These five AIM firms could own the tech stars of tomorrow
Touchstone Innovations (IVO) may be on the list to enter the FTSE AIM 50 index in the next quarterly constituent changes, but the technology businesses developer and investor won't be there for long. The takeover by IP Group (IPO) is near completion and Touchstone will soon be leaving AIM - IP Group left more than a decade ago.
This removes one of the largest companies from AIM, as well as a way for investors to gain exposure to a portfolio of start-up and early stage companies backed by an experienced team. There are still five other companies, though, that have portfolios of technology companies that they are helping to develop and grow.
Generally, the larger businesses can hold onto a bigger stake in the companies so that they can retain more of the benefits if they are successful. These companies vary significantly in size, but they all have interesting investments that could become highly significant to their valuations. Individual companies that they invest in could eventually be sold to larger rivals or float on the stockmarket.
Frontier IP (FIPP)
Net Asset Value (NAV): 30.7p a share (June 2017)
Originally spun out of AIM-quoted Sigma Capital, Frontier IP (FIPP) was initially quoted on Plus/NEX before moving to AIM in January 2011. Frontier IP is a small company, but it has strong links with universities, including Herriott Watt, Plymouth and Cambridge. It has been able to retain higher stakes in investee companies in recent years.
Those formal relationships are important in identifying opportunities and earning a stake by providing advice and support. Frontier IP can also help to secure additional finance. One-fifth of NAV is in cash.
Nandi Proteins was one of the earlier investments. It develops food protein technology. A £1 million fundraising will finance commercialisation of technology to help food manufacturers to reduce sugar and fat in their products.
Exscientia provides artificial intelligence-driven drug discovery services and this year it has signed collaboration agreements with GlaxoSmithKline (GSK) and Sanofi. If compounds are discovered and reach certain criteria, and if there is a commercial product, then Exscientia will receive milestone payments.
In the case of GSK, total milestone payments could be up to £33 million and for Sanofi it could be up to €250 million. In reality, the maximum is unlikely to be achieved, but there is still significant upside. Evotec AG has invested €15 million in Exscientia and the two companies are collaborating on potential cancer treatments.
Mercia Technologies (MERC)
NAV: 40.4p a share (March 2017)
Mercia (MERC) focuses on technology businesses that are scalable and do not require significant investment to develop their services. Mercia has a stake in AIM-quoted infertility testing products supplier Concepta, but the vast majority of its portfolio is unquoted and it has sold its stake in AIM-quoted Abzena (ABZA). Nearly 50% of the NAV is cash.
One of Mercia's largest investments is virtual reality content developer nDreams, which, at a valuation of £11 million, accounted for 12% of the investment portfolio at the last balance sheet date. nDreams has launched award winning game The Assembly on Sony PlayStation VR and more games are in the pipeline.
Impression Technologies is a joint spin out from the University of Birmingham and Imperial College - the base of Touchstone, formerly known as Imperial Innovations, and it is a co-investor. The company's Hot Form Quenching (HFQ) technology is used to manufacture lightweight aluminium components for the automotive sector. Impression is part of a consortium that gained £9.6 million of grant funding.
Oxford Genetics is a more recent life sciences investment. It is a developer of biological molecules for the synthetic biology market. A recent cash call will help the company expand into the US.
Amphion Innovations (AMP)
NAV: -1p (June 2017)
Amphion Innovations (AMP), which has been quoted for 12 years, is predominantly focused on medical and life science business and it has already spun out radiation detection technology developer Kromek, which it has sold out of, and antibiotics developer Motif Bio (MTFB) onto AIM - Motif Bio subsequently listed on Nasdaq.
Amphion still owns 14.1% of Motif Bio. These shares are part of the collateral for a loan facility, which needs to be refinanced by early next year. Amphion is the only one of the companies to have a negative NAV, but the potential for its investments means that the value of the portfolio could rise and wipe out the deficit.
Polarean Imaging Ltd is set to join AIM next year and it is seeking pre-IPO funding. Amphion owns 26% of Polarean, which develops drug-device combinations to improve the effectiveness of MRI systems, including a gas polarisation platform that provides a non-invasive, radiation-free method to visualise lung structure.
The technology was originally developed by General Electric (GE) and it can be retrofitted to existing MRI machines. Northland placed a value of $29 million on Polarean in its pre-IPO research, which compares with a valuation of $22 million at the previous fundraising.
Polarean is already selling its gas polarisation platform to medical research institutes. A phase III trial is being set up for the drug-device platform under the guidance of the US FDA. Northland believes that Polarean could move into profit in 2020, based on a $10 million fundraising.
NAV: 19 cents a share (May 2017)
Tekcapital (TEK) has access to more than 4,500 research institutions around the world and the intellectual property they are developing. That means that it can identify interesting IP at an early stage. ekcapital was originally an information business and it diversified into acquiring specific groups of IP.
Medical devices business Belluscura has already been spun off and it is set to join AIM. Tekcapital owns 47.5% of Belluscura ahead of the flotation. Belluscura has acquired non-core product lines from larger companies. This includes disposable surgical access devices, a level of consciousness monitor and the Revolution portable oxygen concentrator. Belluscura also acquires new IP and technologies.
Lucyd, which is developing augmented reality glasses, wants to raise up to $10 million via a token sale. The tokens will enable investors to buy the products that are developed and they will be tradable.
The Tekcapital NAV should improve following the flotation of Belluscura.
Draper Esprit (GROW)
NAV: 372p a share / 344p a share excluding goodwill (September 2017)
Draper Esprit (GROW) differs from the other companies in that it does not focus on university IP and it is nearer to a standard venture capital company. The principal focus is European businesses that have the scope and ability to grow internationally. The group takes a hands-on approach with board representation and it is a member of the Draper network, which has invested in the likes of Skype and Tesla (TSLA).
Draper Esprit has a strong track record and is the biggest of the five companies. It has significant fire power because of the £100 million it raised at 324p a share during the summer. VCT manager Elderstreet has been acquired and it can co-invest with its owner. This will help to accelerate the progress of the portfolio and the plan is for the company to invest £60 million plus EIS/VCT co-investment of £40 million.
The strategy is to invest small amounts at early stages of a business and if it is going well invest more later. The aim is to achieve growth of 20% a year.
The core portfolio includes review company Trustpilot, telemedicine company Push Doctor and healthy snacks provider Graze.
Draper Esprit has invested £5.6 million in Trustpilot, which at a current valuation of £29.5 million is the largest investment in the portfolio, and has helped it to expand into 65 countries. Push Doctor, which is raising its profile via advertising, enables patients to contact UK qualified doctors digitally and the company says this can be done within six minutes.
Draper Esprit increased its exposure to seed capital by paying £17.9 million for the Seedcamp funds, which have 40 investments, of which 10 are believed by the group to have significant potential. That includes fintech business TransferWise.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.