Kinnevik AB

STO:KINV B

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for standing by. Welcome to Kinnevik Third Quarter 2022 Report Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

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

[Georgi Ganev, executive]

Thank you very much, and good morning, and welcome to the presentation of Kinnevik's results for the third quarter 2022. I am Georgi Ganev, Kinnevik's CEO; and with me today is our CFO, Erika Soderberg Johnson; our Chief Strategy Officer, Samuel Sjostrom; and our Director of Corporate Communications, Torun Litzen.

Let's start by moving to Page 2. As you may have seen, we're hosting a digital capital markets update this afternoon at 2:00 p.m. Central European time. More information about that is available on our website. And we have a lot of exciting things to present to you at the event, and therefore, today's earnings presentation will be rather brief.

We're of course more than happy to take questions related to this quarter's valuation changes on this call to make sure we can focus on longer-term strategic perspectives on the update this afternoon.

On Page 3 is an overview of the highlights during the third quarter. We released this report again with a rather challenging backdrop for us as growth investors. Market unrest, multiple contractions, and a tougher fundraising environment are putting pressure on our companies, their valuations and their access to capital. And our net asset value was down 5% in the quarter. And in a moment, Erika will guide you through the development of our NAV, and Samuel will provide some more details on the key valuation changes during the quarter.

But more importantly than quarter-on-quarter changes in valuation, in this environment, we're trying to make the most of our permanent capital structure, which sets us apart from other investors more distinctly now than during the exuberant markets of last year.

Firstly, we're investing more capital in our companies where we have conviction at more attractive valuations. We're also taking the time to explore new and adjacent investment themes where we believe we can create long-term value, such as in climate tech. We're assessing opportunities over the full investable universe across all growth stages.

And lastly, we're also driving and supporting value-accretive consolidation opportunities. And I believe this quarter highlights our excellent example of this.

We will give you more details at the event this afternoon, but the combination of Budbee and Instabox is a clear proof point of our strategy to invest early and support our company's entire growth journey. Since we first invested in Budbee, the company has increased revenue by 10x and we have remained the largest owner in Budbee by consistently investing at or above pro rata in the company's fundraises. And we will be the largest owner of Instabee, the new company, followed by Budbee's founder and Instabee CEO, Fredrik Hamilton.

You will also have seen that we have announced 2 new investments in the climate tech space. This is growing on a considerably investment of time and resources over the last 2 to 3 years, looking actively at different ways of combining superior shareholder returns with combating climate change.

The 2 new companies join our existing, but smaller investments in the space, the Copenhagen-based Agreena and Berlin-based Vay. Our investment in Solugen is our first sizable climate tech investment. Solugen is on a mission to decarbonize the chemicals industry by using sugar instead of petroleum in the production process. And this creates a safer, cheaper, and more environmentally friendly chemicals.

I'm also very excited about the recently announced EUR 25 million investment in H2 Green Steel. And just as chemicals, steel is one of the most important industries to target first in the Green Industrial Revolution. Our ambition is to deploy more capital in both these companies over time, and we will cover the respective investment cases at our capital markets update this afternoon.

The last highlight of this quarter is Monese, which has secured an investment by HSBC as part of a strategic partnership. And this is a true testament to the successful execution of the company's strategy to expand its B2B offering.

Babylon has had a tougher journey in the market since the IPO last year. But last week, the company announced its intention to divest a network of physicians, providing physical care in California. And this allows Babylon to focus on its core business model and the digital-first contracts. The company is also raising USD 80 million in new funding in a private placement, where Kinnevik will invest $26 million, that is approximately 3x our pro rata. The company expects to be funded to breakeven now, a focus which we fully support.

Now it's time to hand over to Erika. But I would like to take this opportunity to express my gratitude to you, Erika, for all your valuable contributions to Kinnevik so far. You're now moving into a role as senior adviser to Kinnevik, and I look forward to continuing working with you in this new setting.

Erika, why don't you go ahead and take us through the net asset value development during this quarter?

[Erika Johnson, executive]

Thank you, Georgi, will do, and thank you for the kind words. Likewise. Overall our net asset value is down by SEK 3.2 billion or 5% in the quarter and amounted to SEK 58 billion at the end of September. This can be compared to the NASDAQ Internet Index also trading down 5% and the Stockholm All-Share Index trading down 4%.

Since the beginning of the year, our net asset value is down by SEK 14.4 billion or 20%. Meanwhile our net cash position of SEK 12.5 billion corresponds to 27% of portfolio value, providing ample firepower for the years ahead.

The fair value of our unlisted assets was written up by SEK 0.3 billion or 1% in the quarter, but it would have been down by SEK 1.2 billion without continued currency tailwinds and down by SEK 0.1 billion without the benefit of liquidation preferences. Samuel will cover both these effects at more depth in a minute.

With SEK 1 billion in net investments, the private portfolio increased in value by SEK 1.3 billion in total. Our listed assets had an aggregate negative impact on our net asset value of SEK 3.5 billion.

With that, I would also like to take the opportunity to thank Georgi and the full Kinnevik team for highly interesting, inspiring, and the rewarding time. And I do look forward to continue working with the portfolio in my new role as Senior Advisor as from the 1st of November.

Now I would like to hand over to Samuel for some more details on key valuation changes in the third quarter and our capital structure and deployment plan. Samuel?

[Samuel Sjöström, executive]

All right. Thank you, Erika. So now we're on Page 5, and I trust you all recognize this chart by now being 3 quarters into what's been a fairly interesting year. This is the step-by-step bridge from the average underlying value change of each of our investments to the actual SEK effect on our unlisted portfolio, meaning leftmost bar is the average local currency value change in each of our companies, irrespective of their weight in our portfolio. And the rightmost bar is this quarter's change in SEK fair value of our unlisted investments as reflected in our Q3 NAV at this point. So let's go from left to right.

