German Startups Group — German Startups Market goes live

SGT German Private Equity (DB: SGF)

Last close As at 27/03/2024

1.22

0.01 (0.83%)

Market capitalisation

74m

More on this equity

Research: Financials

German Startups Group — German Startups Market goes live

German Startups Group (GSG) opened its secondary shares trading platform on schedule as a first step in the transition to an asset manager and market place. The next steps in the development of the platform include the launch of the G|S Tech50 Fund and planned co-operation with SharesPost to open the US market to German investors. The platform has yet to prove its success and grow in scale, but a successful transformation could potentially create value beyond the existing NAV per share. After accounting for post-balance sheet events (a share buyback and transaction yielding a €1.6m revaluation gain), we estimate the current discount to NAV at 42%.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Financials

German Startups Group

German Startups Market goes live

Financials

Scale research report - Update

11 October 2018

Price

€1.46

Market cap

€18m

Share price graph

Share details

Code

GSJ

Listing

Deutsche Börse Scale

Shares in issue

12.0m

Last reported net debt at 30 June 2018

€7.5m

Business description

German Startups Group is a Berlin-based venture capital investment company primarily focused on providing investment to technology businesses in German-speaking countries. With the launch of its secondary shares trading platform, the company started the transition to a wider business model, including market place.

Bull

NAV likely understated.

Success of new business model may result in narrowing/closing the valuation gap to NAV and realising additional shareholder value.

Listed exposure to a diversified portfolio of technology start-ups in Germany.

Bear

Low liquidity.

VC investments are inherently high risk.

Potentially constrained by capital.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

German Startups Group (GSG) opened its secondary shares trading platform on schedule as a first step in the transition to an asset manager and market place. The next steps in the development of the platform include the launch of the G|S Tech50 Fund and planned co-operation with SharesPost to open the US market to German investors. The platform has yet to prove its success and grow in scale, but a successful transformation could potentially create value beyond the existing NAV per share. After accounting for post-balance sheet events (a share buyback and transaction yielding a €1.6m revaluation gain), we estimate the current discount to NAV at 42%.

Follow-on funding rounds trigger revaluations

GSG reported basic EPS of €0.14 in H118, which is equal to the total EPS in FY17. Taking into account the recent €3m convertible bonds issue, diluted EPS came in at €0.12. Investors will be able to convert bonds into GSG shares in 2023 at c €2.50 per share, ie 58% above the current share price. GSG did not exit any positions during H118 and results were mostly driven by revaluations of the key holdings in its portfolio (€2.7m vs €0.9m in H117). In total, during H118 GSG invested €3m in follow-on funding rounds and made an initial investment in Chrono24.

Transition to an asset manager and market place

On 19 June, the secondary shares trading platform G|S Market was launched and the first transactions were already settled. The platform could contribute to GSG’s business development – as a source of stable cash flow derived from commissions, and a support to GSG’s own portfolio management activities. As of 8 October, 10 offers are available, and GSG plans to exceed 50 by the end of 2018. The next steps in the development of the platform include the launch of the G|S Tech50 Fund and potential co-operation with SharesPost to open the US market to German investors.

Valuation: Continues to trade at a discount to NAV

GSG’s current share price of €1.46 represents a 39% discount to NAV at end-June 2018 (based on the book value of equity ex-minorities). Taking into account events after the reporting period, the share buyback and revaluation gains, we estimate that the discount increased to 42%. Importantly, the discount may be understated, as the valuation of minority holdings is mostly based on historical transaction prices. In June and July GSG bought back 230k shares and intends to conduct further share repurchases in the future.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/14

0.1

1.5

0.32

0.0

4.6

N/A

12/15

5.6

3.6

0.49

0.0

3.0

N/A

12/16

10.9

(5.4)

(0.29)

0.0

N/A

N/A

12/17

9.6

1.8

0.14

0.0

10.4

N/A

Source: German Startups Group accounts

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Financials: Results driven by follow-on funding rounds

GSG’s basic EPS in H118 came in at €0.14, which is equal to the total FY17 EPS. During H118 GSG issued €3m in five-year convertible bonds, which implies potential dilution in the future (10% at a conversion price of €2.5033 per share). Taking this into consideration, the fully diluted EPS came in at €0.12. The investment business showed a net gain of €2.8m (16% lower y-o-y), which largely consisted of revaluations, as actual profits from the sale of assets amounted to €75k, and GSG did not exit any positions in H118. Net revaluation profit amounted to €2.7m compared to €0.9m reported in H117. In line with earlier management declarations, the company focused on follow-on financing rounds in existing portfolio holdings and during H118 completed additional investments in Ceritech, AuctionTech, Itembase, TVSmiles, Remerge and Fiagon. Together with the initial investment in Chrono24 (we highlighted the purchase of a 2.1% stake in our last update note), GSG invested a total of €3.0m during H118.

