This morning, venture capital firm Allied Minds (LSE: ALM), one of Neil Woodford’s favourite businesses, announced that one of its portfolio companies, HawkEye 360, has raised $9.6m from a series of backers including Allied itself.
According to the group, the funding will help HawkEye cover the “build and launch costs of the company’s first commercial satellite cluster and for general commercial purposes.”
The HawkEye follow-on round is just the latest investment for Allied Minds. Earlier this year the company also made two new investments in TableUp and Orbital Sidekick, a software provider to the restaurant industry and analytics firm respectively.
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These new ventures seem to be part of management’s plan to turn Allied’s performance around. Last year the group crashed out of the FTSE 250 after revealing pre-tax losses of $58.2m on revenues of $2m during the first six months of 2017. These losses followed the $146.6m writedown on the value of seven of its portfolio businesses and a £64m cash call.
Poor record
Allied Minds is a venture capital business. The group invests in early-stage businesses, mainly in the tech and MedTech space, hoping to generate a huge profit when these firms reach maturity and are bought out or list via an IPO.
Unfortunately, Allied’s track record of investing is poor. So far, there have been no windfall profits from IPOs or business sales.
With this being the case, even though Neil Woodford continues to support the business, I’m staying away. There are many other companies out there with a better record of producing returns for investors, such as Burford Capital (LSE: BUR).
Industry leader
Burford is one of Woodford’s top five holdings in his flagship Equity Income fund, and it is easy to see why. A few years ago, litigation finance, which Burford provides, was virtually unheard of as an asset class. However today, the litigation finance industry is booming and Burford is leading the market.
Litigation finance is an exciting asset class. Financers help fund the cost of legal action in return for a share in any award made by the court. These returns can be enormous. For example, a few months ago Burford told shareholders that, at the conclusion of one legal dispute between a Spanish company and the government of Argentina, it had generated a return on investment of more than 700% over seven years. Institutional investors are queuing up for this kind of exposure.
That said, while returns can be higher, it requires experience to be able to navigate the industry successfully. Burford has this experience, which is why growth has exploded over the past five years.
Net profit more than doubled to $265m year-on-year for the 12 months to the end of December last year. In 2012, for the year as a whole, Burford’s net profit was just $17m.
With growth exploding, I’m excited about Burford’s future. I believe both the demand and supply of litigation finance will only grow and Burford is in a prime position to continue to profit from surging investor demand.
Shares in the company are currently trading at a forward P/E of 19, which is slightly higher than the companies I’d usually invest in, but I believe the multiple is appropriate for a business that has grown EPS at a rate of 70% per annum for the past five years.