For companies where there weren't any transactions in the quarter, the average value change was down by around 13% including the valuations of Budbee and Monese, which were guided by transactions, that number is closer to 11% down. And weighing all value changes by each company's weight in our portfolio were down by around 6% in Q3. Just pausing there for a second, this is the number you can perhaps most easily compare with public markets. And the magnitude is pretty comparable to our relevant indices moved in this quarter.

The last 2 [indiscernible] the effect from liquidation preferences is pushing 6% up to 4% down and the persistent currency tailwinds are inverting a negative 4% to a green and positive 1%.

Now I'd like to expand just a bit here, firstly, on preferences. The accumulated difference between the share of value were entitled to under the terms we have invested at and our underlying throughout the share value has increased slightly this quarter by SEK 0.4 billion to SEK 2.7 billion for the end of Q3. For some companies, it has decreased, and for some, it has increased. And the SEK 0.4 billion is the net change. As touched upon last quarter and in today's report, this effect is centered around a handful of investments in companies where we've typically only invested in the most recent round.

Then currencies. You would know that the Swedish krona has continued to depreciate considerably against the dollar. In Q3, FX in the dollar in particular has a SEK 1.5 billion positive impact on our valuation. And in today's NAV statement, around 62% of the private portfolio is dollar denominated with the balance being in euros, Swedish and Norwegian krona, and a bit of sterling, and the exact proportions are available in Note 4. Looking back at 2022 to date, the accumulated FX tailwind amounts to a fairly material SEK 3.9 billion.

Moving on now to Page 6 and the 2 more fundamental drivers of value changes, multiples and growth. Year-to-date we've contracted multiples pretty much in line with public markets on average by around 40% to 50%. And meanwhile all companies have grown revenues by a factor of 4x their average public market benchmark.

This quarter, I would say we're typically being a bit more heavy-handed on those of our companies that are less efficient in terms of converting cash burn into revenue growth. And this is to reflect the patterns we're increasingly seeing in public markets of high burn or low-profit businesses facing a slightly augmented multiple contraction relative to their profitable peers.

Now I think this page resonates well with our firm view that our carrying values are squarely reflecting public market valuation levels for end of September. However, the one discrepancy that stands out on this page is probably in value-based care, and I'll be getting back to that in a second.

But first, just to conclude, we feel our valuation in today's report from a sound foundation from which we can continue to reflect whatever happens from here on out. And in case of considerable market movements, that will be the dominant short-term driver of our NAV development. And in case of more stable markets, our investees' performance will be the key driver of changes going forward, just as it will inevitably be over the longer term.

On Page 7 then, we're outlining the most important movements in valuations this quarter in our private portfolio. And you all will already have picked up on these, but just to quickly give you some additional context. We have 3 material upwards revisions in Budbee, Cityblock, and VillageMD, 2 material downward revisions in Mathem and Oda, and we're also taking down our valuation of Pleo a little bit. So let's take them one by one.

We're marking Budbee in line with the valuation in the ongoing merger with Instabox. This means valuing Budbee at a material premium to key peer InPost, which we find easily defendable. Budbee is growing more than 4x as fast, has proven its underlying EBITDA profitability, and the merger is a big positive. With this mark, our valuation is up around 23% from last quarter or around 70% year-to-date.

Moving on to value-based care, as I mentioned on the previous page, we've contracted our multiples around 5x more than the movement in the peer group year-to-date. That is primarily due to the flurry of takeover offers and speculation in the peer group during the third quarter, which has boosted valuation levels considerably. Now we're wary of reflecting takeover premiums in the valuation of our industries. And we're therefore valuing our assets in the space considerably lower relative to the peer group this quarter than in past ones.

So at Cityblock and VillageMD, we're raising our multiples by no more than high single-digit percentages. And that means being materially more conservative even relative to the peer group constituents not directly subject to takeover bids or speculation compared to where we were last quarter. With continued strong growth, restrained burn, and a weakening Swedish krona, we're writing up both our value-based care investments pretty significantly this quarter. But even so, we're not quite back even to Q1 levels in dollar terms quite yet.

All right. So on to the 3 downward revisions. We're writing down our Mathem investment by around 75% in Q3. We've identified and acted on a need to rebase our valuation level in relation to the peer group and are contracting our forward-looking multiple by almost 60% in the quarter. This material write-down effectively means 3 things.

Firstly, we will have taken down our multiple by 65% to 70% year-to-date. And that's a contraction pretty much in line with key e-commerce comps such as Boozt, HelloFresh and Zalando. Secondly, we're now valuing Mathem at a discount to these peers. And thirdly, we are basing our valuation on a more conservative outlook from both a growth and a capital needs perspective just like what has unfolded in public e-commerce companies with profit warnings being issued across the board over the last 6 months.

There are similar, albeit milder dynamics going on at our valuation of Oda, where we're cutting our mark by around 50%. Continued contraction in market multiples is working against us, and we are grounding our valuation on a lowered outlook relative to prior quarters.

Oda is still expected to grow well in excess of the peer group, and they've proven their unique ability to generate positive cash flow margins from online grocery retail. So we remain at a not immaterial premium mark to comps on a near-term basis, but that differential is coming in line when looking into 2024 and beyond.

Lastly and quickly then on Pleo. We are down a rough 15% in the quarter, and this is purely market-driven. Comps were down 1% or 2% in the quarter, but we're taking down our multiple by closer to 20% to better reflect the patterns we're seeing in public market valuations of hyper growth cash consuming SaaS companies relative to more profitable, lower growth comps.

