From investment company to hybrid VC fund
Sofina (SOF BB) is the holding company of the Belgian family Boël, which currently holds around 55% of the shares: it has been listed on what today is Euronext Brussels since 1910 and has a market cap of €8 billion.
Founded in 1898 as Société Financière de Transport et d’Entreprises Industrielles, it was initially an engineering conglomerate active in the energy and transportation sectors. The current controlling shareholders entered the share capital in the 1950s, and it was in the early 1970s that Sofina became the classic European, family-controlled investment company with holdings in well-known, mostly local (i.e. Belgian and French) storied companies: its initial investment in Colruyt is dated 1975, and similarly it invested in Danone in 1987, SES in 1998 and bioMérieux in 2009.
We aspire to be the preferred partner of entrepreneurs and families who lead growing companies by backing them with patient capital and supportive advice
Today, however, the company is completely different from even just a decade ago: it has in fact pursued a strategic move towards more international exposure (more than half of the portfolio is invested outside of Europe since 2017) and “growth”. Sofina is right now a hybrid venture capital fund with equity holdings in Europe, the US and Asia, across different sectors but with a particular focus on Consumer and retail, Digital transformation, Education and Healthcare.
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Investments are grouped as following:
1. Long-term minority investments (30% of NAV): mainly in Europe-based companies run by entrepreneurs and/or families. The initial investment size is between €75m and €300m. Investments in this group include both listed (The Hut Group - THG, bioMérieux, GL Events, Colruyt) and unlisted companies (First Eagle Investment Management, Cambridge Associates, Mérieux NutriSciences, Luxempart, …). The full list of holdings is available here, including already exited investments (Danone, Orpea, Ipsos, Eurazeo, Caledonia Investments, …).
2. Growth (19% of NAV): started in 2013, it includes minority stakes in private companies in high-growth sectors with a demonstrated product-market fit, proven economics and limited technology risk. Investment size is typically between €20m and €100m. As for above, the full list is available here: a couple of these companies have IPOed after Sofina’s initial investment (IHS Towers, 1stdibs) but the majority is still private. Past investments in this group include Flipkart, divested in 2018.
3. Private funds (51% of NAV): investments in venture and growth capital funds with equity commitments between €5 and €50 million. Sofina has been investing in such funds in the US since 1978, and in India and China since 2005: it currently has around 80 core General Partners, of which this is a selection:
The allocation of the Direct Portfolio (1+2 above) is the following:
while the allocation of the Private Funds Portfolio (3) is:
The investment criteria for selection are particularly sensitive to the ESG elements:
“We are convinced that working to have a positive impact on environmental, societal and governance (“ESG”) aspects in as a company and as an investor is not only the best thing to do, but will also have the effect of creating lasting value for our stakeholders and our portfolio companies. (2021 Annual Report)”
Some key financial numbers
Sofina only publishes semi-annual accounts, so the latest available numbers are from June 2022. Also, while the financial statements and notes are available in English, the management discussion is in French only: this is not exactly a company that communicates a lot with the market or that provides regular updates on its strategy.
Nevertheless, management has shown that it can increase NAV over time.
Sofina has always run a very conservative balance sheet, with little to no leverage for most of its existence: the current €700 million bond outstanding was issued in 2021 to diversify funding sources and support ongoing growth initiative. And that is balanced by €580m in cash and current financial assets (and supported by €10bn in equity capital).
They also proudly boost that the company has increased its annual dividend per share without interruption since 1956. The current dividend yield is, however, a paltry 1.4%.
Similar to many other stocks, Sofina’s price started to climb in 2016-2017, to then explode exponentially in 2020-2021, only to crash back to earth last year, closely replicating Nasdaq: market price is down ~45% from the peak in December 2021.
As is the case for most listed private equity/VC funds, Sofina traded at a discount to NAV for most of its existence (on average 25% since 2004). It then switched to trading at a premium since May 2020, when the euphoria for “everything growth” started to permeate markets, and reverted to a discount early last year. Currently, it’s trading at just a 22% discount to NAV [As already pointed out, the latest reported NAV is from June 2022: current NAV is likely to be lower, and the discount would also be narrower.]
Unfortunately, the company does not disclose much more than the above slides: for example, there is no detailed breakdown of NAV or a discussion of the valuation methodologies used for unlisted holdings (like VNV Global does, for example).
This time the conclusions are pretty straightforward, and binary.
If you like the “growth” approach with an ESG tilt, Sofina has a long-standing track recording in compounding NAV and equity capital over time (although the portfolio is different today than it was just a decade ago).1 It is one of the few opportunities for retail investors to have semi-direct access to some of the best VC funds in the world (with a double layer of costs: the fee paid to the VC funds and Sofina’s operating expenses).2
If you are not a fan of the strategy and/or its near term prospects, the discount to NAV (which is far from “significant”) will not entice you under any circumstances: it is unlikely that VC funds will see many exits at 2021 valuations in the next few years. And we all know that VC/PE funds are reluctant to write down the value of holdings in their funds: the current "real" NAV is likely to be much lower than reported, not only because the latter is stale, but also because VCs are artificially keeping their valuations up. When reality will finally set in, that discount could easily turn into a premium...
It should be noted, however, that NAV has compounded at just 9% since the global financial crisis: not exactly what you would have expected from such an aggressive strategy over the last decade.
Another interesting company in the alternative space that is available for retail investors is the London-listed investment trust RIT Capital Partners, which manages money for one of the many branches of the Rothschild family. RIT is more geared to listed equities, absolute return strategies and private assets: VC is less than 20% of the portfolio. I might write about it in the future.