Welcome to the July 2021 newsletter for the Waterhouse VC Fund.
The Fund specialises in gambling assets and businesses that are related to the gambling industry. The Waterhouse family has been involved in gambling and related industries for over 100 years, and the family’s experience, contacts, and capital provide opportunities that most funds would not appreciate or have access to.
Since inception in August 2019, the Waterhouse VC Fund has achieved a total return of 1,728% (assuming the reinvestment of all distributions). The unit price is $18.27, as at 30 June 2021. See our long-term performance table at the end of this newsletter.
With the completion of a second financial year of performance under our belts, this newsletter will review the contributors to the Fund’s performance, key successes and errors during the financial year, our approach to portfolio construction, and the exciting opportunities that we believe could contribute to future outperformance.
Performance figures
“As a result of overdiversification, their (active managers) returns get watered down. Diversification covers up ignorance.” – Bill Ackman
The fund returned gross performance of 483.6% over FY21, outperforming all major global indices. The largest contributor to fund performance was BetMakers. BetMakers has now appreciated 1,674% since our first investment. Our portfolio turnover ratio was very low at 2.8%, reflecting our strategy of buying great businesses with excellent management teams and our intention of holding for the long term.
Waterhouse VC Fund FY2021 Performance by Quarter
Key successes
Our major success throughout this last year has undoubtedly been our focus on key industry drivers and gaining a deep perspective on what the gambling landscape will look like beyond most investors’ short term investment horizons.
We remain focused on finding businesses that are best positioned to benefit from our perspective on the future gambling landscape. We are particularly excited by the US growth opportunity, which we have written about extensively and see as a ‘Land Grab in the Land of Opportunity’.
We believe we can leverage our contacts and expertise to understand industry trends before the rest of the market catches up. We frequently engage directly with our portfolio companies and prospective opportunities to optimise our capital allocation.
Our investment in Aspire Global (+57% since purchased) is typical of our investment edge. Most investors would shy away from Aspire’s obscurity. As detailed in our February newsletter, the business offers B2B products and solutions for launching and operating online casinos and sportsbooks. They can handle all aspects of running a gaming site, making the company a “one-stop-shop”. Aspire offers products for the customer-facing aspects of a gaming site like casino, sports betting and bingo platforms, plus outsourcing solutions for ‘back-office’ operations like payments, customer support, compliance, VIP management, CRM services, and data analysis. First-hand experience allowed us to understand Aspire’s diverse B2B product suite from the perspective of a gambling operator and we’re confident in the ability of the well-aligned and respected management team.
Worst performer
Our worst performer was Ubisoft as detailed in our June newsletter. We were initially attracted to Ubisoft’s scale, hit franchises, and promising release pipeline. However, we exited the position due to issues concerning the company culture and lack of sports-related gaming franchises.
Thinking in bets
While there are only 15 pure-play gambling and gaming stocks listed on the ASX and 40 companies in the MVIS Global Gaming Index, our investable universe is surprisingly large.
Our mandate allows us to invest in small cap companies globally, including those with large owner/operator stakes that are typically excluded from indices. When further considering companies that earn a small amount of revenue from gambling, or are related to the gambling industry like gaming or media companies, our investable universe is orders of magnitude higher.
We run a concentrated portfolio of only our best ideas, selected from our investable universe. We believe it would be detrimental to Fund returns to dilute the impact of our best ideas, through diversification for its own sake.
As our portfolio companies continue to carve out a piece of the future gambling landscape that we envision, we are happy to hold them through their journey and will not feel pressured to sell down businesses that have earned a higher portfolio weighting.
Looking ahead
We continue to find opportunities across our three investment themes:
Dominant scale operators in regulated markets
Business-to-business services to gambling operators
Convergence with the gambling industry, such as video gaming, media and more
We are particularly excited by businesses that have the ability to grow within the burgeoning US sports betting market or have gambling exposure in crypto/decentralised metaverses. We discussed the latter in our April newsletter. The entire real-world gambling ecosystem is being rebuilt in virtual worlds, presenting opportunities to innovative new businesses while challenging established operators.
PlayUp (detailed in our March newsletter) is a particularly exciting recent investment that we believe could deliver outperformance in FY22. PlayUp has taken the approach of developing and owning their own wagering technology platform, as opposed to outsourcing to third-party providers. This has allowed them to pursue a differentiated strategy. The business prides itself on personalised customer service and custom-built player tracking designed to improve betting options. We believe that there could be a significant increase in PlayUp’s valuation multiple, with the business valued at circa 1.1x 2022 revenue compared to listed peers at around 4x. PlayUp is currently mulling a public listing, which could lead to a realisation of this valuation multiple uplift.
As we mark the Fund’s 2-year anniversary, we continue to remain as focused as ever on our core areas of expertise, and strive to improve all aspects of our research and operational processes in our pursuit of building a world class investment firm.
For wholesale investors that want to follow gaming’s global growth, please follow us for updates on Twitter @waterhousevc.
Please note the above information in relation to BetMakers, Aspire Global, PlayUp and Ubisoft Entertainment is based on publicly available information in relation to each of them and should not be considered nor construed as financial product advice. The Fund currently has a position in BetMakers, PlayUp and Aspire Global. The information provided in this document is general information only and does not constitute investment or other advice. Readers should consult and rely on professional investment advice specific to their individual circumstances.
Gambling Fund gross performance as at 30 June 2021