Kinnevik AB

STO:KINV B

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the Kinnevik conference call.

I would now like to hand the conference over to your speaker today, Georgi Ganev, CEO. Please go ahead.

[Georgi Ganev, executive]

Thank you, and good morning, and welcome to the presentation of Kinnevik's results for the fourth quarter and full year 2022. I'm Georgi Ganev, Kinnevik's CEO; and with me today is our CFO, Samuel Sjostrom; and our Director of Corporate Communications, Torun Litzen.

On today's earnings call, we would like to cover a bit more than just the fourth quarter, as outlined on Page 2 of the presentation. We will go through how our companies have performed operationally in the last year and how their plans and priorities have been refocused going into the new year. We will talk about what this, together with rising interest rates and lower risk appetite from investors, have meant for the valuations of our private portfolio companies and our NAV development throughout 2022.

Furthermore, by closing 2022, we have concluded the fifth year of our transformation. So I would like to take a step back and look at what we have accomplished over these last 5 years. Lastly, we will go through our priorities and expectations for 2023 before we end today's call with a Q&A.

But first, let's have a look at the highlights of the fourth quarter on Page 4. Our net asset value was down by 9% in the fourth quarter and 27% in total during 2022. Samuel will guide you through the development of our net asset value and how the valuations of our private companies have developed during the year in a few minutes.

Our investment activity during the quarter is a good example of what our platform enables us to invest in. We can invest in private high-growth software companies such as the hospitality management system Mews, a type of business model that we have a deep understanding of. But we can also impact public high-growth opportunities as demonstrated by the investment in Recursion, a clinical-stage biotech company forming part of our evolving healthcare portfolio.

And our platform also allows us to invest in more capital-intensive private market climate tech companies, such as H2 Green Steel, which is on a mission to decarbonize the green steel industry. These new investments covered 3 of our 4 investment focus areas: Software, healthcare and climate tech.

Our fourth focus area is platforms and marketplaces where we find Norwegian online grocer Oda. And during the quarter, the company raised EUR 150 million from new investors like Summa Equity and Verdane and with participation from Kinnevik.

This raise was executed in an extremely challenging fundraising environment, which is a true testament to the company's potential. And the fact that the market multiples have gone down in this space does not impact our view on the company's long-term potential.

And last but not least, I'm very proud that Kinnevik was recognized twice during the quarter for our efforts in sustainability. In the face of a very difficult environment, one could suggest that we should deprioritize our efforts to build sustainable businesses when in fact this is the time to double down. And as we have said many times, we have a long-term view and we are building for generations, not only for the coming quarters.

Now let's move on to Page 5. Beneath the material swings in valuations over the last 3 years, we have seen encouraging progress amongst our private companies. And as illustrated on this slide, our private companies grew topline by around 100% on average in 2022, just as they did in '21, outgrowing public market benchmarks by a factor of around 3x. This means our companies are, on average, 4x the size today compared to the end of 2020. The most explosive growth has been seen within virtual care led by Spring Health and in software led by companies like Pleo and TravelPerk.

Coming into 2023, however, the uncertain and dynamic market conditions has made it difficult for our company to forecast growth expectations and to set appropriate spending levels. Many have therefore begun to trade in growth for runway and profits as appropriate. We believe our companies and ourselves will need to stay nimble and reactive throughout 2023. Because with this uncertain outlook, we should be prepared to deal with more material deviations compared to what we would face in a more typical year.

On the next page, Page 6, we show that we have taken down our estimates on topline for 2023 by around 15% on average in the quarter as our companies gradually shift focus toward profitability. In return, the runway profile of our unlisted portfolio has improved materially. And it is expected to consume around 40% less capital on average in 2023 compared to 2022.

Overall this growth profitability tradeoff had a net negative effect on our assessed valuations in the fourth quarter. But we believe strongly it makes a more resilient portfolio heading into uncertain 2023. It means that our companies are less reliant on the near-term funding environment and much better prepared to deliver on our longer-term expectations.

Looking at the runway profile then. Around 10% of our value weighted portfolio needs to raise new funding during '23. Meanwhile around 40% is already profitable or funded to breakeven under new and more conservative plans. Among these, you find VillageMD and Instabee, both of which were executed on cash flow accretive mergers in the last months.

