October 2017 – FIRE v London

I’ve just discovered a unicorn. Or more to the point, I’ve just learnt that one of my angel investments has become a unicorn. A real one!

Unicorns – myths and reality

What am I going on about, you might be asking? In the investing world a Unicorn is a common nickname for a startup business that reaches a valuation of $1bn+. That’s the type of unicorn I’m talking about. There are dozens, but not hundreds, of unicorns in the world. In the UK the better known ones include Asos, Deliveroo, FarFetch, Funding Circle, Transferwise and Zoopla.

But many so-called Unicorns are not ‘real ones’, to my mind. How come? Because the valuations are often something of a fantasy, and concocted out of funny structured notes for the benefit of the media/credulous staff/others, rather than being a true reflection of the value of the company. I do speak from some experience here, sadly.

For me a ‘real’ Unicorn is one where investors are able to sell shares at a Unicorn valuation – i.e. a price which values the company at $1bn+. Asos and Zoopla pass this test – both are now public companies worth >>$1bn, and their investors have full liquidity. Deliveroo does not pass this test; the large sums being invested at $1bn+ valuations represent money going in to the company, but (to the best of my knowledge) existing investors have not had an opportunity to sell any holdings and, if they did, it would be at a significant discount to the headline valuation.

When is it wrong to take a 40x profit?

So, in my case I received one of those rare but delicious emails this week telling me that I have an opportunity to sell my shares in an angel investment that I made around 10 years ago, and sell them at a significant profit. The total valuation at the offer price is a smidgeon over £1bn. For the record I bought shares at a little over £10/share and can now sell them at £400/share, so this is almost a 40x gain. Happy days! I’ve held these shares so long that the annual rate of return is not as high as you’d think, but it’s around a very respectable 40% p.a.

Continue reading “Investing in Unicorns” →

(Republishing an old post which I somehow accidentally deleted)

It’s the end of the third quarter. As the summer comes to an end and we approach harvest season, I am struck by the analogy between farming and portfolio management. I’ve been doing quite a bit of farming in the metaphorical sense. Let’s take a look.

Adjusting my business plan. For my portfolio, a key part of my business plan is my target allocation. As my deleveraging continues, it’s time to revisit my target allocation. I’ve now reduced the net debt target by 10% of my portfolio value. As I do this I also need a compensating drop in the ‘asset’ part of the balance sheet. So now I’ve been revisiting the appropriate mix of assets – is the mix of ‘arable’ (equities) and ‘wheat’ (fixed income) still the right mix? Overall as I deleverage, reducing my risk level, I am slightly increasing my target equity exposure. The table below shows the changes, and the resulting new targets are further down this blog post. You can see I’m also, indirectly, increasing my US weighting (to 50%) at the expense of my UK weighting (now 25%).

2017 10 allocation delta FvL

Move one of my ‘mortgages’. I have two portfolio loans, and borrow in both GPB and USD. I only recently noticed that with US interest rates on the rise there is now a significant difference between borrowing costs between GBP and USD. My UK bank charges me around 2.50pc for borrowing GBP; my broker charges less than 1.50pc for GBP, but about 2.5pc for USD. By shifting some USD debt into GBP I save. Hence the business plan’s change on cash is all in the USA column. I am not a forex trader so this is not a bet either way on GBP or USD – it’s just arbitraging the interest rates. Already, I’ve moved around £100k this way, saving me around £1k pa.
Selling a ‘field’. To deleverage I need to sell assets. Normally I hate selling. But if the asset is owned by the bank anyway, and I repay the bank with my proceeds, then my net position doesn’t change – only my risk levels and my exposures. The question is what to sell. I’m mostly selling fixed income holdings, as long term I prefer equities and the fixed income was mainly there to smooth returns.
Moving a ‘fruit tree’ away from the ‘taxing squirrels’. Some of the work required to manage my ‘farm’ is to reduce fees and taxes. My main effort here has been to shift assets into Mrs FvL’s name, as well as into my Ltd company. She is a basic rate taxpayer and I am a higher rate one. I’ve moved about £30k around in Q3; not as much as I’d hoped but still useful. If this makes 3.5pc and I’ve saved 20pc tax then this is £200 pa. For one quarter’s work this is OK.
Paying down the ‘mortgage’. Deleveraging continues, as repay my portfolio loan. I’ve done pretty well in Q3 on this, and have got my loan-to-value ratio down below 25pc. My farm would have to drop in value an unprecedented amount to trigger foreclosure.
Topping up the farmer’s wife’s pension. My own pension is big enough to be on track to exceed the Lifetime Allowance. If if my investments do well then the taxman will penalise me. But my wife’s pension still has some way to go. So I’ve topped it up by £5k. In theory, at least ; right now the SIPP provider can’t trace the payment.
Off to the market, but to buy not to sell. As usual this little piggy’s assets have been productive, with several of the animals providing me with income. I’ve redeployed these funds into a mixture of ‘arable’ assets (equities such as Disney, WPP, QCom – more details here).

But enough of my farming. How did I finish up in Q3?

Looking back at Q3 the most obvious market developments felt currency-related. But it is noticeable how equities – particularly US and European equities – rose significantly. Being long global equities and hedged on the the pound has felt like the right strategy throughout.

In September in particular we saw a big jump in the value of the pound. At the same time, and unrelated (unlike FTSE movements), US/European equities rose significantly too. Fixed income fell slightly – the more so in the UK where foreign investors presumably marked prices down as the currency rose.

Continue reading “Q3 portfolio review; it’s been a busy summer.” →