Sofina SA

XBRU:SOF

Earnings Call Analysis

Investment Firm Navigates Market Volatility

Sofina's strategy revolves around being a partner offering patient capital and diversification to reduce risk across broad sectors, mainly in the U.S., Europe, and Asia. Despite market volatility, with a recent stock rally, their discount rate improved from 31% to 25%. Their net asset value (NAV) is down 5% year-on-year, though long-term performance aligns with benchmark indices. Direct portfolio value creation was modest at 3%, with low levels of divestments and investments. Major impacts came from performance growth and the positive multiples effect, indicating a shift from last year's negative trend. Top investments include ByteDance and Groupe Petit Forestier, with Baidu dropping out due to valuation adjustments. Overall, they maintain cautious optimism, with focus on creating synergies and sustainable growth despite external market conditions.

A Reflection on Sofina's Investment Strategy Amidst Market Evolutions

Sofina, a diversified investment company, prides itself on a strategy that combines virtue with dynamism, focusing on growth and value creation across various sectors and regions. Boasting expertise in consumer retail, digital, health care, and education, it aims to support businesses at every stage of their development. To mitigate risk, Sofina emphasizes geographical diversification, covering significant portions of global GDP in the U.S., Europe, and Asia. A growing focus on environmental, social, and governance considerations signifies its commitment to innovating profitable solutions for contemporary issues while doing good.

Stabilizing Net Asset Value Amidst a Dynamic Market

Sofina's foundations have allowed it to navigate the market effectively, as evidenced by a relatively stable Net Asset Value (NAV), which only saw a minor decrease from EUR 9.3 million to EUR 9.2 million. This minor decrease in NAV stands in contrast to the broader market's double-digit adjustments. Sofina's meticulous upkeep of comfortable liquidity is reflected in a net cash position of EUR 200 million, down from EUR 300 million, but still robust with EUR 800 million on the balance sheet and an increased availability of EUR 1.1 billion in undrawn credit lines. This financial flexibility is crucial for navigating unforeseen market changes and supporting ongoing investments.

Performance and Valuation Dynamics within the Portfolio

The investment company reported a value creation of 3% in its direct portfolio, a notable deceleration compared to the previous year. This change stems from reduced investment and divestment activity, along with a shifting market landscape. Nevertheless, the overall impact of multiples—valuation based on EBITDA, sales, or ARR—has shifted from a significant negative to a positive influence. This combined with a performance impact that remains positive, indicating underlying business growth in spite of negative adjustments from other variables such as debt position or valuation methods.

Sector Distribution and Top Performers

Sofina maintains a well-balanced sector distribution that aligns with the market opportunities rather than fixed allocations. Two sectors, consumer retail and digital, remain dominant for the company, with health care and education also featuring. Notably, the top direct investments include ByteDance and Groupe Petit Forestier, whilst Baidu has dropped from the top 10 due to governance concerns. In the private funds spectrum, Sequoia holds its position as the largest partnership, reflecting the company's longstanding industry relationships.

Selective Investment Approach During Market Adjustment

As the market undergoes a correction phase, Sofina has strategically slowed its investment activity, preferring quality over quantity. This approach is showcased by its selective new investments in ventures like Too Good To Go and Mistral, and exits including partial sales in Aohua and secondary investments in Lenskart. On the private funds side, the company engaged with TA Associates and Volition Capital, highlighting a 'flight to quality' in the private equity space and allowance for new partnerships that promise high growth potential.

Earnings Call Transcript 2023-Q2

[Harold Y. Boel, executive]

It's always good to start with what we stand for, and the key words here is being a partner, entrepreneurs, family. This notion of patient capital and this notion of the value add we can bring to help them grow. This is stuff we exchanged before on and that you know quite well.

If I go to what's Sofina, what Sofina is and the investment case around Sofina, it's a combination of virtues

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For a long time, being able to take the time, being able to be patient, being able to build partnerships across all the ecosystems. And dynamism, which is focus on growth

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A focus on value creation. This translates into a diversified strategy. And with diversification, what I mean is looking, going after the greatest virtue of diversification, and that is risk reduction.