So with 10% of our portfolio, by value, needing new financing this year and around 20% needing new financing next year. There will, of course, be a handful of difficult situations for us to manage. But the resilience of our portfolio means that roughly SEK 2.5 billion that we are expecting to invest into our existing portfolio will primarily be used to accrete our ownership in our high conviction businesses.

And with that, I would like to hand over to Samuel to go through the private valuations and the development of our NAV.

[Samuel Sjöström, executive]

Thank you, Georgi. So with that covered, I will be spending some time on the more technical considerations. Clearly, however, against the backdrop of the operational performance of our private investments that Georgi just went through.

That means we are now on Page 7. And this is a page where we're showing changes in valuation and revenue multiples during 2022 in the investees, in our most important NAV categories as well as how those metrics stack up against the public market benchmarks.

Now before I speak to these charts, I just want to note that 2022 was a challenging year to value private growth businesses like ours. The number of price points materializing in private markets practically came to a halt. And this has forced us to draw inference almost entirely from public markets.

As Georgi mentioned earlier, we are valuing a portfolio of companies that has grown topline by 100% year-on-year on average, more than 3x faster than their public peers. So super imposing, more mature public market valuation levels onto our young, fast-growing private portfolio requires a lot of thought and a lot of deliberation.

So how we dealt with this challenge? Well, there are a couple of data points on this page. And what this data basically shows is that we have effectively taken down valuations in line with what we have seen in public markets in the case of investees that have not recently been priced by external investors.

The red bars show our weighted average cuts on prices and multiples in 2022. And the gray and white bars show the comparable peer group median and top quartile levels. On average, we ourselves have contracted revenue multiples by more than 50% during 2022. That's more or less the exact same multiple contraction that we have witnessed in the peer groups that serve as benchmarks for our private businesses.

So in a way, a simple way of describing a number of complex assessments is that we have just led public market multiple contraction flow right through our NAV. But we have had a few price transactions in our private portfolio during the second half of 2022.

In this quarter, VillageMD raised capital at a small premium to our Q3 mark and Oda raised capital at a small discount. And earlier in the year, we had Omio and Monese, both raising capital at significantly higher valuations than what we have recorded in our most recent quarterly reports. And we've also seen smaller transactions in companies like TravelPerk taking place close to our fair value.

So if one were to draw conclusions from this handful of indications, it seems we've done an okay job in trying to reflect how private market valuations have developed in 2022. And clearly, would we remove the priced companies that I just mentioned from these charts, the cuts to our private valuations shown in the red bars here would go even deeper.

All right. So if that covers the magnitude of our actual underlying valuation reassessments, let's then move on to how that translates into net asset value. Because if we flip over to Page 8, thank you, there are effects that sit outside of our underlying valuation assessments that have a material impact on our NAV in 2022.

What this chart shows is that the 54% average underlying write-down translates into a 23% write-down of fair value. And there are a few factors that are comporting that 54% number. Firstly, I mentioned the handful of price transactions in our portfolio. And we've also invested SEK 4.6 billion in new capital into our private portfolio through 2022 that has not been subjected to the same radical valuation changes as the capital that was already invested in our portfolio when 2021 ended.

Secondly, during 2022, downside protection mechanisms like liquidation preferences have had a SEK 3.2 billion positive impact and around 2/3 of that impact stems from a handful of later-stage lower burn businesses.

Thirdly, 60% of our unlisted portfolio is effectively in U.S. dollars. And while the dollar retreated a bit during the fourth quarter, it still provided significant positive tailwinds over the 2022 full year. In total, currencies had a SEK 2.8 billion positive impact on our private company valuations during the year.

And that's what bridges us to the 23% write-down you see in our NAV statement. So again, in companies where we have exercised our discretion and revised valuations without the ability to calibrate against price transactions in the current market, we have taken down our valuations by public market magnitude.

But due to a few transactions, the significant amount of capital we have deployed together with variables like currencies and liquidation preferences, the NAV impact is a lot more muted than our underlying valuation reassessment.

So with that out the way, then let's move on to the larger valuation reassessments in Q4 on Page 9. The 4 key revisions this quarter are of VillageMD and Spring Health on the upside and of Instabee and Cityblock on the downside. And you have more elaborate descriptions of the valuations of our material businesses in Note 4.

