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During the month we exited VNV Global.

As way of reminder, we initially built the position in 2020 following the COVID selloff when the company was trading on an excessively wide discount. In turn we exited c.98% of the holding over the course of late 2021 and early 2022 at prices north of 100 SEK per share, when the company was on a narrow discount / premium. We then rebuilt the position in the summer of 2022 when the share price was in the SEK 20s and the discount had blown back out, as part of our PE/VC-basket.

Our decision to sell comes following the announcement of a rights issue at a ~65% discount to NAV, with the intended proceeds being used to buy a secondary stake in BlaBlaCar. Notwithstanding the extent to which they are buying BlaBlaCar on a discount to its reported carrying value, an unforced discounted rights issue alters what we consider to be the fair level of discount and should be penalised. Over the course of our investment, we were impressed by VNV’s management team, however the rights issue raises questions of judgement, and we did not feel adequate explanations for their actions were given.

Overall, it was a relatively successful investment for AGT, with a +38% ROI / +61% IRR. This compares to an ROI of +12%/+10% for the MSCI ACWI ex-US and MSCI ACWI respectively (all figures in Sterling).

VNV’s share price fell -6% in February following sharp gains over previous months, making it the single-largest detractor from returns. This was despite reports that key healthcare technology asset Babylon (55% of NAV using AVI’s valuation) is exploring a US listing. In our view, Babylon is held at a conservative valuation in VNV’s NAV, reflected in part by the shares trading at a premium to the last reported NAV. Our own estimate re-values Babylon using a basket of listed peer multiples and puts VNV on an estimated discount of almost 30%.

VNV had become an outsized position on the back of strong performance (up +67%) since our initial investment in Jun-20, and we recently reduced our investment to a size that better reflects some of the business execution and regulatory risks around Babylon.

VNV Global was the single-largest contributor to returns in December, adding 142 basis points (bps) as its share price rose +32%. VNV is a Stockholm-listed company which invests in early-stage technology-enabled businesses, in particular those with strong network effects. We attribute the strong increase in VNV’s share price to increasing investor enthusiasm around Babylon, the digital healthcare company. We have long believed that Babylon is held too cheaply in VNV Global’s NAV, a fact that the market is evidently now recognising, bidding the company up to a 40% premium to the last reported NAV. Our own valuation work, which values Babylon using a basket of US digital healthcare peers, suggests that VNV Global trades on a discount of 25-30% to our estimate of NAV. We believe that Babylon is likely to list in the near-term, which will provide a more transparent view of investors’ appraisal of its potential.

At Babylon’s recent Capital Markets Day (October 2020), we were given a significant level of insight into the company’s growth plans, in particular opportunities in the US value-based care market in which it is partnering with insurance companies to provide its services to members. Despite Babylon’s revenues for 2020 increasing an estimated fourfold over the prior year, we still view Babylon’s growth prospects as exciting given the size of the US market alone, which is measured in the trillions of dollars, and the company’s digital and data-driven model and the potential cost savings this can yield. We consider VNV’s other key portfolio holdings – Gett, BlaBlaCar and Voi – to also be highly attractive assets with significant growth potential and, in several cases, potential catalysts in the near- to medium-term.

VNV Global (3% of AGT’s NAV) was the largest detractor this month, reducing returns by 35bps. Share price returns were -12%, driven primarily by the fund moving from a premium to a discount. Following the month end, the share price has recouped most of the previous month’s declines.

Share price fluctuations aside, we remain excited by the prospects for VNV’s holdings. Babylon (32% of NAV) continues to display rapid growth, significantly boosted by a change in how people approach healthcare as a result of the pandemic and subsequent lockdowns. Babylon’s stated mission is to reduce cost and strain on healthcare systems by focusing on healthcare rather than, as it contends, caring for sick patients as many health systems currently do. In other words, Babylon believes that one solution to over-strained healthcare systems is prevention, not cure. This approach reduces the need for patients to attend hospitals and undergo expensive treatment and procedures, resulting in better health outcomes for patients and lower costs for providers. A recent independent study (pending publication in a peer-reviewed academic journal) of Babylon’s trial with the NHS indicated that the use of Babylon reduced hospital spend by 35% and A&E visits by 25%.