So 4 sectors. They're very broad, and what we're looking at is in the thematics inside these sectors, which have wind in the sails. But the sectors of focus allow us to build expertise, to build knowledge. We have complementary investment styles, and the idea there is to cover all the stages of a business life cycle, from idea to -- an idea in the garage becoming a legendary business, and every step in between.

We have 3 regions that cover the lion's share and -- of world GDP, around the U.S., Europe and Asia, and providing the, again, level of diversification. We believe that geographical exposure is the 1 [indiscernible] risk that we have in the portfolio, and therefore, we cover the 3 regions.

And another element of the strategy is a growing focus on

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Considerations, with the ambition to move from being a risk mitigator into an

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to be a driving force in the business going forward, and actually, it is going to be -- it is

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that we see in the world, with

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So [ actually ], you don't want to be doing stupid stuff. But at the same time, a firm conviction that there's going to be a lot of value to be created when businesses innovate and find profitable ways to address these issues, so the combination of doing well and doing good.

And this is covered with our different investment styles, with the private funds pillar. Looking essentially at the earlier stage and through, again, partnership, building relationships across time, and covering from idea to growth stage, and then our direct investment style covering the later stages, from Sofina growth to all the way to our long-term minority investments.

Again, that hasn't changed, and what I see happening in the market, what I see in the evolution is indeed, vis-a-vis this, the market changes every day. But the fundamentals for me don't change, and the fundamental ways in which Sofina can play upon evolutions in the world to continue making and creating value. My conviction is that we're still very, very well positioned even if, as any business, we will have to adapt and -- to the changing circumstances.

If the -- the broad view, if I then focus on the highlights of the first half year. Conviction that our foundations and our ability to invest across the cycle are helping as well. In terms of performance, what we see is the underlying businesses, and we have a good view there on the direct portfolio, which is a little more than half of the business, are creating growth, and therefore, value. And there is a slide with -- giving some more quantitative data around that. What we also see is that there is a growing field and a growing opportunity set of creating synergies across the group. A lot of that plays around ESG actually. The fact that we're very focused on that is allowing us to help our businesses, the businesses in our portfolio which are confronted, where it's from, what the stakeholders say or, for instance, from [ arrival ] of new regulations to make sense of it all and making sense, embedding it in their own strategy.

What it translates into is that the NAV globally has stabilized versus the end of last year. We're down at a small percent which, it is what it is, but compared to the double digits -- Yes, exactly. And there are ongoing market adjustments, in the sense that all we see is, if you look at different sectors, if you look at different regions, if you look at different businesses in that place and where are there in the cycle, the sentiment there can be quite different. So you have things which are still -- which we think, where we think the message of the impact of high interest rates under valuation hasn't sort of trickled down yet. And then we have basis where it's more -- it's very, very difficult to get funding, therefore, a big impact on valuation.

If you make the sum of all of that plus the evolution of the public market, that's where you arrive to a level of stability. So this is still ongoing, and that's where we look at investment. Our activity is much lower than what it has been in the past, both on the exits and on the new investment side. It is what it is. We -- again, we're playing the long game, so we're not particularly worried about putting capital [indiscernible] to work at a high [ pace ] across. Then we don't have the we don't have the pressure that maybe some private equity players have of, they're counting their fees and the [ LP ] is saying we should do something with [ it ] because we're paying you to actually invest.

We -- our mission is to invest our capital in the best possible way at every moment in the cycle. It translates into a low level of activity, but it's not Sofina specific because if I look at what's happening on the private fund side, we also see that vis-a-vis earlier years, there's much less fundraising activity, there is much less capital [ calls ], and capital distributions are much lower. It doesn't mean, however, and that's the advantage of having a flexible model, that we spend more time with our portfolio companies. And the fact that financial investors in many conditions a little bit on the sideline, it actually creates an opening for companies to move into consolidation of their sectors. So we see that in a number of sectors, we have companies starting to -- some sectors which were very dispersed are starting to consolidate.

An example would be, for instance, [ Ceterix ], which is in the --

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With 1 of the competitors in the space. We refinanced the balance sheet and created 1 of the -- or maybe the leader in the

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That is going on, and we were very active in making that transaction happen, all the while keeping disciplined and selective. Again, we don't feel pressure. We look to create performance across the cycle for the long term, which means in terms of new investment, it has been much lower than what it was in the past. And so be it.