But in short, at VillageMD, we are valuing the business at a slight discount to the recent funding round that was carried out to finance the acquisition of Summit Health, leading to a write-up of 16% in dollar terms. Headed into 2023, the combined business is expected to be EBITDA positive, while growing slightly ahead of its public benchmarks.

At our other value-based care business, Cityblock, we're decreasing our valuation by 18% in dollars. And this stems from a contracting multiple, keeping the relative valuation to VillageMD largely unchanged and also in part from a slightly lower revenue base due to one-off effects of the company consolidating its footprint to further improve gross margin.

Another larger change this quarter is that we are taking down our valuation of Instabee by 28% after having picked it up by more than 20% in Q3. Now this volatility and this quarter's adjustment is a good example of the difficulties in forecasting and setting growth expectations for more consumer-facing businesses heading into 2023.

We've taken down our short-term forecast quite materially relative to the previous quarter to leave more room for positive surprises in this uncertain environment. With this write-down, we're still up more than 20% in 2022. And that reflects the company's great progress and the strong rationale of the merger.

Lastly, then, we've written up our underlying valuation of Spring Health by 27% in this quarter again in dollar terms. This is a company that grew revenues by more than 250% in 2022 and is on track to have scaled topline by 10x since our 2021 investment by the time 2023 comes to an end. This performance means that the company has regrown into the valuation we invested at in September 2021 in spite of 75% multiple contraction during the same period. It also means that the effect of liquidation preferences that has kept our fair value unchanged over the last quarters is almost back to 0. So in total and in broader strokes, we wrote down our private investments by 10% in the fourth quarter, driven primarily by a mix of multiple contraction and revised outlook.

Looking then at the full NAV, it is down by 27% in 2022. Clearly valuation levels in our growth portfolio have been the key driver of downward pressure in 2022, decreasing by more than SEK 16 billion in value before adding the SEK 4.7 billion we net invested into the growth portfolio during the year. Counterbalancing this is the resilient Tele2, down SEK 3 billion when adjusting for the SEK 9.6 billion in capital that we released through dividends and our May sell-down. And also, of course, our significant net cash position, making up 20% of our end-of-year NAV.

And as I believe you all have seen, the big swings have continued during the first few weeks of 2023 with our public investments trading up by 8% to 9% and the more important benchmarks for our private valuations expanding by around 15% to 20%. So in this market, you could say that the expiry date of our quarterly NAV continues to be fairly short.

Before I hand it back over to Georgi, I would like to try and summarize 2022 from a valuations perspective and provide some of our thoughts as we start the new year. Firstly, our private companies outpaced their public benchmarks by 3x in 2022, growing revenues by 100%. And we're expecting our portfolio to continue to outperform these benchmarks on average in 2023.

Secondly, we've taken down multiples by more than 50% on average, in line with what we have observed in public markets. So we're entering 2023 with reset multiples reflecting the current state of market.

Thirdly, we've traded in an average 15% cut on expected 2023 topline in favor of extended runways, with 40% of our private portfolio by value now being invested in companies that do not require further capital injections. The outlook remains highly uncertain. And we remain very humble, but our rebased expectations seek to reflect this uncertainty as well as a recessionary economy.

This all means again that we've taken down our underlying private valuations by more than 50% on average. And as I mentioned, looking at the handful of price transactions during the second half of 2022 that sit outside of that number, we seem to have done a decent job in triangulating private market valuation levels.

And this means we should have eaten away at least a very big chunk of the private market overhang that [ Ganev ] referred to when discussing the near-term future of our venture and growth capital ecosystem. So to sum up, 2022 has been a challenging year across dimensions, including that of our valuation assessments that we have sought to accurately reflect the public market downturn in the valuations of our private companies and we will continue to do so in 2023.

With that, I would like to hand it back to Georgi for a recap of our 5-year transformation and our priorities going forward.

[Georgi Ganev, executive]

Thank you, Samuel. So let's go to Page 13 to look at what we have achieved during the first 5 years of our transformation. Since the start of 2018, we have gone from having about 10% of our portfolio invested into private companies to about 70% today.

And at the same time, we have gone from a net debt position of SEK 1.1 billion to a net cash position of SEK 10 billion. This transformation is, of course, not without challenges. And when we set out on our new growth focused strategy, we focus primarily on 3 of them.

