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We have fully exited the position in Kinnevik, as the shares traded at a large premium to NAV following the distribution of Zalando to shareholders.

Having re-initiated a position in January 2019, over the lifetime of its investment, AGT earned an IRR of +58% and an ROI of +70% (in GBP). Kinnevik was a classic AGT investment: high quality undervalued assets, managed by skilled and long-term orientated operators, trading at what was a very wide discount to NAV. AGT was aggressive in doubling down on its position during the COVID-19 sell-off at a ~30% discount to NAV, with these incremental purchases more than doubling our position. At the right valuation we would love to own Kinnevik once again.

Gearing has been reduced to 3% following the exit of the Kinnevik position, as well as the trimming/exit of other positions in the portfolio.

Kinnevik was July’s largest contributor, adding 133 basis points (bps) to returns, driven by strong NAV growth (+7%) and a tightening of the discount from 23% to 10%. Kinnevik has been the largest contributor to AGT’s portfolio in 2020 (share price total return of +40% at the time of writing), with many of its holdings benefitting from a giant leap forward in consumers’ adoption of digital technologies following lock-downs. Key holdings such as Zalando (internet fashion retail; 38% of NAV), Livongo (digital health management; 14%) and Global Fashion Group (internet fashion retail; 5%) have all seen exceptional share price performances since the start of the year.

Livongo has been the star performer, with its share price rising five-fold in 2020. The company provides users with the ability to manage chronic diseases (such as diabetes) remotely, thus reducing pressures on health systems by allowing non-emergency patients to reduce in-person visits. This functionality has been highly desirable in the midst of a pandemic and, together with Livongo’s demonstrated ability to reduce health care costs, has accelerated new customer launches.

Following the month end, Livongo and Teladoc (a US-listed virtual healthcare services company) announced a merger which would see Livongo shareholders receive a combination of Teladoc shares and cash. Kinnevik would own 5% of the combined entity and receive an estimated dividend of $140 million (1% of NAV). At the time of the announcement, this represented a +10% premium to the undisturbed share price, giving Kinnevik a 13x return on the capital invested in Livongo. Kinnevik will benefit from crystallising a portion of its returns via the dividend, with the potential to monetise its stake with greater ease as a result of holding a smaller stake in a larger company.

Kinnevik – which we added to in the sell-off – was the third-largest contributor to returns over the period, adding 110bps to returns as the NAV rose +19%. Together with a small widening of the discount (22% to 24%), share price returns over the month were +17%. Returns for AGT were boosted by a +6% strengthening of SEK/GBP. NAV growth was driven primarily by very strong performances from online fashion retailer Zalando (49% of NAV) and Livongo (8%), which in May rose +37% and +50% respectively.

Zalando’s management gave full-year guidance for revenue growth of 10-20% and EBIT of €100-200m, both of which were materially ahead of market expectations. The current environment is accelerating the penetration of e-commerce, with Zalando reporting +39% growth in new customers in April. Similarly, the current environment also incentivises brands – particularly those reliant on bricks-and-mortar distribution – to use the Zalando platform, with management reporting that over 50 new brands had joined as Partners in recent weeks. This is crucial for Zalando given the flywheel effect in which the more brands that join, the wider Zalando’s assortment, attracting more customers and in-turn more brands, thereby cementing Zalando as the “starting point for fashion”.

Similarly, Livongo, the chronic disease management company, also raised full-year guidance. Livongo supports users in managing their conditions, such as diabetes, remotely, and thereby benefits as health systems look for ways in which to avoid non-emergency patients making in-person medical visits. Moreover, management explains that Livongo’s demonstrated ability to reduce health care costs – valuable in an uncertain economic environment – is accelerating new customer launches.

Kinnevik ‘B’ was AGT’s fourth-largest contributor in November, adding 23bps to returns. During the month Kinnevik distributed its holding in Millicom – the Latin American-focused telecoms company which the Stenbeck family founded some thirty years ago – to shareholders. Kinnevik’s shareholders received 0.14 Millicom shares for every Kinnevik share held, equivalent to a dividend of 18% of the pre-distribution NAV, netting AGT approximately £7.2m. The distribution reinforces Kinnevik’s objective of dedicating a higher portion of its portfolio to disruptive, technology-enabled businesses. Having attended the capital markets day back in September we believe this to be an attractive move.

Kinnevik was also a significant contributor in August, adding 23bps to NAV, as the share price rose +8% in SEK terms (+6% in GBP). Returns were driven by a combination of NAV growth (+2%) and a 4% tightening of the discount to 23%. Key holding Zalando (41% of NAV) reported better-than-expected Q2 results and raised full-year guidance, resulting in the share price increasing +8% over the month. Tele2 and Millicom (27% and 20% of NAV respectively) also performed positively, with share price gains of +4% and +1% in SEK terms. We will attend Kinnevik’s Capital Markets Day later in September and are hopeful that the market will be given further insight into the potential distribution of Millicom shares. We added a small amount to Kinnevik over the month at an average discount of 28%, which compares favourably to the long-term average of 19%.

