Heliad Equity Partners GmbH : 06.06.2017 Edison - Scale research report - Initiation

Scale research report - Initiation

06 June 2017

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Heliad Equity Partners (Heliad) is a DACH-focused investor in the tech, e- commerce and lifestyle sectors. It is managed by Heliad Management GmbH, a company wholly owned by Heliad's largest shareholder, FinLab (A7A). Stakes in listed tech companies FinTech Group (FTK) and MagForce (MF6) account for 69% of the portfolio value and their value currently exceeds Heliad's market cap, having appreciated 34% and 76%, respectively, in 2017 to date. The performance of these holdings and the diversification offered by Heliad's 12 other investments may make it an attractive way to access the German tech, e-commerce and lifestyle sectors at a discount.

Following a difficult 2016, when the share prices of Heliad's two biggest holdings fell, Q117 has seen a reversal, leading to 17% NAV growth in Q1 from €8.43 to‌

€8.92 per share. This has come on the back of good results from FinTech and progress on the roll-out of MagForce's cancer nanotherapy. Heliad's other investments appear to have interesting potential for development, particularly in the e-commerce space. The recent acquisition of a stake in bmp Holding, a listed company operating in a similar market to an existing investment, may provide synergies as well as a clearer valuation should a merger take place.‌

Heliad invests in relatively small companies in Germany's growing tech and e- commerce sector, both private companies and listed small caps, which management believes are undervalued. It looks to invest in companies with revenues of under €50m but with growth potential. The management fee is 2.5% of NAV and a 20% carry on realised investments. Heliad expects to make around four new investments in the next 12 months following the bmp investment in May, equity funding for which was provided by FinLab's biggest shareholder, BF Holding.‌

Heliad reported NAV per share of €8.92 at 31 March, and we calculate that the value of its investments in listed companies is c €6.99 per share (2 June). Heliad's current share price is therefore a 5% discount to the listed investments, and only a 3% premium net of €3.8m of liabilities (assuming these are unchanged since 31 December). We believe there is scope for the discount to continue to narrow, supported by greater transparency and increased investor relations efforts.‌‌‌

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Business description

Heliad Equity Partners is a Germany-based investment company focused on listed and unlisted smaller companies in German-speaking countries. Investments typically comprise growth and venture stage technology companies operating disruptive business models or addressing structural issues.

Analysts

financials@edisongroup.com

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated‌

Source: Heliad Equity Partners data

Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March

2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Heliad invests in companies operating in the internet and technology, e-commerce and lifestyle sectors, based in German-speaking countries, which have the potential to transform or dominate their sector through a new technology or approach. It aims to invest in relatively small companies, with annual sales of €1-50m, and will look at both private and public equity opportunities, taking a buy-and-build approach, rather than a passive one. In this way it seeks to assemble a portfolio of investments, which would likely be too small for institutional investors and, through its own listing on the Deutsche Börse's Scale Segment, make them accessible to other investors. It is notable that its investments in listed companies take the form of private placements to establish a major stake in a company, and may be complementary to its private investments, potentially offering an exit via a merger.

Heliad Equity Partners, the listed entity and the limited partner (LP) in each investment, is managed by Heliad Management GmbH, the general partner (GP). Heliad Management is 100% owned by FinLab, another German company listed in Frankfurt. The management company receives a 2.5% annual management fee as well as a performance fee of 20% of realised net earnings (the same as 20% of net profit under German GAAP). FinLab also owns 47% of the shares in Heliad Equity Partners. Exhibit 1 shows the corporate structure. FinLab's two biggest shareholders, with 49% and 31% of the outstanding shares respectively, are BF Holding and Apeiron Investment Group, which

in turn are owned by Bernd Förtsch and Christian Angermayer, leading German entrepreneurs. The access to deals afforded by the connections of these shareholders differentiates Heliad from other PE houses. Before examining the portfolio in more detail we will look at the investment strategy.

Heliad focuses on German-speaking Europe (DACH) where it has a wide network. The region is one of the most economically important on the continent: Germany is the world's fourth-biggest economy by GDP and mid-sized firms such as those Heliad looks at (the Mittelstand) are one of its cornerstones, and may be undervalued as a result of their size and because illiquidity makes them inaccessible to institutional investors. The German economy remains healthy, with the IMF expecting it to grow 1.6% in 2017 and 1.5% in 2018.

The sectors Heliad addresses are all those which are expected to see market growth, where products and services can be scalable and where innovation, either through technology or the way it is used, can give companies the ability to dominate their markets. We will look at the markets in

which Heliad's investments operate in more detail later, but Germany provides a potentially fertile market for e-commerce and fintech in particular. The World Bank estimated that 87.6% of Germans used the internet in 2015 (vs 74.6% in the US and 92.0% in the UK), but the Ecommerce Foundation (a worldwide non-profit organisation) estimated that in 2015 business-to-consumer e- commerce only had a 1.97% share of GDP, vs 6.12% and 3.32 % in the UK and US and a global average of 3.11%, implying that there remains room for growth.