The first was that we were basically building a new portfolio from scratch that needed to become self-sustainable within a fairly short period of time. The second is how we were going to finance this model relative to the previous one. And finally, the third, we were also, to an extent, building a renewed track record as an investment firm in new exciting sectors.

On Page 14 is the S curve you have seen many times by now, illustrating how we have built the portfolio of growth companies across various stages of maturity. On one hand of the spectrum, you will find some very early-stage investments like Agreena and on the other side much larger, profitable businesses like VillageMD. This speaks to the strengths of our platform and as an investor in 2 concrete ways.

The first is that we do not have any constraints as to where on the maturity curve we can invest. We can get in very early and we can get in much later. We can invest $10 million and we can invest $100 million. We can invest into private and we can invest into public companies. And this flexibility may never be more relevant than in the market we're going through right now.

The second strength is that we can follow on through the life of an investment. Budbee or Instabee by now is a good example of this. Having moved successfully along this S curve, growing revenue by 10x since our first investment in 2018 up until the combination with Instabox last year. We have supported them on every step of their growth journey by investing at or above in every funding round. And we are on a similar journey with a company like Pleo, for example.

Moving then to Page 15. We come to the next challenge, financing. Over the last 5 years, we have reallocated capital at an aggressive pace. We have spun off SEK 75 billion in stock to our shareholders. And we have rotated out SEK 32 billion in dividends and sell-downs in our more mature assets.

But more importantly, we have already over these first 5 years released SEK 8 billion from our growth portfolio at strong returns. And this reallocation within the growth portfolio has financed over 35% of the SEK 22 billion we had invested over the last 5 years.

So with a strong cash position, we ended 2022 with, together with the dividends we expect from Tele2 and a continued rotation of capital within the growth portfolio, we are confident we can maintain our investment momentum going forward.

On Page 16, we can see the results and our track record to date. Even with the significant market correction during 2022, we have generated a 5-year IRR of 33% per year ending 2022 in our post-2018 investment cohort and IRRs exceeding 50% with our 2 largest and relatively new sectors, healthcare and software.

We haven't yet reached at all the same results within platforms and marketplaces, much in part due to the material headwinds faced by our online grocers coming out of the pandemic. However, we are optimistic about the results we should be able to deliver from the reset valuation levels that we end 2022 with.

And again, our growth portfolio today makes up 70% of our overall portfolio. So going forward, the result generated by our growth-focused strategy will have significantly larger impact on our shareholder returns in the next 5 years compared to what it has had during the past 5 years.

Let's now have a look at our priorities and expectations for 2023 on Page 18. In 2023, we will maintain a disciplined approach to capital allocation using our strong financial position to support maximize the impact from the company where we have the highest conviction, but we will also continue to prune the portfolio. We aim to maintain our investment momentum in 2023. And we expect to invest around SEK 5 billion, which is roughly half into existing businesses and the other half into new companies. The economic environment will likely continue to be depressed, unpredictable and complex for some time, which our companies, of course, will need to adapt to.

But that said, we believe that the current rerating of growth stocks and the challenges in raising new capital in 2023 will ultimately result in a more stable outlook for our venture and growth ecosystem. And we also believe it will create opportunities for us as an investor. And we intend to make full use of our uniqueness as an investor with a long-term view and permanent capital structure in pursuing those opportunities.

Now we are ready to answer your questions. So operator, please open up for Q&A.

[Operator]

[Operator Instructions] We will now take the first question. And it comes from the line of Joachim Gunell from DNB.

[Joachim Gunell, analyst]

So just starting off with your -- with funding and its projections for the private portfolio. You provided a split of how you see this move into the coming years. When we sum that up, we get to the 40% plus 30% plus, I guess, 10% in terms of funding, so you get to 80%. So is there any comment about the remaining 20% of the portfolio value here and finally for that part?

[Samuel Sjöström, executive]

Hello, Joachim, Samuel here. I'd answer your question like this. That 10% that we have in the most imminent bucket on that chart, clearly, we'll need to deal with just as we'll deal with sort of runways ending at a later point in time.

[Joachim Gunell, analyst]

And you've now provided the full year figures for 2022 in terms of growth and then the gross margin profile for both your price assets and call it peer group averages. There seems to have been somewhat of a shift in the gross margin trajectory for -- an improvement for virtual care, but somewhat of a, call it a decline for both marketplace software and consumer finance holdings.

