January 2021, or c £169m including the undrawn RCF.

As at H121, the group had additional cash resources available of £39.2m from EIS/VCT investors.

H121 investment income reflects £56.4m of portfolio net fair value gain (H120: £57.6m) and fee income of £6.1m (H120: £5.5m) from management and director fees. Central costs were £6.6m (H120: £5.0m), the majority of which relate to employee costs (H121: 33 employees). Management is targeting fee income (H121: £6.1m) less total operating costs (H121: £7.3m) to be below 1% of NAV (H121: 0.2% of NAV), but we expect the gap to more than close with the successful launch of Draper Esprit’s co-investment fund. The income tax charge remains minimal (H121: £0.2m).

As an investment company, Draper Esprit’s financial performance centres around its balance sheet, the growth in fair value of its investment portfolio, the resultant growth in net assets and net asset value per share, and the cash resources available to the business to allow the group to continue to fund its portfolio companies to maturity and exit. With an illiquid portfolio of high-growth, early-stage private businesses, this presents a valuation challenge.

Growth in portfolio fair value is irregular and the timing of realisations and exits can be hard to predict. Given this variability, there is no easily defined revenue and profitability trend and so the business is typically valued at a premium or discount to NAV rather than on a profit multiple.

Consequently, the principal value driver for Draper Esprit is the increase in value of its investment portfolio. This in turn is driven by a combination of realisations (H121: Peak Games, which Draper Esprit exited at a premium to its carrying value), funding rounds involving third-party investors at higher values (H121: UiPath, Trustpilot, M-Files and Cazoo), as well as revenue growth in the underlying portfolio businesses, driving increased peer multiples-based valuations.

With the group providing formal NAV valuations twice a year, these represent a trailing indicator to the ‘true’ value of the portfolio. This gap is widened by a substantial proportion of assets being held at the value of the last funding round, which will be further out of date.

Typically, where a funding round has been completed in the last 12 months, management uses this as the carrying value, but where there has been third-party funding invested and a material change of circumstances, or the last funding round is more than 12 months old, following IPEV guidelines, management applies a multiples-based valuation.

Updating the valuation from the basis of historical funding rounds arguably offers a better view of fair value, but still leaves NAV as a significantly trailing indicator for a high-growth portfolio. Whether the company trades at a discount or premium to NAV depends on critical factors such as: 1) the group’s NAV track record; 2) management credibility; 3) the perceived conservatism of carrying values; and 4) the prospect of attractive exits driving future outperformance.

Looking ahead, as Draper Esprit builds its third-party fee-earning funds business, it should increase fee income and start to generate positive underlying profitability, allowing investors to value the business on a hybrid NAV/earnings basis. We would expect the value of the fund management business to be incremental to NAV, based on a percentage of funds under management (FUM) or on a multiple of underlying earnings net of recurring central costs. This valuation upside is unlikely to be material at the outset (assuming the co-investment fund is launched in FY22), but value will increase, becoming material as the third-party fund management business scales.

Draper Esprit’s most direct competitors are private European VCs such as Accel Partners, Balderton Capital, Index Ventures, Northzone and Partech Partners. However, with few direct peers on the public markets, we would identify the companies in Exhibit 18 as Draper Esprit’s closest quoted comparables.

The peers can be placed into three groups:

IP commercialisation companies and VCs invest in earlier-stage businesses, which cannot easily be marked to market, meaning that group NAVs are typically based on the latest funding round, often a significantly trailing indicator. In contrast, later-stage private equity businesses can be valued more easily and more regularly by reference to market multiples.

The market prefers companies with a well-diversified, high-growth portfolio, a history of value realisation and exits, a consistent long-term track record and strong corporate governance. A premium is often applied where the company owns an income-generating asset management arm (eg 3i), whereas for eg HgCapital and VNV, the management vehicle is held separately from the investment vehicle.

Draper Esprit’s peer group includes: