Heliad Equity Partners — Focused DACH tech investor

Heliad invests in companies operating in the internet and technology, e-commerce and lifestyle sectors, based in German-speaking countries, which have the potential to transform or dominate their sector through a new technology or approach. It aims to invest in relatively small companies, with annual sales of €1-50m, and will look at both private and public equity opportunities, taking a buy-and-build approach, rather than a passive one. In this way it seeks to assemble a portfolio of investments, which would likely be too small for institutional investors and, through its own listing on the Deutsche Börse’s Scale Segment, make them accessible to other investors. It is notable that its investments in listed companies take the form of private placements to establish a major stake in a company, and may be complementary to its private investments, potentially offering an exit via a merger.

Heliad Equity Partners, the listed entity and the limited partner (LP) in each investment, is managed by Heliad Management GmbH, the general partner (GP). Heliad Management is 100% owned by FinLab, another German company listed in Frankfurt. The management company receives a 2.5% annual management fee as well as a performance fee of 20% of realised net earnings (the same as 20% of net profit under German GAAP). FinLab also owns 47% of the shares in Heliad Equity Partners. Exhibit 2 shows the corporate structure. FinLab’s two biggest shareholders, with 49% and 31% of the outstanding shares respectively, are BF Holding and Apeiron Investment Group, which in turn are owned by Bernd Förtsch and Christian Angermayer, leading German entrepreneurs. The access to deals afforded by the connections of these shareholders differentiates Heliad from other private equity (PE) houses. Before examining the portfolio in more detail we will look at the investment strategy.

Heliad focuses on German-speaking Europe (DACH), where it has a wide network. The region is one of the most economically important on the continent: Germany is the world’s fourth-biggest economy by GDP and mid-sized firms such as those Heliad looks at (the Mittelstand) are one of its cornerstones, and may be undervalued as a result of their size and because illiquidity makes them inaccessible to institutional investors. The German economy remains healthy, with the IMF expecting German GDP to grow 1.6% in 2017 and 1.5% in 2018.

The sectors Heliad addresses are all those which are expected to see market growth, where products and services can be scalable and where innovation, either through technology or the way it is used, can give companies the ability to dominate their markets. We will look at the markets in which Heliad’s investments operate in more detail later, but Germany provides a potentially fertile market for e-commerce and fintech in particular. The World Bank estimated that 87.6% of Germans used the internet in 2015 (vs 74.6% in the US and 92.0% in the UK), but the Ecommerce Foundation (a worldwide non-profit organisation) estimated that in 2015 business-to-consumer e-commerce in Germany only had a 1.97% share of GDP, vs 6.12% and 3.32% in the UK and US and a global average of 3.11%, implying that there remains room for growth.

Heliad’s primary investment criterion is the quality of the management team or the company’s ability to bring in a new one. It will also give managerial assistance where necessary: for example, Thomas Hanke spent a year working at FinTech Group as head of business development and investments before returning to Heliad as CEO in April 2016. The typical investment horizon is between two and four years, although Heliad does not have a time limit. The aim is to achieve a cash multiple of 3-5x in that timespan. Heliad will consider various methods of exit from its investment, including IPO and trade sales. Selling shares in listed entities has been the favoured method so far, with the Deutsche Entertainment (DEAG) and FinTech stakes being reduced over time. The recent acquisition of a stake in bmp may provide a way to exit BettenRiese too in due course: both operate in the sleep product markets and bmp is listed, so a merger between the two might be a way of both creating value, if there are synergies, and making it possible to realise that value.

As shown in Exhibit 1, the portfolio is dominated by FinTech Group, and the technology and internet sector comprises nearly three-quarters of investments by value (Exhibit 1). Management is working to diversify the portfolio, but the relative scale of the FinTech holding and recent good performances of FinTech and MagForce mean they are likely to comprise the majority of the portfolio for some time. We understand that management expects to make four or five new investments in the next 12 months and would expect Heliad to continue to sell down its stake in DEAG. Below we look at the portfolio in more detail, explaining the investment case for each holding.

Detailed financial statements are not available for the unlisted constituents of the portfolio because Heliad consolidates them, either because it holds a controlling interest, or because they are held through HEP Beteiligungs, but we show basic income statement data for the listed investments in Exhibit 3 as well as the value of Heliad’s holding in each company. We would draw attention to the fact that Heliad’s listed investments have a current value of €65.9m, just 3% less than Heliad’s own market capitalisation of €68.1m. It may be that a discount is being applied to reflect the 2.5% annual fee and potential 20% ‘carry’ payable to the management company and for Heliad Equity Partners’ own costs, but the discount on the listed investments seems high: Heliad’s total liabilities are only €3.8m (at 31 December 2016), giving a net value for the listed assets alone of €62.1m. This does not seem to ascribe any value to the unlisted holdings, which Heliad reports make up c 25% of portfolio value. We explain each business briefly below.

FinTech has itself consolidated several other businesses and is now reorganising itself into tech and finance entities. It reports under two segments and is in the process of reorganising its divisions so that the operational structure matches the structure of its financial reporting more closely.

The securities trading and financial services division (€19.4m of revenue, €11.9m EBITDA in 2016) comprises flatex, an online broker, and ViTrade, a specialist trading platform for very active investors. flatex is the fastest-growing online broker in Europe and had net new client growth of 25,000 in 2016, bringing the total to c 175,000. It has customers in Germany and Austria and management aims for their number to exceed 200,000 by the end of 2017. Both businesses provide non-advice securities transactions to well-informed investors. Securities covered include all financial instruments tradeable on German exchanges as well as numerous international ones, over-the-counter (OTC) direct trading, FX and CFDs. Both operate online and have no branches, charge competitive fees (with no subscription costs and a maximum of €5.90 per trade OTC and €5.00 for exchange-traded instruments, flatex is the cheapest online broking platform available to German retail investors). Other differentiating factors include the range of trading partners (19) available to its customers and the fact that they can also use flatex to invest in time deposits or overnight money. flatex can also make loans to its customers. FinTech also has a mobile payments business called kesh and is winding up a second online broker called brokerport.

The transaction processing and white-label banking division (€70.8m of revenue, €28.3m EBITDA in 2016) is made up of XCOM and its fully owned subsidiary biw (Bank für Investments und Wertpapiere). These earn R&D revenues for developing financial technology for their clients, execute securities transactions and provide business process outsourcing to over 250 financial service companies and banks (notable clients include Commerzbank and Deutsche Bank, for which FinTech runs LOX, the exchange-traded products over-the-counter system with 3bn price feeds and 50,000 transactions a day). The two entities also provide services to flatex and ViTrade, including securities settlement. biw is a full-service bank in its own right and holds over €1bn in customer deposits. XCOM provides software, hosting services, complete specialised banking processes, deposits, brokerage, payment transactions, cards, loans, mobile payments and peer-to-peer transactions as well as cash logistics, ATM operation and settlement. All services and products are highly secure, while maintaining flexibility, as they are fully integrated into clients’ existing systems and easy to use. As well as established financial services providers, the clientele includes start-ups needing their own systems.

FinTech is listed in Frankfurt under the ticker FTK and recent share price performance has been good, with the shares up 28% ytd (Exhibit 5), partly driven by encouraging FY16 results published in April. FinTech has not paid any dividends to date, but Heliad has realised €7.7m of its investment. The current value of Heliad’s remaining stake is €52.7m, meaning that the cash multiple on the original investment (including realised returns), which was 2.4x at 31 December, is now likely to be c 3x. Separately, under the Scale scheme, we will be initiating on FinTech in due course, but will not be providing forecasts.