Can you tell us a bit about what is driving this development as these businesses are increasingly, call it, prioritizing profitability?

[Georgi Ganev, executive]

Sure. I mean, overall, Joachim, there's a fairly complex mix effect here, right, because we're weighting this by Q4 '22 numbers and the data we've shown in past reports have been weighted on Q4 '21 numbers. But to your more specific comments on gross margin, for instance, in software, the reason that's coming down is really that Pleo is now making up a smaller share of this group of investments relative to a year ago. And Pleo has higher gross margins than our other software investments have on average. So that lower weight is pushing the average down a bit.

Another example of -- that's driving that is the addition of Mews, which is just structurally a lower-margin business also than Pleo and that also moves that average down a bit.

[Joachim Gunell, analyst]

So on a like-for-like basis, there aren't that much changes in terms of [indiscernible] gross margin profiles?

[Georgi Ganev, executive]

No, Joachim, I'd say, it's the gross margin profiles that are really enabling our companies to slow down burn more so than anything else.

[Joachim Gunell, analyst]

And just finally for me, can you comment a bit more here about the fact that you -- as we look into the next year, you expect for this pattern where, call it, fewer investments drives more of your NAV growth and then particularly call it where you see value crystallization opportunities in private portfolio?

[Georgi Ganev, executive]

Yes, I can. Let me first go back to your first question, Joachim, because we had a hard time hearing you because you were cracking up a bit. I think your question then was how we sum up those different buckets of companies that need to raise capital, right? So it's the 10% of the portfolio that needs financing this year, another 20% next year and the rest basically being 70% is either funded to breakeven or beyond 2020, end of 2024. I think that was your question. So I just want to clarify that.

When it comes to your question now regarding how would we see kind of the portfolio develop during 2023. We say this that this time we have gone through 2022 and also in the uncertain outlook of 2023, we'll do nothing, but fast forward and accelerate or, let's say, to distinguish between the winners and the less resilient companies. So if that normally would take us 2, 3 years in a portfolio, it will go faster than that. So therefore we also have the ability to focus our capital allocation to the companies where we have the long-term ambition. That trend will continue in 2023.

[Operator]

We will now take the next question. And it comes from the line of Derek Laliberte from ABG Sundal Collier.

[Derek Laliberte, analyst]

So I was wondering about you mentioning that revenue expectations, overall, you took down by about 15% following the review. I was wondering if you could give some more detail about how much is driven by the company sort of refocusing on profitability and how much is still driven by generally lower demand?

And perhaps if you could specifically comment on Instabee in which the valuation is down by quite a bit there. What has prompted the sort of revised revenue outlook, if it's lower e-commerce demand? Or are you just being cautious in an uncertain environment?

[Georgi Ganev, executive]

Derek, thank you for your question. I mean, I think it's a combination. For sure, the companies have prioritized profitability over growth in some areas to extend their runways. So that's driven by the companies and in the dialogue with us, obviously, and other investors. I think in uncertain times and difficult times like last year, that's the right thing to do operationally as a CEO and founder, even though it hurts our kind of short-term valuations.

But looking specifically at Instabee, I mean, you can just read the outlooks from their clients, right? So looking at Zalando, Boots and other e-commerce companies, their outlooks have been revised down throughout the 2022. And of course, that impacts the whole market.

But we should remember that our companies are growing very, very much. And comparing that to the market in general, even if we take down our growth forecast on average with 15%, we're still outpacing the market growth many times. So it's kind of a slight adjustment, yes, but primarily driven also because we would like to have a more resilient portfolio going into 2023 and hopefully going out of 2023 as well.

[Derek Laliberte, analyst]

And I was wondering specifically on a couple of companies there, Vivino, #1, I think the valuation has been quite flat, but we haven't heard that much about the company. So just if you could give some sort of update on how that's performing.

And also I was wondering about Mathem, how things are looking from a demand standpoint and the inventory towards consumer press being negatively affected by some -- by the warehouses here?

[Georgi Ganev, executive]

Yes. So both Vivino and Mathem, I would say, are 2 of our companies facing challenges post-pandemic. We had extreme levels of e-commerce in those companies during the pandemic. And they are struggling to handle that steep decline in growth. And on top of that, in Mathem, you have the kind of efficiency challenges since they are at least 2 years behind Oda. Luckily we have Oda as a blueprint for us as an investor. So we know that the model works.