Okay. That's what we have prepared in terms of valuations, and I look forward to revisiting the topic and doing my very best to answer your questions when we get to the Q&A. For now, I think we all want to move on.

[Operator]

[Operator Instructions]

[Samuel Sjöström, executive]

I'm not quite done. Okay.

Page 8. It has not escaped you that our financial position is strong and that we've stepped up the intensity of our capital reallocation since 2018. For end of Q3, we had a SEK 12.5 billion net cash position, corresponding to more than 2x the capital we've deployed over the last 12 months. We continue to gravitate towards the SEK 5 billion baseline in terms of gross investments on an annual basis, noting that we will clearly oscillate around this level on a rolling LTM basis.

And at that baseline, SEK 12.5 billion last well into late 2024 without any capital inflows. And as a side note, on top of that net cash position, we have SEK 3.5 billion in bonds to tap into maturing in 2025, '26, and '28. On the investee side of things, in the [indiscernible] of this page, we're giving you an updated view on the runway figures we provided last quarter.

These percentages are highly indicative and weighted to our fair values for Q3. But having said that, 6% of our fair value sits in investments whose runway end this side in New Years and an additional 6% has runway ending during the first half of 2023. As such you can expect a handful of fundraises over the coming months within the existing portfolio. More than 20% of our fair value is invested in companies with a runway of 9 to 15 months, meaning it lasts into the second half of next year. And the remaining 70% or so of value is in companies that are either profitable, funded to breakeven, or that have runway that extends into 2024.

Now when you look back and contrast this against our earnings call deck last quarter, if you haven't already, you will note that these percentages are typically moving in the right direction, meaning the average runway extends further into time than it did 3 months ago. And there's basically a confluence of 3 factors driving this.

Firstly, some of our companies have raised new capital in the quarter. Secondly, many of our companies are cutting some of the excess accumulated during the last 2 years, decreasing their burn. And lastly, as I've mentioned, we are reflecting our investees' profitability and financial strength in our valuation, meaning that all else equal, companies with shorter runways have lower valuations and therefore lower weight in these figures than they might have had last quarter.

So all in all, we feel good about where we and our investees are as far as financial positions go. This comes with 2 caveats, however. One, that we're able to over-allocate capital into the opportunities in our existing portfolio that we have the highest conviction in. And two, that we're able to invest our follow-on capital at fair terms that reflect the current environment.

And speaking of capital allocation, let's move to the last page we prepared for this morning's call.

So I trust you are all acquainted to the framework that we introduced in 2019 to guide our capital allocation as we began the transformation of Kinnevik into the growth-focused investment platform we are today.

The key parameters of this framework have been investing 1/3 of our capital into first round investments or new investments and 2/3 into follow-ons. It's been to add around 4 companies per year to our portfolio and to, over time, build a well-distributed portfolio of around 30 meaningful companies across sectors and stages of maturity.

The objective of this framework and these parameters was to provide clarity and predictability to a rather drastic change in Kinnevik's profile. And in the first 2 or so years, our deployment largely followed these parameters.

However, also since 2019, we've reached 2 significant achievements. Firstly, we've made considerable strides in building a broad, significant and balanced growth portfolio. Secondly, as I just covered, we have a terrifically strong financial position. And these 2 factors has, over time, given us the confidence and encouragement to slowly but steadily take steps outside of this framework. And you can see the results and the figures in the center part of this page showing the actual traction against these parameters since 2019 up until today.

So drawing on this and having learned a few lessons these last few years, on the rightmost side of this page, you have our new and current thinking on our capital allocation. Going forward, you should expect us to split our capital 50-50 between new and follow-on investments. You should expect us to add no more than around 8 companies per year with ebbs and flows depending on opportunities we find. And you should expect us to not focus on evening out our sector exposure, but rather to continue to evolve it as evidenced by today's announcement of our investments into Solugen and H2 Green steel.

On stake size, we have grown more comfortable with lower ownership levels, in particular, in later-stage assets, and we're going forward, focus more on ensuring that we have an adequate level of influence rather than a specific and dogmatic target percentage stake.

And lastly, you should expect us to continue growing our portfolio in terms of number of companies, but considering the inevitable power load distribution that this portfolio will follow over time, we expect around 10 to 20 companies to be more material to our short and medium-term development at any given point in time.

Now lastly, to be perfectly clear, these parameters should not be taken as a gospel. We will not be piling in capital into underperformers nor will we pass on a great new investment just to hit this proportion. But we believe that these parameters give solid enough guidance as to where we believe we will end up if we continue focusing on pursuing the best opportunities to deploy the capital we manage on behalf of our shareholders.

With that, I'll hand it back over Georgi.

[Georgi Ganev, executive]

Thank you, Samuel. So wrapping up this quarter, I believe that the full effect of an economic downturn remains to be seen. However, the current market environment is doing little to mute our conviction in the power of technology. What we'll do, however, is to create a clear distinction between the companies that will emerge stronger and those that will fail. And Kinnevik will undoubtedly have our share of both, but I believe we are in a very strong position due to a highly disciplined allocation of capital. And it is a key priority that we maintain our investment momentum in a high and absolute bar for what constitutes a great investment, irrespective of market environment.

That said, I would like to remind you again of our capital markets update this afternoon at 2:00 p.m., where we will dive deeper into our strategy, our investment themes, and our priorities going forward.

And now we are ready to answer your questions. So operator, thank you. Please open up for Q&A.

[Operator]

[Operator Instructions] Now we are going to take our first question, and it comes from the line of Derek Laliberte from ABG Sundal Collier.

