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Why Bailador Technology Investments Ltd shares look cheap

A shared frustration amongst more sophisticated retail investors is the inability to buy into the best early-stage tech companies requiring capital to fund their growth prospects.

Getting in on the ground floor of the investing elevator can lead to spectacular returns, but the best early-to-expansion stage opportunities remain the preserve of private equity and venture capital specialists searching for tomorrow’s Atalassian, Slack, or Macquarie Group-backed Nuix.

However, there’s a listed investment fund on the ASX run by ex-Fairfax CEO David Kirk that gives retail investors access to some of Australia’s best tech startups.

Bailador Technology Investments Ltd (ASX: BTI) currently has ownership stakes in a portfolio of 10 expansion-stage tech businesses all of which generate significant annual revenues, while having potential to scale quickly in large addressable markets.

As at September 2017 the total value of nine of the tech businesses held was $117.3 million, with Bailador carrying $10.5 million cash and no debt to provide a net tangible asset (NTA) value of $127.8 million.

Notably, the company has 120 million shares on issue that currently change hands for 84 cents to mean the market is only ascribing the business a value of ($0.84c x 120m) $101 million. So on face value the stock appears cheap at a 21% discount to the accounting value ($127.8 million) of its portfolio of growing tech businesses.

However, Bailador (Spanish for ‘dancer’) performs in a relatively high-risk space where investments can head south quickly.

This explains some of the discount to NTA, although the discount should narrow if it sells its stakes in businesses to realise cash and develops a longer investment track record. Moreover, if the NTA rises organically in line with its tech investments’ value then investors should enjoy some strong returns.

The group generally invests in businesses with recurring revenue models normally in the software-as-a-service (SaaS), cloud, or information technology space.

Recurring revenue is loved by tech investors as it means companies never have to make another sale to keep revenues at least flat assuming they lose no customers. These companies can often add more customers for minimal additional cost without the need for large amounts of additional invested capital.

This model compares favourably to a medial device company like Cochlear Ltd (ASX: COH) for example that must constantly sell additional hearing aid devices to new customers just to maintain its top line.

One of Bailador’s core holdings is Siteminder a business-to-business cloud-based platform that helps hotels lift revenues via its web-booking software-as-a-service (SaaS) recurring revenue business model. Bailador’s stake in Siteminder is currently valued at $40.5 million from a total investment of just $13.8 million.

Other businesses part-owned and growing strongly include Straker, Docscorp and social media harnessing user generated content (UGC) specialist Stackla.

The latter uses machine-learning technology and SaaS to helps companies take social media users’ content to market their brands in original ways.

Bailador has invested $11.2 million in the high-growth Stackla business, with its stake now valued at $12.6 million.

Home-loan-lending digital middleman Lendi is a fintech grower that may also be familiar to readers.

While the prospects of Bailador’s tech stable sound exciting, risks exist as demonstrated by the recent need to write off Bailador’s entire investment in a tech flop named iPro. A decline in the value of its Siteminder investment for example would also be seriously damaging to Bailador.

The firm also charges investors a management fee of 1.75% of the NTA per year to pay its bills, including the core overhead of staff costs. While a performance fee of 17.5% of net portfolio gains exists only when those gains are realised in cash as the proceeds of investments.

This is notable as performance fees won’t be charged when the accounting value of investments climbs.

Moreover, when cash is realised from the sale of investments it’s likely a good portion of that cash could be paid out to shareholders in the form of dividends providing the company has sufficient balance sheet flexibility for further investments. Any dividends are also likely to act as a catalyst for the group’s share price closing the gap on its NTA.

Investing stalwart Washington H. Soul Pattinson & Co. Ltd (ASX: SOL) owns nearly 20% of Bailador’s shares, with heavy ownership among staff and key decision makers also aligning their interests with investors.

Outlook

Whether or not Bailador should dance into your portfolio depends on your risk appetite, but given the discount to NTA provides a certain margin of safety it looks a sound bet for investors after exposure to the venture capital tech space.

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Motley Fool contributor Tom Richardson owns shares of Cochlear Ltd & Macquarie Group.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares in Washington Soul Pattinson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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