And right now Mathem is implementing that new warehouse and have gone live already. So we have high hopes and ambition that we will see the same efficiency improvement over time in Mathem. Specifically, Vivino, as you know, it's one of the, or is the largest wine app in the world with many millions of users.

By transforming that into a more full-fledged marketplace, it has its challenges, both to kind of have the right inventory and to monetize that customer stream in a good way. And of course, doing that at the same time as the market is declining for Vivino is a challenge.

We have [indiscernible] helping us there on the valuation level, so they are flat. But we don't foresee any write-ups in Vivino for some time because of those [indiscernible].

[Operator]

We will now take the next question. It comes from the line of Rasmus Engberg from SHB.

[Rasmus Engberg, analyst]

I have just one question remaining. It relates to VillageMD. The capital increase there, are you participating in that? Or is it just the 2 companies that are mentioned in the releases?

[Georgi Ganev, executive]

Hello, Rasmus. No, we have not participated in that capital increase. And as you might recall, we invested in VillageMD some years ago and then the strategic investor, Walgreens Boots Alliance came in and it's a large investor, and they have gone way above 50%. So in that company, we are a smaller investor, happy investor because of the progress, obviously, but without the same influence as we had in the beginning of their journey.

[Rasmus Engberg, analyst]

I was just curious because I didn't see that your ownership share decreased or has the money not formally been raised yet, is that why?

[Georgi Ganev, executive]

Rasmus, if you look back, our ownership has decreased, and it's now standing at around 2%.

[Rasmus Engberg, analyst]

Compared to last quarter?

[Georgi Ganev, executive]

Compared to before the deal, we're down, I think, 1.5 percentage point or something, yes.

[Operator]

We will now take the next question. It comes from the line of David Johansson from Nordea.

[David Johansson, analyst]

I have 2 questions really. And the first one is related to Oda, where you did not achieve your valuation mark despite the larger write-down in Q3. So it looks like the dilution was quite high in this deal where you had to go super pro rata to protect your ownership share. Could you maybe comment on the dilution effect here and other factors affecting the valuation versus your previous fair value? And maybe also, since I don't have much to go on in terms of funding rounds, do you believe the down round in Oda could be representative to the rest of the portfolio when they have to seek funding? Or if not, why is that the case or for some of your other assets when they have to seek outside capital in the coming year or so?

[Georgi Ganev, executive]

David, let's try to kind of separate it into a number of answers for your questions. But I think, firstly, as Samuel pointed out, it has been difficult to value the companies from quarter-to-quarter throughout last year. On average, we've done a decent job in following the fluctuations. Maybe Oda and Mathem, as I also said during the presentation, has been impacted the most from both kind of the changed environment regarding consumer buying power, but also, of course, they're less traded peers where multiples have gone down.

We were very close to what we had in our book before this round. Then more tactically, we have a long-term conviction in Oda. So when we want to invest more than our pro rata, we're actually, as an investor, even happy for a lower valuation. That in itself is not an issue. And I don't think it's symptomatic. If you look recently where we have our marks and where the rounds are being made, take Monese as an example. But there are also other examples where we have probably had too low valuation in our books compared to a recent round shortly thereafter.

I don't know if you want to add something, Samuel?

[Samuel Sjöström, executive]

No, maybe to just clarify some confusion. This round was priced at a slim 10% discount to our valuation in Q3. I think the reason that number looks larger in our NAV statement is really 2 things: A, given the volatility in the market, we're being fairly cautious in terms of extrapolating deal valuations on enterprise value. So we are valuing Oda at a 10%, 15% discount to that headline mark.

Plus, as you already mentioned, on the long-term here and the potential and geographic expansion, we are introducing a larger ESOP at Oda. And the way we deal with ESOP from a valuation perspective is very easy in that we take the full dilution all at once. We don't sit down and elaborate on strike prices and so forth in allocations. But we take the full dilution at once, which is slightly different than what you see in public businesses. So those 2 effects is really what widens that gap. In terms of actually pricing this business relative to other e-com businesses, we were very close to where this round happened.