I look then in terms of numbers, what it translates into. You see NAV going from EUR 9.3 million to EUR 9.2 million, and then you have the value and net asset value per share, and the cash position going a little bit down. We're still in the net cash position, but it's EUR 200 million rather than EUR 300 million. But with comfortable liquidity on the portfolio, EUR 800 million on the balance sheet plus our available credit lines, we've increased that by EUR 200 million to EUR 1.1 billion. These are undrawn at the moment of closing, and our residual commitments on the PE program are at EUR 1.3 billion.

And that's the view of managing the liquidity risk in the business by having cash on the balance sheet available, credit lines comfortably in a comfortable position vis-a-vis are our commitments. It is unlikely that all distributions and exits possibilities would stop and all capital calls would be executed in 2 weeks. It's unlikely and it is impossible. But it does mean that to be able to operate, we need that financial flexibility, and that's exactly what [ this ] is showing that we're keeping that one going.

I look at the next slide, evolution of NAV, and again, there was the comment that we made last year. An acceleration of NAV around the years 2020, 2021. Some of it was having been given back within the correction last year. But all in all, a reasonably smooth curve in line with the long-term growth that we try to -- that we stand for, and that is our objective. However, looking at the share price, it's a different story with a great volatility and an acceleration of the volatility of the [indiscernible] [ slash ] premium, something we unfortunately do not control. So at semesters end, discounts stood at 31%. Further to our newsletter, there's been a little rally in the -- small rally in the [ stock ], you [ got ] around [ 210 ] still. It's good 10%, 10-ish percent. So discount now should make the calculation is at 25%.

Our performance, what we see is versus our [indiscernible] a benchmark index, there has been some recovery in the market driven essentially by the [indiscernible]. So the 11% is, I think for more than [ 60% ] Don't quote me on the numbers, but it's order of magnitude by Facebook and Amazon, et cetera, their recovery. Whereas our NAV still down year-on-year, minus 5%. So there was also a big correction actually in the second half of last year. If we look -- our longer periods, actually, we are more in line with our benchmark, with the benchmark [indiscernible].

Direct portfolio. Value creation, 3%, so much lower if you compare that to last year, a lower level of divestments and investments, and a small -- well, market impact. ForEx was helpful last year. That's helpful this year. It's part of the [indiscernible].

And next. That's the -- that is the slide, so Slide 9. The 1 which I think is interesting, and we're trying to track to share with you also on portfolio level how things are going. The evolution of listed, that's the market impact on our listed, unlisted companies. There's not much to say about that. But if we look at the unlisted, we try to separate the evolution evaluation according to a number of dimensions. One of them is the multiples effect, so companies are valued at multiples of EBITDA, multiples of sales, multiples of ARR, depending on the valuation method. And we look at -- then we take comparables when we do the valuation, and we see how to have the comparables, public market comparables evolved, and that gives the multiples impact. What we see is that the multiples impact, which was extremely negative last year, which was the big driver of the value correction in EV, is actually turning positive.

Then we look at the performance impact, so we look at how the businesses are doing. We look at the growth depending, again, on the metric that we use. The growth of sales, the growth of EBITDA and so on, and we see how that has happened. So this is -- this captures the value impact of the company's underlying growth. And what we see is that 1 is positive. I remind you, it was also positive last year, but to an extent, not sufficient to counterbalance the very, very negative multiples impact.

Then we have other impacts which is, for instance, the company's debt position has changed, so we need to obviously correct the equity value for that. It also, in the valuation methods vis-a-vis the comparable, sometimes we take a discount to a premium depending on the growth factors, et cetera. That [ alone ] can change, so it's neither a market impact nor an underlying performance impact, but it's more how do we judge the company. And that number is negative, and then bringing both together.

I spent a little bit of time for this slide, but it's something we want to keep tracking to be able to have this, well, this vision on the underlying portfolio, how it is creating growth and value.

If I look at sector distribution, of that, we see that sector balance hasn't changed the whole -- a whole lot. Keeping reasonably balanced between our 2 big sectors, which is consumer retail and digital, then with smaller exposures to health care and education. There is an investment activity story behind that, selling and buying and also valuation, our valuation story. We don't have target allocations for the different sectors. It depends. We always chase the best opportunity. And then the balance between listed and unlisted, it's stable vis-a-vis previous period.