GSG’s revenue amounted to €5.3m in H118 (up 15% y-o-y), most of which is generated by its fully consolidated subsidiary Exozet. On 14 May, GSG announced that it was entering into negotiations to sell its 50.7% stake in the company, but these were put on hold for the summer and we await further announcements. In the initial release, GSG announced that the offer price would translate into a revaluation gain vs book value of around €1m, a €1.5m profit on the initial acquisition price and a low single-digit million euro cash inflow. The proceeds could be used to perform further share buybacks (although this could negatively affect the stock’s liquidity), as per management’s declared intention, or to make early repayments of GSG’s loans.

Exhibit 1: Results highlights

€000s

H118

H117

y-o-y

Profits from financial assets valued at fair value with recognition in profit or loss

4,081

1,243

228.4%

Losses from financial assets valued at fair value with recognition in profit or loss

(1,379)

(331)

316.6%

Profits from sale of financial assets

75

2,379

-96.9%

Losses from sale of financial assets

0

0

N/M

Result from investment business

2,777

3,291

-15.6%

Revenues

5,265

4,568

15.2%

Change in inventories

358

141

154.4%

Income from own work capitalised

294

466

-36.8%

Other operating income

90

316

-71.5%

Cost of materials and services received

(1,560)

(935)

66.8%

Personnel expenses

(3,820)

(3,439)

11.1%

D&A

(340)

(225)

51.3%

Other operating expenses

(1,546)

(1,624)

-4.8%

Incidental acquisition costs of investments

(31)

(12)

N/M

Result from other components

(1,289)

(744)

73.3%

Interest income

16

26

-39.2%

Interest expense

(218)

(350)

-37.8%

Financial result

(202)

(324)

N/M

EBT

1,285

2,222

-42.2%

Income taxes

136

4

N/M

Net profit (ex-minorities)

1,622

2,242

-27.7%

EPS (€)

0.14

0.19

-27.5%

Diluted EPS

0.12

0.19

-34.1%

Source: Company accounts

After the 2018 interim report, GSG announced that it had recognised a €1.6m upward revaluation (or €0.13 per share) on one of its key holdings, which will be reflected in the H218 results. As of end-H118, GSG’s consolidated net debt position stood at €7.5m (Edison estimates) implying a net debt to equity ratio of 23% compared to €2.5m and 8% end-2017 at end-2017.

Transition to an asset manager and market place

In our previous update note, we discussed GSG’s transition to an asset manager and market place. The most significant issues that GSG sees in the German tech assets market are low liquidity and transparency. Currently, the market operates in a ‘closed-shop’ ecosystem, with only VCs and well-known business angels involved, and lacks smaller investors. To address these issues and encourage new investors to enter the market, the minimum investment amount in the German start-ups market (GSM) was set at regulatory minimum of €0.2m, whereas ticket sizes in the start-up market typically reach €0.5-5.0m. Another incentive is in the calculation of commission as there is no fee attached to investors and all the matchmaking costs are covered by the seller. GSG aims to earn around 5% of the total volume traded, with the fee scale dependent on the value of investment, starting at 6% with €0.2m investment and reaching 2% on an investment of more than €10m in investment. When it comes to stakes in other VC funds, commissions start at 4% and reach 2% using the same analogy. As detailed in our last update, further incentives include creating dedicated single-asset SPVs (and offering their stakes to investors), dedicated fund-of-funds and a passively managed VC fund investing only in the top 50 of the highest valued German start-ups. The so-called G|S Tech50 Fund will be managed by a majority-held (50.004%) subsidiary of GSG – German Startups Asset Management – and is intended to start in Q418. GSG also announced that it plans to co-operate with SharesPost, a US-based secondary shares platform, to make investments in US-based start-ups available for German investors.