[Derek Laliberte, analyst]

So I was wondering on Mathem, if you could give some more detail on this material revision of the company's future capital needs that you write about in the report. And also with regards to the top line headwinds, what are the key drivers behind those? Is it general consumer demand? Or is it consumers seeking other alternatives?

[Georgi Ganev, executive]

Derek, thank you for your question. I will try to start to give you an overview of how we think regarding Mathem and what we see. I mean, as Samuel said, there's, of course, a lot of pressure on peer multiples, which is the main driver in this revision. But there's also the comps from the, kind of, pandemic period that looks very different today with revisions of forecast. But there is also a change as we see in consumer demand slightly because of the uncertain macro environment we're in.

And that comes in different kind of aspects, some slight reduction of baskets, more kind of skewed basket towards low-margin products and so forth. So that in combination with Mathem being, as we have said before, a couple of years behind Oda in terms of efficiency, because they have not yet deployed their central warehouse. This hits them harder, and it also changes the kind of capital need. So we are tough on Mathem valuation this quarter compared to Oda. But those other parameters that I just went through, the consumer demand, the consumer power, and peer multiples, they are the same for both companies.

[Derek Laliberte, analyst]

And just a follow-up on Mathem there, I mean, what's your thoughts on Mathem being a sort of viable long-term competitor versus the incumbents given that it doesn't own the wholesale part of the value chain? Or is that perhaps not so relevant as you see it?

[Georgi Ganev, executive]

I think it's a very valid question, Derek. And I think nothing has changed in our long-term thesis around online groceries. And we've said from the beginning that this is a difficult environment. You need to invest a lot in kind of central picking, really optimized for home delivery. You need to invest a lot in the last mile logistics piece. But when you have enough density and enough volume and a good system to make that picking efficient, it's very difficult for #2 or #3 to actually emerge as even a challenger in this market. That has been the case in many other markets before the Nordics, right?

The other trend that we see is that the online penetration will go up in this space. When we first invested in Oda and Mathem, the penetration was between 1% and 2%. During the pandemic, it went up to maybe all the way to 7% or 8%. Now it's probably down to 4.5% something again. But over time, this will increase. So we believe that with the proof points we've had from Oda's central warehouse in Norway and the same type of kind of structure and software that will drive that efficiency, we have a high conviction that Mathem will be equally efficient over time in Sweden.

And together then with the partnership we have with Axfood, remember, that was a very important structure to actually have the access to the purchasing power. We believe we will become the leader with Mathem in Sweden.

[Derek Laliberte, analyst]

And finally, if I may, I'd like to ask on the funding needs and this percentages of the private portfolio fair value guidance on capital and it's certainly helpful. But I was wondering if you could be a bit more specific on like how many of your companies need capital soon and what this roughly would correspond to in Swedish krona, if you were to defend your pro rata share? Like is this SEK 5 billion investment payers brand and now guiding for half of it into existing investments? I mean, is that a good estimate for this over the coming years?

[Samuel Sjöström, executive]

Hello, Derek, it's Samuel. I'm not necessarily willing to get into which companies are in that 5%, 6% figure, nor do I have readily available sort of the metrics you referenced our pro rata share in the next few funding rounds over the coming months.

What I do feel, this is the tricky part about this framework, right? So we are expecting to invest a bit more than our SEK 5 billion benchmark this year. We have a few follow-ons in the pipeline that we're expecting to close out in Q4. And the companies whose runway ends this side in New Year is, clearly, that will need to be sorted out.

I think where we end up in terms of split, let's see, we have plenty of new opportunities in the pipeline as well. So there's both a push and a pull in that new to follow-on proportion.

[Derek Laliberte, analyst]

All right. Just -- yes, sorry for interrupting, Georgi.

[Georgi Ganev, executive]

Obviously more examples of what you see in this quarter, companies where we lean in considerably like our investment is announced, investment in Babylon and companies where we will probably pass. So I think that extreme will be, there will more of this kind of distinction going forward.

[Derek Laliberte, analyst]

And then what's driving this? Perhaps you mentioned somewhere, but what's driving this sort of change from the 1/3 to 2/3 split between and even existing to 50-50?

[Georgi Ganev, executive]

I mean, it's partly the access to capital to funding that we have. So that's one part. But the other thing is also the opportunities we have in our pipeline. I mean, over the last 5 years, when we have built up this portfolio, we have extended our investment team. We spent a lot of time in working in new interesting adjacent themes, and that has also opened up for possibilities.

And now with the kind of the latest, I would say, addition to our investment strategy, which is climate tech, we see there are rooms for more investments.

[Operator]

[Operator Instructions] And the next question comes from the line of Joachim Gunell from DNB.

[Joachim Gunell, analyst]

So talks in a bit more on the Q3 results. Can you say anything about any sort of like sequential revisions in terms of what you expect in terms of operational performance of the underlying unlisted assets when it comes to projected revenue growth as of, we'll call it, the coming 12 months in relation to where we stood in the summer? And with that being said, also how many of the -- how large share of the unlisted assets have this more like direct consumer exposure?

[Samuel Sjöström, executive]

All right. Hello, Joachim, it's Samuel. I think what you could do is compare the page we had in the deck on growth and multiple contraction with the same page we had in Q2. And if you do that comparison on the growth numbers, I think you will see that growth in 2022 year-to-date is slightly lower than it was in H1. And as always, there's a multitude of factors driving this. But just to name a few, in software, clearly, TravelPerk is facing some tougher comparable periods with the pandemic easing and Pleo's weight in this group of assets is slightly lower with the write-down this quarter. So that's affecting the aggregate number.

In value-based care, our younger company, Transcarent has a lower weight after write-ups of the more established VillageMD and Cityblock. I think in Platform in marketplaces, clearly, we mentioned the headwind faced by Mathem and Oda. So on aggregate, we're still growing at that pace we want to be growing at, meaning sort of 4x our average peer, and we feel very comfortable about that.