On the Private [ Funds ], as you can see, much lower level of calls and distribution, our net investor on the period. But vis-a-vis the whole program, what we're looking at is a EUR 30 million [ on ] EUR 4 billion. So this notion that the programs give or take, and with some volatility across the period that is actually self-financed, is justified here with a value adjustment negative. My intuition there is that because of the reporting time frame of the funds, there is somewhat of a lag. We are, as a [ quoted ] company, we have to be much shorter on the [indiscernible] to translate into the published NAV all the evolutions we see in the market. On the Private Funds business, there is more of a lag on how did they go into numbers of all their companies and so on, and this is probably a reflection on that. But again, a small [ variation ]. And then ForEx, a lot of [ operated ] funds is in dollars, and so euro's strengthened.

Breakdown of the portfolio, strategies hasn't changed and geographies also not. The U.S. takes the lion's share. It's normal. It's the deepest market -- the deepest and most liquid market in the world for private investments, and therefore, it's in the U.S.

Next slide, the top 10. In terms of direct investments, ByteDance still in position #1. Groupe Petit Forestier is the number two. So few evolutions except, and pre-empting question here, [ Baidu's ] been [indiscernible] dropped from the top 10 because of our valuation exercise taking into account the [ new flow ], taking into account the ongoing governance issues, covenants in the sense of the ability of the company's institutional [ coming ], as it were. And ability to react to business challenges is something that we [indiscernible] about, and it's not where it should be. But we are engaging the company together with other shareholders [indiscernible].

Then in private funds, Sequoia remains the largest partnership. We have this 1 as one of the oldest ones in the book, and we had the good

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In all its [ expansion ], be in the U.S., China and India and the rest. Known names in the business, and people we've been working with for a long time.

Key events. So new investments, few and small investment in Too Good To Go together with Blisce. An investment -- a small investment, and that's really getting our foot in the door with Mistral. So Mistral is a European-led large language model, open sourced, trying to harness the power of open source to be able to create a more transparent and probably qualitatively better large language model. It's a very early venture, so small investment, high risk, high return, but 1 way to keep learning about the state. And then reinforcements in a number of our portfolio companies, including Biobest, which is 1 of the examples of companies consolidating their space.

And then some exits, some liquidity generation from our investment in [ Petit Forestier ]. [ Petit Forestier ] is an investment we made in 2007, and so we have the opportunity to do a little bit of liquidity there. And then the full exit that has been announced that it was closed in the meantime with Biotech Dental. Partial exits of our investments in Aohua. Aohua is an endoscopy business based in China which was listed on the Shanghai Stock Exchange in 2021. Actually, we had a very long lockup and we've been starting to sell down that position [ ever since ]. The company is doing quite well. It has been very [indiscernible]. And so it's a small but profitable investment. And we had the [ occasion ] to do a little bit of secondary Lenskart, which is an opticians business in India doing very, very well. A little bit of liquidity.

On the private funds, the comparable list last year was -- slide's so busy, you could hardly see the white. If you remember, this is an example that, yes, activity is lower on the market. Very [ old ] partnerships in the TA Associates raising fund. TA is 1 of the oldest names in private equity, and in our books, we've been involved with since the 70s. They raised the fund. It was a very successful raise, so there is a [ flight ] to quality also going on in private equity. And then following other businesses or other partners.

And at the same time creating room for new managers where we're looking for people who are very hard to access and what was difficult in the past. And these conditions made it easier, and I think [ Khosla ] of those examples, but also diversifying sort of the focus of the business, and Volition Capital is maybe a good example of that. Volition is a management based in Boston. We have the focus on what they call [ route strap ] companies, so usually software business, but these are companies which have reached a significant level of sales without ever using [indiscernible]. So that's why they call it [indiscernible], and where Volition will typically be the first institutional investor, and really then to help them consolidate their space and accelerate the growth. Again, hard to access management because the opportunities in that space are far and few between, but they have very good names and we have the opportunity to be investors with [ listed ] examples.

And the principles, the numbers, the stories. At your disposal for [ questions ].