MagForce is a nanotechnology company listed in Frankfurt under the ticker MF6. It has developed a medical device called NanoTherm to treat cancer. Put simply, the technology involves injecting tumours with magenetic nanoparticles, which can then be excited (heated) remotely by a NanoActivator to destroy the tumour while minimising the impact on surrounding healthy tissue. We have recently re-initiated coverage of the company and our report includes detailed forecasts. MagForce is executing its strategy to drive uptake and acceptance (in the US and Europe) of NanoTherm. In Germany, MagForce has six centres (three utilised, c 50 patients to date) commercially capable of treating glioblastoma (GBM) patients. To accelerate uptake of NanoTherm treatment in Europe, we expect MagForce to look to expand from Germany into other countries over six to 18 months. In the US, its subsidiary MagForce USA is in talks with the FDA to initiate a planned clinical trial in prostate cancer patients (potential launch in 2018). Data are expected in 2018 (potential launch soon after).

Again, recent positive newsflow has helped the share price (up 73% in 2017) and the successful execution of management’s strategy could be expected to see further gains. Please see our initiation note for a more detailed outlook and explanation of sensitivities (link in paragraph above).

Deutsche Entertainment (DEAG) has been listed in Frankfurt under the ticker ERMK since 1998 and was founded in 1978. It operates in the entertainment industry, organising concerts, Christmas fairs and other events in Germany, Austria, Switzerland and the UK, promoting recorded music and selling tickets to other events. It hosts around 2,000 events per year and sells c 5m tickets. It has exited an unprofitable festival business, which led to a loss of €26.2m in 2016 (previously reported at €17.8m). DEAG has 10 subsidiaries operating in the live touring industry, including ACT Artist Agency in Germany (currently running a tour of Germany by Riverdance), KBK (running the 2017 German tours for Status Quo, Alice Cooper and Chris de Burgh) and Raymond Gubbay (specialising in ballet, opera and classical music events and with strong links to the Royal Opera House and the Royal Albert Hall). The entertainment services division includes myticket.de, a ticketing website; Verescon, which designs sets and entertainment spaces; Handwerker Promotion (which promotes rock music events) and 13 other subsidiaries.

Heliad has recently been selling down its position in DEAG because the cash multiple has been in the target zone of three to five times the original investment and the shares have been in the portfolio for longer than the usual holding period. We believe that Heliad did not participate in DEAG’s recent €2m capital increase which will allow it to invest in a UK ticketing business.

MAX 21 has been listed in Frankfurt since 2006 under the ticker MA1. It holds positions in mail management, IT security and cloud services. Its holdings include Binect, KeyIdentity, Necdis and GFN. All are at early stages of development and Heliad management does not expect Max 21 to report a profit in 2017, although revenues are projected to be over €10m and the FY16 consolidated loss of €6.4m is expected to be substantially reduced.

In May 2017 Heliad invested €930k to acquire its stake in bmp Holding, an e-commerce company listed in Frankfurt and Warsaw (BTBA and BMPAG). bmp has three subsidiaries, which sell sleep products such as beds and mattresses online: sleepz, Matratzen Union Gruppe and Grafenfels. Heliad and bmp are exploring the extent to which BettenRiese could be incorporated in bmp. It is expected that the fragmented sleep products industry may well see consolidation in future, and that e-commerce will take market share from bricks-and-mortar retailers. Heliad aims for its sleep investments to emulate Eve, a successful UK company which management says is on a considerably higher valuation with similar financial metrics to bmp.

The German PE market is among the largest in Europe, with close to 200 private equity firms based in the country and German institutions having an average allocation to PE of €535m according to Preqin. There were 120 PE-backed buyout deals in 2015, with an aggregate value of €20bn, the third biggest market in Europe by value after the UK and France (second only to the UK in number). The 240 PE-backed venture capital deals in 2015 totalled €1.7bn, the second highest number and value in Europe. The market is dominated by deals in the mid-cap range, defined as €50m to €500m, meaning that Heliad operates in something of a niche below that level. The industrial sector has seen the most activity in recent years but information technology has been second every year since 2011, followed by healthcare and consumer discretionary, meaning that Heliad’s sector focus is more mainstream. As measured by the LPX Index, European PE performance has compared well with other asset classes in Germany (Exhibit 7), meaning that it has attracted considerable amounts of capital (Exhibit 8).