I think looking into the future, we are sort of continuously every quarter adjusting our forecast. What will have happened between now and our Q4 report is that all our companies will have undertaken sort of their 2023 budget exercises. So I'm sure we'll be a lot wiser by then. In what direction that will change these numbers, I honestly can't tell from where we are today.

[Joachim Gunell, analyst]

But all assets equal, doing the, call it the, using the framework you alluded to, I would assume that adjusting for FX, the -- I mean, 12-month expected revenues of the aggregate portfolio is broadly unchanged sequentially?

[Samuel Sjöström, executive]

Yes, it hasn't changed in more than an immaterial way. Place it like that.

[Joachim Gunell, analyst]

Can you say anything about in what currency and how large share of this very sizable net cash position you have is invested in interest-bearing instruments versus, call it, depositing hubs?

[Samuel Sjöström, executive]

We have that in the notes, I'm sure somewhere. We have a fairly stringent policy as to how we deal with what we call excess liquidity, and you can probably look it up in the report. In terms of FX, it's 99% in SEK.

[Joachim Gunell, analyst]

And just finally, okay, we can spend more time this afternoon, of course. But the climate tech is somewhat out of, call it, core focus sectors that you've been building traction, the industrial network, and brand in recent years. So can you just help us understand how your ability is to source the best deal flow here and then considering H2 Green Steel as an example?

[Georgi Ganev, executive]

Yes, I can, Joachim. Again, we will dive deeper into this, this afternoon. But I think in short, first of all, our permanent capital structure fits squarely with a lot of these ventures that we are looking at. So as an investor, we have something unique to provide.

Secondly, the way we work, as we started with health care 7 years ago, is to dipping our toes into a few new companies. We also invested in a niche fund, Carbon Direct to extend our network. We have a set of advisers and not to say the least, we have a Board with several experienced people within this field.

So of course, leveraging all that and looking at our structure, we believe we have a good chance of not only accessing this deal, but actually to become very strong partners with these people. And H2 Green Steel is one good example, of course, a natural link to that business. The fact it has also a Nordic or Swedish business, but also Solugen, this U.S.-based company with founders that we have met several times, they've been over visiting us in Sweden. We feel very comfortable that we can be strong partners with such a company for a long period of time.

[Operator]

[Operator Instructions] And the next question comes from the line of Andreas Lundberg from SEB.

[Andreas Lundberg, analyst]

Starting off with consumer behavior, you touched upon Mathem earlier here, Georgi. What can you say about the other companies when it comes to consumer behavior in the recent quarter? That's the first one.

[Georgi Ganev, executive]

Yes. I mean I would say that Mathem and Oda are the ones being mostly affected like the whole kind of e-comm peer group have been. For other services, we don't see a very clear trend. And maybe to add on what Samuel went through when we got the question from Joachim, it's not only that we see kind of weaker consumer demand. It's deliberately so that companies are also changing their forecast to extend the runway. So it's not that we don't see a space for growth.

And I can give you a few examples. If you look at the travel industry, for instance, what we have to look at is not only the total TAM, total addressable market, and that grows or shrinks, but also the structural movement within for, in this case, kind of unmanaged travels for SMB, to manage travel for SMB, and the move from kind of brick-and-mortar solutions to digital solutions.

And that shift within the travel segment is much more important for a company like TravelPerk or Omio. So when we go through the growth plans for our consumer businesses, whether that is in travel, if that is in value-based care or something, it's those kind of megatrends, the shifts within the segments or the sectors and the addressable markets that are most important. And we are not that worried that we will have big revisions or cut because of a weaker consumer market in most of our businesses.

[Andreas Lundberg, analyst]

And then perhaps a question for Erika or for you, Georgi, I don't know. Why are you changing CFO?

[Georgi Ganev, executive]

I can take that one. I mean it's a question that is -- it doesn't have one simple answer. We have had the pleasure of working with Erika over the last 2 years and the great operational experience that Erika has, has proven valuable to many of our companies. And that's what we want to extend and to do more of going forward.

As such, Samuel has been with the company for quite some time now, being instrumental in defining this framework for us as a growth investor and working with our strategy closely with me and the investment team. And I see him as an ideal CFO for the next phase of the company's journey.

So it's a natural transition. And for me, it's something that is very good for our portfolio that we can have the access to Erika and working closely with companies and also serving on the Board for some of them and continue with a strong kind of internal successor.

[Andreas Lundberg, analyst]

And last one, a clarification on this revenue growth effect on valuations of close to SEK 4 billion in the quarter. Let's say, your aggregated revenues are expected to be SEK 500 million higher in the next 12 months compared to the next 12 months a quarter ago, then you put, let's say, 8x multiple on that. Is that the way you do it so to say, but on an individual basis, company by company?

[Samuel Sjöström, executive]

Hello, Andreas, it's Samuel. Not quite sure I exactly followed your reasoning there. But maybe I can put it in my own words in very simple terms. If our companies continues to grow and have a sort of tempered cash burn and multiples remain stable, then yes, you should expect the realization of that to the forecasted growth to generate NAV clearly.

[Andreas Lundberg, analyst]

I'm sorry, could you repeat that? If you have unchanged revenues, but with cash burn, did you say that?

[Samuel Sjöström, executive]

Sorry. If our companies perform in line with their plans and they do not burn too much cash and the multiples remain stable, then yes, you will see NAV accretion. That's sort of the very core of the value creation model.

[Operator]

[Operator Instructions] And the next question comes from the line of Johan Sjoberg from Kepler Cheuvreux.