Kinnevik was another detractor in January, reducing returns by 10bps.
We (re)built a position in Kinnevik over the month following a widening
of the discount out to 19-20%, having previously exited the stock in
November 2017 on a discount of 12%. The negative impact from
Kinnevik in January was a result of the -5% weakening of the SEK
relative to GBP, as Kinnevik’s share price actually rose +3%. The NAV
performed even better, up +6% for the month, and driven to a large
extent by a +21% gain in Zalando (28% of NAV), the German-listed
online fashion retailer. Following a c. -50% fall in the share price of
Zalando in 2018, we believe the company’s valuation, at 1x
EV/Sales, to be too low given the potential runway for growth. We are
comfortable once again aligning our capital with that of the Stenbeck
family, given their long-term mentality and track record of value
creation through prudent investments and active stewardship.

Kinnevik was our top contributor despite its NAV falling as a result of share
price weakness in top holding Zalando and across its listed telecoms
businesses. Having remarked last month on Kinnevik’s very wide discount
relative to its Swedish holding company peers, we did see it narrow
dramatically in June albeit due in part to a declining NAV. Kinnevik also
announced the long-awaited appointment of a new CEO, Georgi Ganev,
who will leave his role at Dustin Group, a technology products retailer, to
join Kinnevik later this year. Having worked at and sat on the board of
Tele2, a key Kinnevik portfolio company, he is familiar with Kinnevik’s
investment style and culture.

Kinnevik appreciated strongly buoyed by solid performance from listed
assets Millicom, Tele2, and Zalando. This follows on from a badly-received
telecoms acquisition made last month under Kinnevik’s interim CEO which
was seen by many as a retrograde step in strategy and direction (Kinnevik’s
telecoms assets are viewed as legacy holdings in a portfolio where its ecommerce
assets garner far more attention). We are more sanguine on this
acquisition, but accept there will remain some uncertainty surrounding
Kinnevik which is unlikely to be resolved until the appointment of a new
CEO. In our view, this uncertainty is more than adequately reflected in the
current 23% discount which is some 19 percentage points wider than the
discount on which its Swedish peers trade.

Kinnevik was also a strong contributor, benefitting from solid performance in
its listed portfolio (most significantly emerging markets telecoms holding
Millicom) and positive sentiment surrounding a further move towards a full exit from its investment in Rocket Internet. While Rocket’s life as a listed
company has been an unhappy one in terms of shareholder returns,
Kinnevik – as a pre-IPO investor – has generated positive returns from its
investment and, much more importantly, would not have made its
spectacularly successful investment in Zalando were it not for the
relationship with Rocket. Toyota Industries and Exor were also healthy
contributors over the month.

While having no effect on our valuation, it was encouraging to see Kinnevik
write up the value of its stake in Global Fashion Group (GFG). The
streamlining of GFG’s portfolio and narrowing losses warranted Kinnevik
to lower the valuation discount to GFG’s listed peers. We still think their
valuation is far too conservative, and believe we are likely to see a further
write up as GFG approaches a potential IPO.

Kinnevik was a strong performer over the month as Zalando, which
accounts for 35% of Kinnevik’s NAV, was up 43%. Zalando’s Q2
numbers surprised the market on the upside with full year guidance
raised and stronger than expected EBIT margin. While we await further
information to be released in the full Q2 earnings report it was an
encouraging development after a period of poor relative performance to
its online retail peers.

The largest detractor over the month was Kinnevik, the Swedish holding
company with investments in telecoms (including Tele2 and Millicom)
and e-commerce (including Zalando and Rocket Internet). Weakness
in Kinnevik’s listed holdings saw its NAV fall by nearly 12% with the
move exacerbated by discount widening of 500bps. Sterling weakness
helped mitigate some of the losses and so our position fell in value by
13.9%. We added to our holding over the month. Kinnevik’s
management have stated two requirements for them to buy back
shares: to have net cash on the balance sheet, and for the shares to
trade at a significant discount to their intrinsic value. The former test
has now been met following the completion of their sale of Russian
online classified business Avito, and we are sure management share our
belief that the shares are undervalued given the Company’s track
record of generating superior NAV returns over the long term.

Kinnevik, another Swedish holding company, benefitted from a substantial
narrowing of its discount due to the sale of its stake in Russian online classified
advertising firm Avito at a sizable uplift to carrying value. Avito was sold at a
209% uplift to the carrying value used by Kinnevik in its reported NAV and 51%
uplift to the value in AVI’s NAV model. Over their 7 year holding period,
Kinnevik’ s investment in Avito recorded a 77% IRR and a 16x return on cost
despite the powerful headwinds of a weakening Rouble.

On the sale side we exited fully from last year’s top performer, Kinnevik. The share price has more than doubled since we first
bought it in October 2012 and at the same time the discount has disappeared. We estimate the shares to be trading well above
current NAV on expectations of a high valuation being achieved for Zalando in any future IPO.