As discussed at VNV’s recent Capital Markets Day (YouTube replays available here), Babylon’s monthly revenue figures should grow rapidly as it scales up its business; management estimates that monthly recurring run-rate revenue by end-2020 could be over $50 million, and over $85 million by end-2021 (i.e. annual run-rate revenues of $1 billion). Note this compares to an implied carrying value in VNV’s NAV for the entire business of $2.6bn. While these are just estimates and, significantly, depend on contracts in the pipeline being signed, we believe that Babylon has successfully built a business that holds out the twin promises of better health and lower costs – a holy grail of healthcare. Furthermore, Babylon’s “integrated care” approach, which uses a mix of AI and digital consultations, is significantly differentiated from the competition and serves to create a network effect as greater customer use drives better AI, which drives higher customer and healthcare-provider engagement, and so on in a virtuous cycle or “flywheel” effect. With several peers operating with what we believe to be inferior business models now having listed and trading at high multiples, we suspect an IPO of Babylon is not too far away.

Having spilt much ink on Babylon to date (and Voi, to a lesser extent), it perhaps behooves us to comment on VNV’s second-largest asset, French unicorn BlaBlaCar (21% of NAV). BlaBla was originally set up in France as a carpooling network, wherein a driver undertaking a journey (from, say, Paris to Lyon) could advertise this on BlaBla’s website and find fellow travellers with whom to split the cost of the journey. BlaBla now has 72 million passengers undertaking shared trips annually, close to 25% of which are matched and priced using big data. More recently, BlaBla has expanded into other transport “modalities”, such as developing a bus marketplace that allows companies to sell seats to passengers. BlaBlaCar here acts as a booking.com-style online travel agent by providing the infrastructure and network that links up suppliers of seats with passengers needing them, driving the adoption of digital ticketing in emerging markets.

BlaBla’s vision is to eventually add a train marketplace to its network and thus become a one-stop shop that would allow passengers to book complex journeys – car to train station, train to a city near to the destination, bus to complete the last ten miles of the journey, carpool to complete the last mile – in a single ticket. This all-encompassing offering would be powered by proprietary algorithms that plan out efficient routes and determine optimum pricing strategies, creating a strong moat.

The offering to passengers is compelling, and BlaBlaCar’s community network of 85 million passengers is highly attractive for carpoolers and transport companies. Growth in one stimulates growth in the other, which drives further growth in the first, and so on in the flywheel effect seen so often across VNV’s portfolio. As with many of VNV’s investments, we can see a hard-to-assail network effect being developed here which both drives future growth and insulates the company from competition.

With little to no marketing spend required (BlaBla owns 87% of its traffic), the operating leverage is significant and should see rapid earnings growth as revenues increase. Further growth can be found in international expansion and adding on further modalities such as trains and short-distance carpooling for commuters. A company with a significant number of growth opportunities and a network effect is, in our view, an attractive proposition and we are excited about BlaBlaCar’s prospects.

VNV Global was the third-largest contributor to returns over the period, adding 62bps. We talked in depth about VNV’s portfolio in the July newsletter. VNV’s share price appreciated strongly in August, rising +20% as the market anticipated strong NAV growth from VNV’s portfolio of digital businesses. Since month end, the shares have declined 6%, perhaps reflecting the abating of investor enthusiasm over what the recently announced Teladoc-Livongo merger might mean for Babylon. Overall in 2020, the share price has risen +21% year to date.

Babylon (32% of NAV) has indeed been the focus of investor attention of late, with its digital healthcare offering becoming increasingly attractive during the COVID-19 period. We learnt in VNV’s latest quarterly that Babylon’s daily consultations grew +70% in Q2-2020 and that is has booked 3x revenue versus the corresponding period last year. We understand that the roll-out of Babylon’s offering in the US is progressing at a reasonable pace, pandemic notwithstanding. By way of reminder, the enormous US healthcare market (measured in trillions of dollars) has only 1% digital penetration, compared to 10% in Sweden. Babylon’s AI-driven product – unique among its competitors – appears a step-change in terms of the potential cost savings it can offer to health systems, and as such we believe it well placed to capture this growth.

Looking to the Teladoc-Livongo merger, we note that the deal creates a company with a $28 billion valuation and 2020e revenues of $1.4 billion, putting the group on 20x revenues. Whilst cognisant of the problems of applying multiples to early-stage growth businesses, we can nonetheless see very material upside from Babylon’s current $2.6bn carrying value, given the inherent attractiveness of a huge total addressable market combined with strong economics. VNV’s managing director agrees, writing in the recent quarterly report that: “I think our expectation that Babylon has the potential to assume a USD 20 bln valuation in five years may prove conservative. There is certainly upside beyond this”.