[Johan Sjöberg, analyst]

Samuel, can I just ask you about Slide #8 about the investee cash runway? Do I read it correctly that this is the sort of the companies which you currently have in the portfolio? This does not mean that you're going to invest into all of these, is that correct, or?

[Samuel Sjöström, executive]

No, no, correct. This is -- and, again, it's in percentages of fair value. So this means that companies that represent, for instance, 69% of fair value per Q3 have runway that extends beyond 15 months or they're fully funded or even profitable. That's how you should read it.

[Johan Sjöberg, analyst]

And then just comparing this slide with the slide that you gave in the Q2 and then I -- sure, you have some different time periods here. But back then, roughly 48% was in that period, which is currently down 69% today. And I was just wondering, is this due to the fact that they have been sort of focusing more upon cash flow and sort of reducing their own growth and sort of just focus on profitability? Or what is the -- could you talk a little bit about that, please?

[Samuel Sjöström, executive]

Yes, sure. No, that's some of it. Again, I think I might have mentioned it during the prepared remarks. But you have a couple of companies that have raised new capital in the quarter that's pushing the runway out in time. Secondly, as Georgi mentioned, many companies clearly are looking to become a bit more efficient in that growth to cash burn trade-offs, and that's also pushing one way out as to decreasing their burn.

And lastly, and perhaps in one sense, most importantly, we're very much trying to reflect our company's level of profitability and financial strength when we value them. So between Q2 and Q3, you will have seen valuation revisions that are driven by the length of our company's runway. And that clearly works in favor of that big green circle in the bottom part of the center of that page.

[Johan Sjöberg, analyst]

And then just on that note, I mean, that's very good and I also think, I mean, has -- just looking at sort of how you value your own listed [indiscernible] I mean, of course, sales multiples has been a key multiple for you. But have you changed your -- the weight you put on those? And also just looking at sort of the EBITDA profitability, has that changed now during 2022?

[Samuel Sjöström, executive]

I wouldn't necessarily say the approach has changed. I mean we use revenue multiples mostly as they're communicated to you guys because it's a very easy measure and everyone understands it. Clearly when we value our businesses, we look at a lot more complex data sets than just revenue multiples because basically, if you put a revenue multiple under a microscope, you'll find assumptions around margins and how growth is going to develop and taper off and how much capital this company is going to consume, and what's the risk to that forecast and so forth. You effectively see a full detail.

On sort of the change in approach, I'd say we've changed our approach just as the public markets have. And we've done a few exercises these last couple of months trying to understand in broader terms how the public market is valuing growth relative to profitability and how that's changed over the last, say, 12 to 18 months. And we primarily look at SaaS companies. It's a welcoming space to do these types of exercises considering there's this massive universe of large public companies with similar characteristics.

And if you do on your free time or even during working hours, like a rudimentary 2-factor regression of SaaS multiples against growth rates and cash flow margins and do that on the basis of data today relative to mid-2021, I think you will see 3 very clear swings since then. And those are, firstly, the coefficient on growth rates has been basically cut in half, but it still remains highly significant in terms of its explanatory power.

Secondly, cash flow margins, I believe, had virtually 0 statistical significance in mid-2021. But now it's a highly relevant measure to explain the variance in multiples on public markets.

And thirdly, the coefficient on cash flow margins today is, I'd say, around half as large as the one on growth. What does that mean? That means from a purely statistical sense that 10 percentage points worth of extra growth is worth as much to your multiple as 20 percentage points worth of extra margin.

So that's sort of what we're trying to reflect here really is that cash is worth more than it used to be. And as you can imagine, we've run our own valuations through these regressions to sort of sanity check our levels, and that's what's underpinning all the valuations you have in the report this morning.

[Johan Sjöberg, analyst]

So yes, if I understand it, you have changed, you're putting more weight into cash flow and today compared with like a year ago, just want to -- because there's a bunch of questions which we get about the, what is the sort of valuation approach that you put on -- or is it just the [indiscernible] because that seems to be sort of the historical way of valuing this -- your unlisted portfolio, but it seems now that you are more tilted towards cash flow? Is that how I should read it?

[Samuel Sjöström, executive]

We're tilting towards cash flow to the extent public markets are tilting towards cash flow. And we don't necessarily opine on how public markets are valuing companies that are similar to ours. We just merely reflect it.

[Georgi Ganev, executive]

Indirect effect, that's a yes.

[Samuel Sjöström, executive]

That's a yes. Yes.

[Johan Sjöberg, analyst]

And then just -- sorry for this. But I also wonder just looking at your upcoming investments also, I mean, you are changing how the -- and then when you're looking at your opportunities now going forward here, and you mentioned our clean tech -- or sorry, climate tech, which is a new sector. But just to get a feeling, should we expect -- where do you see the best opportunities right now to invest? I mean, climate tech is an obvious one, but just looking at your sort of the current or what you have invested into the part and just looking at your different segments, could you say something about that?

[Georgi Ganev, executive]

I mean, I think it's fair to say that we are, of course, expanding our core sectors as well. I mean climate tech is one of those new themes we're looking at. But looking at our sectors, it's basically a combination of business models and to understand certain kind of markets, industries and having deep expertise.

So I think take the theme of future of work that spans across several business models that we know, which is then kind of marketplaces, it's the software bucket, and it's also kind of the bucket that we say kind of new themes and early bets. And we tried then to kind of ring-fence that theme around investments like Jobandtalent, Omnipresent, and SafetyWing. And I think you will see a continuation of us thinking like that, a combination, again, based on business models and sectors.

In the health care space, for instance, we have also made a shift from kind of more traditional virtual care into going into more value-based care and niche care providers such as Spring Health and Quit Genius. That will also continue as we will expand our healthcare portfolio into other new areas because of our kind of understanding of the field or extended advisory network and so forth.