[David Johansson, analyst]

Thank you for providing clarity on this. Also, if I may, we have seen the VillageMD starting to acquire a number of healthcare practices across the U.S. And it looks like Walgreens; it's accumulating its ownership in the company. And as this has become quite a mature asset, what is your plan for this investment? And could this potentially be something you're looking to divest here in the coming year or 2?

[Georgi Ganev, executive]

As we've done in the past, we have already divested part of our stake in VillageMD. And as I said, when we invest in companies, we are necessarily not looking for control, but for influence. But in VillageMD, there's a limited influence from our side. And it is at the kind of end of that maturity curve, if you will, the S curve I referred to. So of course, there is an opportunity for us to divest. But we will only do so if we need the capital and if the price is right.

[Operator]

[Operator Instructions] We will now take the next question. It comes from the line of Stefan Wård from Pareto Securities.

[Stefan Wård, analyst]

I'd like to ask 3 questions. First one is on operational update on Babylon and Transcarent. Second one is a little bit like you described, the roadmap for VillageMD, if you could do a similar sort of scenario for the holding in Cityblock? And then finally, I would like to get some sort of longer-term view on how much net cash you, I mean, it's obviously a favorable position to have a lot of cash. But from a capital efficiency perspective, what would you like to run the business with? I mean SEK 10 billion seems a little bit excessive. Then you will continue to get the ordinary dividends, at least from Tele2 of plus SEK 1 billion per annum and then you have some assets to divest.

How should we think about the capital structure of Kinnevik say in a 3 to 5-year perspective?

[Georgi Ganev, executive]

Okay. Thank you, Stefan. I will start, and then we'll see if Samuel has anything to add. Maybe we have different views on the cash position. That will be fun to hear.

But starting with operational performance in Babylon and Transcarent, I mean, I think looking at Babylon first. We have discussed this many times before. The company ended up being a perfect storm after [indiscernible] IPO back in 2021 and focusing only on growth; has done incredible work to kind of reposition the business as more focused value-based care provider in the U.S., cutting burn significantly and still growing in these focused businesses. So that's great.

The issue with Babylon was more on the funding side, having a funding overhang, I would say, after the redemptions in this pack. So with the increased capital that was made in October and together with the kind of, I would say, focused strategy in the U.S. where there will be a few assets sold, Babylon should be funded to breakeven. But I think the issue with Babylon has been less operational and much more financially driven because of that IPO at the wrong timing and what markets now expect from a business being public, i.e., profitability.

On Transcarent, it's a much, I would say, younger company. And we almost compare that journey with what we saw at Livongo back then and doing some kind of more overarching comparison to that journey, we're quite pleased to see the development in Transcarent. And they are actually ahead if we compare what we saw at Livongo at this stage. Having said that, they have also, of course, been forced, I would say, almost to focus also on a balanced growth and trade in that hyper growth for some cash preservation actions.

So that's also impacting the valuation in our books. But we are very pleased with the team. And obviously, as you know, we have followed that team for a long period of time before. Glen Tullman and the rest, many of those who actually built Livongo is now on this journey. So we're excited.

On Cityblock, compared to VillageMD, I think it's very different because, firstly, we don't have the strategic owner as Walgreens Boots Alliance than wants control in Cityblock. And we have that influence I was referring to earlier. Cityblock has also a completely unique position because they are targeting a market very, very difficult to manage.

And almost no one else has been able to show that type of cohorts that we see in Cityblock. So they can actually cater the needs for these populations and do it profitably. Again, what Samuel referred to earlier in the presentation is that they have also shifted by focusing on certain geographies and certain populations and traded in that growth for longer runway. Therefore that also impacts the valuation in our books this quarter, together with the kind of general multiples not being increased in the market.

Then I will go to the third question on how much cash we need. And I will let Samuel also come in here. But I think in times like this, it's very good to have this strong cash position. Historically funds, private equity firms, investment firms have always been able to generate the best returns after a recession and a downturn. We believe this will be the case this time around as well.

And with our wide network in these 4 focused sectors that we today currently invest in and a lot of dry powder, we can invest both in our existing portfolio that we have marked down now to market levels and in new opportunities within these sectors.

Therefore I think the cash that you referred to as maybe excess capital; I think it comes very handy before an uncertain time like this. Over time, we just want to keep up our investment momentum. And right now, what we have announced, it's around SEK 5 billion per year, which actually have been around the average for the last 5 years. And today we just want to make sure that this is the momentum we can keep up with. Samuel?