The resources being committed to private equity have been pushing asset prices up. Although data for 2016 are not available, in its Private Equity trend Report 2016, PwC reported that the average year one EBITDA multiple paid for PE deals in Europe over €100m was 11.4x in 2015, up from 10.9x in 2014. Against that background, Heliad’s focus on smaller deals that do not attract the attention of larger PE funds and institutions may differentiate it, as does its network, as mentioned above. Heliad’s network and focus may therefore mitigate some of the effects of strong investment interest in PE, while benefiting from the fact that the PE market is well developed and commonly explored as a funding option by businesses seeking investment. We will now look at the markets in which Heliad’s subsidiary companies operate.

Germany is a hub of financial technology, with a large number of fintech companies that benefit from the skilled workforce, a tradition of entrepreneurship, access to capital and a large and relatively wealthy domestic market. The German Federal Ministry of Finance commissioned a report on the industry, which was published in October 2016 and identified 346 active fintech businesses in Germany in the crowd-lending, crowd-investing, social trading, wealth management and robo-advice sectors. These companies had assets under management or administration (AUMA) of €2.2bn in 2015 and several subsectors have seen triple-digit compound annual growth between 2007 and 2015 (the period covered by the report). The market being addressed by those companies was estimated to be close to €1.7tn (€1.3tn in wealth management and €380bn in financing). The authors forecast growth in total market volume from €2.2bn in 2015 to €58bn in 2020, €97bn in 2025 and €148bn in 2035, a compound annual growth rate of 23%. Market penetration is already high, with 87% of financial institutions reporting that they co-operate with a fintech company and intend to continue to do so in future. The appeal of fintech is its potential to earn significant returns by capturing greater market share from more traditional financial services provision, improving the service offering and reducing the cost of providing it. What is more, incumbent providers appear to be embracing the trend. Although this may mean greater competition from established banks, brokers etc, it also allows potential collaboration and may make exits easier should incumbents seek to consolidate the sector.

Similar trends to the ones supporting fintech are beneficial to e-commerce. Internet penetration in Germany is second only to the UK in Europe, and a growing proportion of internet users are also internet shoppers (82.4% in 2015 vs 77.0% in 2012 according to the Ecommerce Foundation), magnifying the increasing reach of the internet. Germany is top of the Logistics Performance Index compiled by Händlerbund, an online trade association, which bodes well for the delivery of goods ordered online.

Including private sales through auction sites and VAT, the Bundesverband E-Commerce und Versandhandel (BEVH) estimates that online consumer sales in 2016 totalled €72.4bn, which is still well below the UK total of c €154.7bn estimated by IMRG and Capgemini, despite the slightly larger online population in Germany. This implies that there is still considerable scope for growth in e-commerce volumes in Germany. The structure of the market may change as well: in Germany, the online share of sales of non-physical goods and services such as flights, music and hotel stays is already high (71%, 69% and 63%), albeit still lower than in the UK (84%, 89% and 79% respectively), whereas online sales of, for example, household appliances accounted for 53% of UK sales in 2016, vs 29% in Germany. This implies that there is possible growth to come from digital sales of physical goods in Germany.

There is overlap between Heliad’s exposure to the lifestyle sector and e-commerce, with its two investments in My Better Life, an online life coaching service, and DEAG, which manages live entertainment events, for which most tickets are sold online. Live music accounted for the largest share (27%) of gross value added (GVA) by the German music sector in 2014,1 the last year for which detailed statistics are available, and in the UK (from where 35% of DEAG’s revenues are derived), live music GVA grew at a compound annual rate of 11% from 2012 to 2015 (with a peak in 2014).2

Below we summarise the biographies and other positions of both the supervisory and management board members.

Volker Rofalski, chairman of the supervisory board, is also on the supervisory boards of Sporthouse, Bio-Gate, Demekon Entertainment, card4you, Mutares and Taishan Capital Management. He has held numerous other board positions in the past and founded TradeCross, which was sold to VEM Aktienbank in 2005. He is also an investment director at PE firm Mountain Partners.