So we will move within our core sectors and we will, from time to time, enter more or less completely new areas like climate tech. So that's basically what I can say right now. Which of these kind of sectors we will invest more capital in? It's very difficult to say because at the end of the -- end of the day, we want to invest in the best companies and back the best founders out there, and we won't do kind of a round robin between these sectors to please the framework. Going back to what Samuel says, we will have a high bar, and we challenge every business case we look at irrespective of sector.

[Johan Sjöberg, analyst]

And then just also looking at your existing portfolio, I mean, of course, you're taking a more sort of harsh approach, which companies to focus on going forward here. And then just to get a feeling of, just coming back to the earlier slide, we're showing the cash needs and how many of your portfolio or how many companies in your portfolio without, of course, naming anyone, but have you decided, "Hey, we're going to leave this. We're not going to put on dime more into it," and could you give some comment to that?

[Georgi Ganev, executive]

I think, again, it's something we cannot out in a call like this because that would not be fair to companies if we start to try to predict which of the ones we will not fund. That would definitely make it difficult for these companies to actually to raise capital. What we have said is that we will have a share of both kind of successful, unproven, and failing companies as well. But thanks to our disciplined capital allocation in the past, I believe we have been a successful stock picker, if you will, and we will be better off than kind of the average in the market.

What's important to say is that we've always been harsh or challenging since we deployed this new capital framework. The difference now is that when you have a market that acts as the current market does, meaning a tougher fundraising environment, we see these things faster, right? Because the distinction between successful company and non-successful company will be more clear to us faster in times like this. That's why I expect the, kind of, the spread between the companies where we lean in and where we pass will be greater now than last year.

[Johan Sjöberg, analyst]

And then when you're talking about also material investment into these 10 to 20 companies, what -- I guess, the only way for us to see it is basically the size of the investment or the size of the actual value in your NAV. What is -- could you give some sort of indication of what is for you a material investment in terms of size, please?

[Georgi Ganev, executive]

Absolutely. I mean, as a stage agnostic investor, permanent capital vehicle, we have done investment, I think the smallest ticket during the last 5 years would have been around $5 million and the largest was $150 million in Jobandtalent. But we have over time deployed more capital than SEK 150 million, if you kind of aggregate what we have done when we follow a company through the different kind of cycle and basis.

So material for us would probably be in the range of between $100 million to $200 million in one company. That's a significant capital deployment to 1 asset, and we can either do it a fair bit at once or over time. We are also not afraid for more kind of capital-intense deployment in the climate tech space because we frankly believe that the climate challenge is a physical one, and it may require physical solutions. So we're prepared to deploy capital in these ranges in those companies as well.

[Johan Sjöberg, analyst]

Can I ask one final question? I'm sorry for -- it's about Babylon. You're now taking the 3x pro rata in that rights issue, which you highlighted in the report. But could you talk about why is that? And are you -- is that oversubscribed? Or was it -- what is the sort of -- how this rights issue, how did that fly among investors?

[Georgi Ganev, executive]

I mean, yes, I think it's definitely so that we did a commitment of our $26 million and the round was, had a caveat of raising at least $75 million. So I think it was in that range we took almost 3x of pro rata. Slightly less now and the race was oversubscribed, you can say, and it seems like they have now subscription agreements signed for $80 million.

We wanted to back this company for the long term because we've been part of this journey since 2016. And although it's been extremely challenging in the public market, I mean, for Babylon was a perfect storm, both kind of a reset in valuations for value-based care providers and virtual care providers in the U.S. in combination with a SPAC or de-SPAC with high degree of redemptions.

So they had less cash than expected, which was not unique to Babylon that happened in very many de-SPACs in the U.S. market. And then, of course, now kind of low liquidity in the stock. And all of that has put an enormous pressure on Babylon. We don't think necessarily that this kind of reflects the intrinsic value of the company. So what we say in the report is that we have the chance to invest more at more attractive valuations. And for the case of Babylon, that's really the case. So IPO at $10 and a bit north of $0.40 where we deployed this capital. So for us, it's kind of a way of looking at this capital deploy and seeing how that can kind of average out our in-price in Babylon that was before this deployment, around $1.50. So that's one piece.

The other piece is, of course, that we still see massive opportunities within the health care space that you can with a digital-first solution and the move to value-based care serves populations better and more efficient. And Babylon is one of those companies in our portfolio, together with VillageMD, Cityblock, and all the more niche player. So we like the space, we know the space, and we're investing now at very attractive burns.

[Operator]

[Operator Instructions] And the next question comes from the line of Oskar Lindstrom from Danske Bank.

[Oskar Lindström, analyst]

Three questions from me, and I think I'll pose them one at a time. First off, on your runway, which you update here, do you foresee significant changes in these runway indications when your companies update their budgets for 2023, '24 in the quarter ahead? That's the first question.

[Samuel Sjöström, executive]

Hello, Oskar, it's Samuel. Let's see. As I mentioned, it's not that we're -- when we're doing our valuations and doing these types of exercises that we're merely looking at whatever the latest number the company gave us was. We're revising our own forecasts at the very least on a quarterly basis. So I think we have a pretty decent idea of where they're coming out. I think on average or should I say, in aggregate, it's probably more likely that they will want to temper their burn relative to our forecast rather than the other way around. But let's revisit in connection with our Q4 results.

[Oskar Lindström, analyst]

My second question is on climate tech, your new investment area or the theme area here. Is H2 Green Steel an example of this? And are you concerned about this being not just sort of a tech, but also having a significant capital-intensive industrial component? And also, do you foresee increasing your stake or investment here further?