In the first month of operations, the number of listed tech assets on the platform reached 13, with the value of stakes offered for sale exceeding €20m. GSG’s intention is to exceed 50 assets by the end of the year and management is confident that this will be achieved. At the end of first month of operations, GSM demonstrated that the value of transactions to be settled stood at €5m, which (assuming the aforementioned targeted 5% in commissions) could translate into c €250k in revenue. As at 8 October, there were nine sale offers on the G|S Market with a total value of €56m, of which €50m constitutes the offer for G|S Tech50 Fund. Of the eight remaining start-ups, five are among GSG’s 20 most significant portfolio constituents.

With the transition of the business model, GSG could achieve three main goals, in our view. First of all, establishing a business with stable cash flow on top of gains realised on portfolio exits. The second possible outcome is upward pressure on GSG’s valuation, led by the success of similar platforms in the US such as Equidate, EquityZen or SharesPost. For instance, the US-based Equidate which, since its inception in 2014, has reached US$1bn in transactions (as disclosed in August this year), recently completed a US$50m financing round, implying a company valuation at US$220m (according to Pitchbook). Thirdly, the platform could assist GSG’s own portfolio management activities, giving access to new investment opportunities, as well as work as a convenient exit route for GSG’s own investments.

Valuation

GSG’s net asset value (ex-minorities, but including goodwill and intangibles) amounted to €31.0m as at end-June 2018, translating into €2.59 on a per-share basis (Edison estimates). However, ytd growth in NAV per share (from €2.45 at end-December 2017) did not translate into share price growth (-8% since our last update) and this results in a higher discount to NAV. The current share price of €1.46 implies a 39% discount to last reported NAV, compared to 31% in our last update. We estimate that the share buyback conducted after the reporting date added a 1c to NAV per share. Furthermore, taking into account the announced revaluation gain of €1.6m (which represents 13c of incremental NAV), the discount increases to around 42% (with estimated NAV at €2.73). The NAV should also increase if GSG finalises the disposal of its 50.7% stake in Exozet at a €1.0m revaluation profit (as originally expected by the company). Moreover, the current NAV and discount are likely understated, given that portfolio companies are mostly valued, where possible, by independent third-party transactions, which reflects the prices achieved in recent transactions and follow-on investment rounds.

As at end-June 2018, the average time elapsed since the last valuation on portfolio companies came in at 226 days. While the current discount to NAV is significant, we believe that one of the reasons behind it is limited transparency on the performance of the portfolio companies, as GSG cannot disclose financial information on minority-held assets. We should also take into account the structure of the company as it operates as a partnership limited by shares (KGaA) and the partner is entitled to a profit advance of 25% from the amount of earnings exceeding commercial losses. The company calculates the possible advance (assuming all portfolio components are sold at NAV on 30 June 2018) at €1m, which translates to 8c per share compared to 4c at end-2017.

The recent issue of convertible bonds resulted in the possibility of future dilution. Obotritia Capital purchased the entire €3m convertible bonds issue and since 3 April these bonds are available for trading on the Frankfurt Stock Exchange. Investors have the option to convert the bonds into 1.2m new shares at maturity. The duration of the bonds is five years, maturing on 8 March 2023, and the conversion price is c €2.5 per share, 58% higher than current share price. As the conversion price is only slightly lower than NAV per share at end-June 2018, the dilution would not translate into a significant change in our estimated NAV per share of €2.73, at the current portfolio valuation. Taking everything into account and assuming full dilution, the future NAV per share comes in at €2.79, implying 43% discount to the current share price. Our estimates are summarised in Exhibit 2 below.

Exhibit 2: Impact of recent and prospective events on GSG’s NAV per share

Source: Company releases, Edison Investment Research

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors.

Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

More on SGT German Private Equity

View All

Latest from the Financials sector

View All Financials content

Research: Financials

Lloyd Fonds — Taking shape

Change is gathering pace at Lloyd Fonds. In line with its goal to become a leading asset manager in Germany over the medium term, it plans to launch its new business model, focused on open-end retail funds, in Q219. Growth may also be by acquisition (finances are robust) with assets under management targeted to exceed €5bn within five years (€1bn+ in 2019). Management is being further strengthened and strategic divestments are under review. Given likely c €2.5m one-off restructuring costs, current year guidance is newly lowered to a net loss of €1.5m. Continued weakness in H118 results only confirms the need to reposition.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free