Heliad Equity Partners GmbH : 12.06.2017 Edison - Full research report - Initiation

Focused DACH tech investor

Investment companies

Share price/discount performance

7.0

6.0

0

-10

Source: Thomson Datastream, Bloomberg. Discrete total return performance in Euros to last reported NAV date.

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

Share price (€)

5.0

4.0

3.0

2.0

Discount (%)

-20

-30

-40

May/16 Jun/16 Jul/16 Aug/16 Sep/16 Oct/16 Nov/16 Dec/16 Jan/17 Feb/17 Mar/17 Apr/17 May/17

-50

HPBK Equity Discount

€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 9.1% stake in bmp Holding, a listed company operating in a similar market to an existing investment, may provide both synergies and potential for a merger with the existing investment, Cubitabo.

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, when the value of its shares in the four listed investments it held on that date was €5.05 per share. Those four investments have since risen in value to €6.81 per share, only slightly less than the current share price. Including the investment in bmp Holdings made on 8 May, the listed portfolio is worth €6.67 per share, 3% below the current price, implying that the market ascribes no value to the private investments. This is explained in more detail in the valuation section on page 12.

200

175

150

125

100

75

May/14 Aug/14 Nov/14 Feb/15 May/15 Aug/15 Nov/15 Feb/16 May/16 Aug/16 Nov/16 Feb/17

May/17

50

Edison profile page

Heliad Equity Partners is a research client of Edison Investment Research Limited

Heliad seeks to provide a sustainable dividend return to shareholders averaging 3% in the long term, by investing in listed and unlisted technology, e-commerce and lifestyle companies in German-speaking countries. The company will pay lower, or potentially no, dividend in some years in order to make this sustainable without disposing of investments at inopportune times. It is managed by Heliad Management GmbH, a wholly-owned subsidiary of FinLab AG.

• 2 June 2017: the portfolio company AlphaPet Ventures completed a €13m funding round from family offices and from Deutsche Handelsbank. Funds will be use to further develop the business and win market share.

• 11 May: Heliad completes capital increase of €2m from BF Holding GmbH.

  Forthcoming

  Capital structure

  Fund details

• 8 May 2017: Heliad subscribed for all of bmp Holding AG's capital increase, buying 690,000 shares (9.09%) at €1.35 per share, an investment of €0.93m. bmp is an online retailer of sleep products and the investment is complementary to Heliad's stake in Cubitabo, operator of BettenRiese.de, which has a similar business model.

Dividend (financial years) 3, 5 and 10-year annualised total return performance

0.25 50

0.20

0.15

0.10

0.05

0.00

2015 2016 2017

40

Performance

30

20

10

0

-10

1 m 3 m 6 m 1 y 3 y 5 y 10 y HPBK Equity HPBK NAV LPX Europe

Portfolio split by investment type (as at 31 December 2016) Portfolio exposure by sector (as at 31 December 2016)

Listed investments (62.9%)

Private investments (26.9%)

Loans and other securities (10.2%)

Internet and tech (74.7%)

e-commerce (17.7%)

Lifestyle (7.6%)

Shareholder base (as at 31 December 2016) Equity investments by company (as at 31 March 2017, listed companies priced at 16 May 2017)

Finlab AG (45.3%)

IFOS Internationale Fonds (14.5%)

Free float (40.3%)

FinTech Group (57%)

MagForce (12%)

DEAG (4%)

bmp AG (2%)

Alphapet, Stapp, Bettenriese, Springland (18%)

Tiani, Libify, MUUME, My Better Life, MAX 21 (7%)

Source: Edison Investment Research, Bloomberg, Thomson, company data.

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 2 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 private equity (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 German GDP 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 in Germany 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 markets and bmp is listed, so a merger between the two might be a way of both creating value, if there are synergies, and making it possible to realise that value.

As shown in Exhibit 1, the portfolio is dominated by FinTech Group, and the technology and internet sector comprises nearly three-quarters of investments by value (Exhibit 1). 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.

Source: Bloomberg data as at 9 June 2017. Note: Bloomberg uses adjustments, which may differ from company reported accounts.

Value of Heliad stake 49.1 10.8 3.5 1.4 1.1

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 3 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 €65.9m, just 3% less than Heliad's own market capitalisation of €68.1m. 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 €62.1m.

This 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.