[Samuel Sjöström, executive]

Yes, maybe just to add a few nuances. Stefan, clearly, we don't find SEK 10 billion in net cash excessive nor did we find SEK 13 billion, SEK 14 billion in net cash excessive in Q2 this year. I think it's really about 2 things here, and Georgi is touching on them. Firstly, it's about having financial muscles that enables us to rotate the portfolio and keep it vibrant and fresh.

Secondly, it's about being able to cover our investment budget. And clearly when we mark down our portfolio by the magnitudes we've done in 2022; that means the first ratio swells a bit. But looking at 2022, holding that cash has been NAV accretive. So we're not concerned about the balance sheet being sort of too round around the hips. And we clearly feel that the value of being able to feel a certainty that we can just continue delivering on the strategy, that value will surely eclipse whatever incremental value you can find by sort of fine-tuning the capital structure, in particular in this environment.

[Operator]

We will now take the next question. It comes from the line of Joachim Gunell from DNB.

[Joachim Gunell, analyst]

Just one follow-up from me commenting a bit about the -- you mentioned here, Georgi, the amount of dry powder in system, et cetera. Can you just -- I know you don't provide any guidance for, call it, net investments for 2023. But which scenarios you ambition for the coming year or, I mean, how is the exit climate and should we particularly look towards the assets which are, call it, further up on the S curve in terms of where you see potential divestment candidates?

[Georgi Ganev, executive]

I mean, I think what we've provided in this report is nothing but simple math. If we want to keep up the momentum to invest SEK 5 billion, and we have SEK 10 billion at hand, it will be SEK 5 billion left at the end of the year. Of course we have opportunities to do exits. And if the markets open up, and we see that we can get the right price from some of these businesses, we prefer to exit than to keep long-term, we might do so. If that results in an increased investment budget for this year or an increased net cash position, I cannot answer now. It truly depends on the opportunities we come across.

So for us, a budget is more kind of an outlook and a forecast we need to have in order to know when to actually act and when we need to force ourselves maybe to look for extra opportunities rather than saying that we have to invest it. We are, again, a permanent capital vehicle, not a fund with fund restrictions and maturity requirements. So we will only invest in the best businesses we find there.

[Joachim Gunell, analyst]

Sure. But my question was more related to if you have seen any, call it, sequential shift with -- not necessarily your cash position. But a lot of dry powder in the vehicle VC ecosystem as a whole and whether, you call it, the exit climate has sequentially improved as growth stocks have come back.

[Georgi Ganev, executive]

No, I think in the contrary, last year, we saw basically companies that typically invest a lot in 2021, not doing many investments or sometimes no new investment during 2022. We kept up our momentum both in the existing portfolio and new opportunities. I think this will change during 2023 and more of, let's say, the ecosystem's dry powder that you referred to will come into play. I see that people are talking about IPO windows potentially opening up during this year. And that will then, of course, open up for exit opportunities.

But I think I just need to rephrase also the term exit related to an IPO. For us, that could necessarily -- there could actually have been a longer commitment to a company, as we've seen in the past with Livongo. So an IPO window opening up is not only about exit for us.

[Operator]

We will now take the next question. It comes from the line of Andreas Lundberg from SEB.

[Andreas Lundberg, analyst]

Just a quick one here. The SEK 2.5 billion, approximately planned investment for existing holdings, how much of that relates to the companies where you see financing needs for 2023?

[Georgi Ganev, executive]

Thank you for the question. A tiny bit, I would say. So again…

[Andreas Lundberg, analyst]

A tiny bit?

[Georgi Ganev, executive]

Yes, a tiny bit. If you look at the total portfolio, it's 10% that needs funding this year, another 20% next year and 70% of our companies in value doesn't need funding before 2025 or never because they are fully funded. So this means that we are very forward leaning, allocating money into our existing portfolio. So the SEK 2.5 billion, the majority of that will go to companies where we see strong traction and where we have high conviction.

[Operator]

There are no further questions at this time. I would like to hand back over to the speakers for final remarks.

[Georgi Ganev, executive]

Thank you very much, and thank you for listening in and for your questions. And as a last reminder, we will report our results for the first quarter of 2023 on the 20th of April. Thank you. Bye-bye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.