Heliad's primary investment criterion is the quality of the management team or the company's ability to bring in a new one. It will also give managerial assistance where necessary: for example,

Thomas Hanke spent a year working at FinTech Group as head of business development and investments before returning to Heliad as CEO in April 2016. The typical investment horizon is between two and four years, although Heliad does not have a time limit. The aim is to achieve a cash multiple of 3-5x in that timespan. Heliad will consider various methods of exit from its investment, including IPO and trade sales. Selling shares in listed entities has been the favoured method so far, with the Deutsche Entertainment (DEAG) and FinTech stakes being reduced over time. The recent acquisition of a stake in bmp may provide a way to exit Bettenriese too in due course: both operate in the sleep product market and bmp is listed, so a merger might be a way of both creating value, if there are synergies, and make it possible to realise that value.

As shown in Exhibit 2, the portfolio is dominated by FinTech Group, and the technology and internet sector comprises nearly three quarters of investments by value (Exhibit 3). Management is working to diversify the portfolio, but the relative scale of the FinTech holding and recent good performances of FinTech and MagForce mean they are likely to comprise the majority of the portfolio for some time. We understand that management expects to make four or five new investments in the next 12 months and would expect Heliad to continue to sell down its stake in DEAG. Below we look at the portfolio in more detail, explaining the investment case for each holding, and explain FinTech Group in detail.

Detailed financial statements are not available for the unlisted constituents of the portfolio because Heliad consolidates them, either because it holds a controlling interest, or because they are held through HEP Beteiligungs, but we show basic income statement data for the listed investments in Exhibit 4 as well as the value of Heliad's holding in each company. We would draw attention to the fact that Heliad's listed investments have a current value of at least €66.5m (assuming that the stake in DEAG is at the lower end of the most recently reported range of 3-5%), 4% more than Heliad's own market capitalisation of €63.7m. It may be that a discount is being applied to reflect the 2.5% annual fee and potential 20% "carry" payable to the management company and for Heliad

Equity Partners' own costs, but the discount on the listed investments seems high: Heliad's total liabilities are only €3.8m (at 31 December 2016), giving a net value for the listed assets alone of

€62.8m, which means shareholders would have access to those assets at almost exactly market value and does not seem to ascribe any value to the unlisted holdings which Heliad reports make up c 25% of portfolio value. We explain each business briefly below.

Value of Heliad stake 51.6 10.9 1.4-2.3 1.4 1.2

Source: Bloomberg data as at 2 June 2017. Note: Bloomberg uses adjustments, which may differ from company reported accounts.

Fintech Group (16.87%, market cap c €300m)

FinTech has itself consolidated several other businesses and is now reorganising itself into a tech and a finance entity. It reports under two segments and is in the process of reorganising its divisions so that the operational structure matches the structure of its financial reporting more closely.

The securities trading and financial services division (€19.4m of revenue, €11.9m EBITDA in 2016) comprises flatex, an online broker, and ViTrade, a specialist trading platform for very active investors. flatex is the fastest-growing online broker in Europe and had net new client growth of 25,000 in 2016, bringing the total to c 175,000. It has customers in Germany and Austria and management aims for their number to exceed 200k by the end of 2017. Both businesses provide non-advice securities transactions to well-informed investors. Securities covered include all financial instruments tradeable on German exchanges as well as numerous international ones, over-the-counter (OTC) direct trading, FX and CFDs. Both operate online and have no branches, charge competitive fees (with no subscription costs and a maximum of €5.90 per trade OTC and

€5.00 for exchange-traded instruments, flatex is the cheapest online broking platform available to German retail investors). Other differentiating factors include the range of trading partners (19) available to its customers and the fact that they can also use flatex to invest in time deposits or overnight money, it can also make loans to its customers. Flatex's new and integrated trading, settlement and banking software reduce costs and make the company profitable despite its low fees. FinTech also has a mobile payments business called kesh and is winding up a second online broker called brokerport.

The transaction processing and white-label banking division (€70.8m of revenue, €28.3m EBITDA in 2016) is made up of XCOM and its fully owned subsidiary biw (Bank für Investments und Wertpapiere). These earn R&D revenues for developing financial technology for their clients, execute securities transactions and provide business process outsourcing to over 250 financial service companies and banks (notable clients include Commerzbank and Deutsche Bank, for which FinTech runs LOX, the exchange-traded products over-the-counter system with 3bn price feeds and 50,000 transactions a day). The two entities also provide services to flatex and ViTrade, including securities settlement. biw is a full-service bank in its own right and holds over €1bn in customer deposits. XCOM provides software, hosting services, complete specialised banking processes, deposits, brokerage, payment transactions, cards, loans, mobile payments and peer-to-peer transactions as well as cash logistics, ATM operation and settlement. All services and products are highly secure, while maintaining flexibility, as they are fully integrated into clients' existing systems and easy to use. As well as established financial service providers, the clientele includes start-ups needing their own systems.