Elsewhere in VNV’s portfolio, Voi (8% of NAV) – the Swedish e-scooter company – is also performing well. Around 50 major UK cities are conducting tenders for scooter licences, with Voi “emerging as the clear UK winner”, having so far been appointed as exclusive licensee in 12 cities, including in the regions of Cambridgeshire, Northamptonshire and the West Midlands. As the latest quarterly report points out, Voi is effectively the only provider of e-scooters to 10 million people in the UK. Early reports from the UK rollout indicate that Voi is seeing daily rides per scooter which are well in excess of the breakeven level. While there may be some hype around this initial rollout and daily rides may stabilise at a lower level, we believe nonetheless that the economics of e-scooters are immensely attractive and the total addressable market very large.

Voi’s constructive approach to engaging with city councils, as well as its greener technology and longer battery life, makes it the obvious partner of choice for regions looking to increase their population’s micro-mobility. Going forward, all eyes will be on London as the highest-profile UK prize, with plans to announce the result of licence tenders in Q4-2020. VNV’s management remain confident about Voi’s prospects, commenting that $100 million in operating profit lies in the “not too distant future”.

We view VNV Global’s portfolio as very exciting. The majority (>80%) of the NAV is in four key assets: Babylon (32% of NAV), BlaBlaCar (21%), VOI (10%), Gett (9%). Following the rights issue, VNV also has 17% of NAV in gross cash (6% net cash).

Babylon is a data-driven digital healthcare provider which uses custom-built AI to diagnose ailments, and provides users with the ability to make on-demand digital appointments with doctors. We had already encountered Babylon through Kinnevik, where it is 3% of NAV, and saw VNV as a way to meaningfully increase our exposure to this attractive asset.

It has been a beneficiary of COVID-19 as healthcare systems have sought to reduce the number of unnecessary in-patient visits. Babylon’s competitive edge is found in its AI technology, which benefits from a network effect as it gains users, enhancing the accuracy of the diagnostic tools, which in turn brings in more patients and commercial partners. This effect raises barriers to entry and makes it difficult for new entrants to dislodge incumbents. To date, Babylon has already partnered with the NHS throughout the UK, and has plans to expand through private partnerships in China, Asia and the US. The US is a particularly exciting opportunity, with only 1-2% digital penetration in healthcare (for context, Sweden has higher levels of digital healthcare adoption, and has 9% penetration), highlighting the growth potential in this massive market.

BlaBlaCar is a French transportation company that links up drivers undertaking a (typically long-haul) trip with other travellers, in order to split the cost. Similar to Babylon, BlaBlaCar’s key advantage is the network effect, wherein the company with the highest number of users attracts the highest number of drivers, which in turn attracts more users – and so on, in a virtuous circle. BlaBlaCar has suffered as a result of COVID-19, but we expect the company to rebound as lockdown measures lift. Further growth should come from geographic expansion, introducing short-haul ride-sharing (e.g. commuting), adding in new add-ons (insurance, car financing), and the recent acquisition of Ouibus to offer complementary services.

Voi is a Swedish mobility company operating networks of electric scooters around major European cities. We believe that it will be a beneficiary of the pandemic, as cities move to emphasise solo methods of transport and reduce reliance on buses and trains. The recent shift in Europe towards the issuance of licences to scooter companies is beneficial insofar as it moderates competition and encourages more rational economic behaviour. Voi’s reputation as a “green” player (longer battery life) and respect for regulations makes it an attractive partner for cities. While Voi suffered a recent public setback by not winning a licence in Paris, we think it is worth noting that: (a) the licences are renewed every 2 years, giving Voi a chance to re-apply; and (b) the license was for a relatively small 5,000 scooters. For context, Voi recently won a contract to deploy 2,000 scooters in Cambridge, UK. While Paris is a mega-city and would have been a high-profile win, the real loss here is not as major as it first appears.

Finally, Gett is an Israeli ride-hailing app similar to Uber, Lyft, et al. However, Gett is an app with a difference: it derives a significant portion of revenues from corporate clients, who are less price sensitive. Gett also provides corporates with significant benefits, such as billing software and analytics, which allows companies to streamline and potentially reduce their ground transportation costs – making Gett more difficult to dislodge.

At the time of writing, VNV trades at a relatively narrow discount as a result of a strong share price and FX moves. However, we continue to see highly compelling upside to the NAV as VNV’s portfolio continues to display strong growth.