And then finally on that H2 Green Steel theme, I mean, you mentioned that, I mean, your Kinnevik shareholder is also invested in H2 Green Steel. Do you see sort of any governance issues that you need to handle on that side?

[Georgi Ganev, executive]

Thank you, Oskar, for the question. Let me start with the last one. On the governance side, of course, we are clearly expecting what it takes to move out people with conflicted interests out of any decision. So I don't see an issue with that at all. I mean as the decision has been taken, it's rather the other way around. I think our close relation with people that have a good insight and control of that company, gives us even a better chance for that influence that Samuel referred to. So I think we, of course, are following everything around the governance, but I think knowing people that works with this business is just an upside for us.

When it comes to the capital intensity, I think it's a fair question. At some point, when these type of businesses scale further, there might be better investors than Kinnevik that have lower cost of capital. But in times like this, when it's still much more of a venture case, I think these type of investments fall in between, on one hand side, kind of the VC players that are typically taking venture tickets, but are at a much smaller size. And, as I said, typical investors, institutions with lower cost of capital. So there is a field in this market where we can play and have a relatively unique proposition. And that's also something that I find very interesting going forward. And H2 Green Steel is a good example of that.

We always want to see some technology component, something that makes these companies a challenger and some sort of scalability, whether that is with partnerships or so forth that we can kind of relate to in other parts of our business. But other than that, we just feel that this is one good example.

[Oskar Lindström, analyst]

And my final question is on the 50% to 75% write-downs in Mathem and Oda, I mean, quite dramatic write-downs. And, I mean, you went through the reasons for the write-downs in those specific cases in detail, which was very good. But, I mean, does this sort of reflect on a sort of larger uncertainty about the values of your unlisted assets? I mean, could we see similar changes in other assets that all of a sudden, you slashed the value in half because you sort of change how you view these assets versus peers to a large extent that maybe you thought they were -- should be valued at a premium and then you feel that that premium should be smaller or that it should be at discount? Is this a risk that we should be thinking about for the rest of the portfolio as well?

[Samuel Sjöström, executive]

Hello, Oskar, Samuel again. Look, I think what's happened at Mathem this quarter is probably the equivalent of a publicly listed e-commerce company issuing a profit warning while still having a not immaterial funding need. And what we're doing is merely rebasing to what many other e-commerce companies are enduring as well. And our private assets are not immune to what's unfolding either in society or in markets.

So I'd say the one thing you should take away from these 2 fairly significant write-downs is the continued sort of high integrity and principles of our valuation more so than risk of downside in other assets.

[Oskar Lindström, analyst]

So I mean, you mean this was sort of company specific rather than something which is a systemic risk in your valuations?

[Samuel Sjöström, executive]

Yes. It's our 2 only online grocery businesses. And they are the 2 material businesses in our portfolio that we compare with e-commerce comps. So in that regard, this is a fairly isolated event.

[Operator]

[Operator Instructions] And the next question comes from the line of David Johansson from Nordea.

[David Johansson, analyst]

I guess we have talked a little bit about this earlier in the call. But looking ahead here, since you're valuing the unlisted companies based on next 12 months revenues and, I guess, given the quick change in sentiment and some of your investments; Pleo, Lunar, and Mathem to name a few. How should we think about the estimate risk to your internal forecast also considering the weak macro backdrop here?

[Samuel Sjöström, executive]

Hello, it's Samuel. I'm going to try and answer that question. I think clearly the current environment makes it more difficult to estimate where the world, the market, the society is headed relative to more stable surroundings. That's not preventing a lot of people from guessing. But I think it's fair to say that this is a more volatile environment in which we're more likely to be off either up or down on our estimates.

But I do not necessarily feel that we're somehow more off than, for instance, public markets would be in relation to sort of consensus estimates and public assets. We have a lot more data in terms of our company's performance than public markets tend to have, and we know our founders and teams at our companies very well, awards and all. So we're as comfortable as we have been. But, yes, it's -- these are fairly exciting times.

[David Johansson, analyst]

And I guess the last one for me. How do you think fundraising markets to impact company valuation marks and, I guess, coming financing rounds, I guess, which should happen more starting next year, but also in 2024, yes, how should we think about that?

[Samuel Sjöström, executive]

Sure. I mean, the idea of us putting out these quarterly NAV statements is to give you our sense of what's the fair value of each of our companies. And I think with a very limited number of exceptions, we're not marking our businesses at sort of the last transaction. Rather we've amended our marks quite a bit. So the star values we have in here are the levels at which we would expect our companies to raise that for end of September. And in that sort of band of what can arguably perceived as fair value, we always try to be a bit more on the conservative side of things.

[Operator]

[Operator Instructions] And the next question comes from the line of Joachim Gunell from DNB.

[Joachim Gunell, analyst]

I will be very brief since we're running out of time. So can you just talk a bit of what's going on in the industry in terms of bridging down rounds with the convertible debt instead of equity issues?

[Samuel Sjöström, executive]

Sure, Joachim, I'll be general. Yes, that tends to be a more common occurrence in these types of markets. You'll also see "Dirty term sheets" where you try to stack on all a bunch of bells and whistles on an equity investment. We have a strong preference in that to price equity fairly and invest in equity. Clearly there will be occurrences where we opt for a convert. But that's our goal. It would be sad to look back at this market a few years from now and realizing we deployed most of our capital into convertibles where the upside opportunity is effectively capped. So that's our view on it. But, yes, converts are happening.

[Georgi Ganev, executive]

Okay. Thank you very much for listening and for your questions. And as a reminder, we will report results for the fourth quarter of 2022 on the February 2, 2023. And later today, we have our digital capital markets update at 2:00. So hope to have you on that call as well. Thank you. Bye-bye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.