Kai Panitzki, deputy chairman of the supervisory board, is a member of the management board of FinLab and was on the board of Börsenmedien, a company founded by Bernd Förtsch, from 2013 to 2016. Before that he was a managing director and acting partner at the leading creative media agency Scholz & Friends (part of WPP Group).

Stefan Müller, supervisory board member, is an executive manager at Börsenmedien and was a member of the management team at FinTech Group for 14 years to August 2016.

Thomas Hanke, CEO/MD of Heliad Management GmbH, holds an MBA from Julius-Maximilians-Universität Würzburg and was an investment manager at FinLab and Heliad from 2010 to 2015. From July 2015 to April 2016 he was head of business development and investments at FinTech Group before returning to Heliad Equity Partners.

The investment managers are Theo Woik and Gunter Greiner; the former is also an investment manager of FinLab. Mr Woik previously worked at ViewPoint Capital Partners from 2006 to 2014. ViewPoint specialises in growth equity and focuses on software and internet technology companies. Mr Greiner has 15 years’ experience in private equity as an investment director. They are supported by Stefan Schütze (legal and compliance) and Juan Rodriguez (CFO). The last two perform the same functions for FinLab.

Heliad’s biggest shareholder is FinLab, which owns 47% of the outstanding shares. IFOS Internationale Fonds Service, a Liechtenstein fund operation and management business, owns 15%. BF Holding, a company controlled by Bernd Förtsch, subscribed for all of the new shares issued in the €2m capital increase on 11 May. Combined with his 49% share in FinLab, this takes Bernd Förtsch’s direct and indirect stake in Heliad to 26%. Mr Förtsch also has significant direct holdings in some of the portfolio companies, including 39.8% of FinTech Group and 9.8% of MagForce (where he was also a board member until 2014), taking his look-through stakes in those companies to 44.2% and 11.2% respectively.

As an investment company, Heliad’s financials are relatively simple. Income is either in the form of dividends (income from investments), receipts of interest from loans to subsidiaries or from cash held on deposit (although interest rates in Germany are currently negative), from selling investments or changes in their valuation. Investments in listed securities are shown at market value, and any increase in value goes through the income statement; the five unquoted venture holdings are shown at cost, in line with IAS 39.46(c). Other unquoted investments assessed at fair value through profit and loss are valued using either comparable prices for the investment or, where they exist, from prices for the company itself (for instance from a new funding round); again, changes are taken through the income statement.

Heliad had lower revenue in FY16 than in previous years, mainly because its two biggest investments, FinTech and MagForce, had poor share price performances. This not only reduced their balance sheet value, but also discouraged Heliad from realising more of its investment. As shown above, both companies’ shares have performed considerably better so far in 2017. Heliad’s unlisted investments are mainly at an early stage of development and did not compensate for the fall in the value of listed investments, resulting in a loss in FY16 after three years of profits.

As explained above, Heliad assesses its own portfolio value and calculated a NAV per share of €8.92 at 31 March 2017, meaning the shares trade at a c 23% discount, well above the discount for the LPX Europe index of c 10% (although Heliad’s discount to last reported NAV has narrowed in recent weeks). Reasons may include the concentration of investments and the low free float as well as the shareholder structure. However, the recent performance of Heliad’s stakes in listed companies has exceeded Heliad’s own shares, having increased by 32% as opposed to 31% for Heliad, as illustrated in Exhibit 13. We have assumed that Heliad’s private investments and cash have not changed in value other than allowing for the capital increase conducted on 11 May (363,000 shares at €5.50 each, or €2m) and for the investment of €931,500 in bmp Holding (which has appreciated in value since it was purchased on 8 May). Meanwhile the listed investments have increased in value from €5.05 per share to €6.67 per share. So although Heliad’s shares have appreciated 32% since 31 May, from €5.23 to €6.86, narrowing the discount to reported NAV from 41% to 23%, look-through NAV per share is likely to be closer to €10.51, giving a discount to look-through NAV closer to 34%.

Apart from the normal risks associated with private equity investment, including valuation risk, management risk and the ability to exit investments, Heliad is sensitive to some other factors: