Welcome to the February 2021 newsletter for the Waterhouse VC Fund.
The Fund specialises in gambling assets and businesses that are related to the gambling industry. The industry is under-researched by most mainstream fund managers. We aim to leverage our unique expertise and existing assets to generate capital growth for investors over the long-term.
Since inception in August 2019, the Waterhouse VC Fund has achieved a total return of 982% ($10.82 unit price), as at 31 January 2021.
Aspiring for aligned management
When analysing the form for a horse race, it’s often difficult to find a mispriced bet, even for a seasoned punter. Other form analysts have access to the same data, like times, weights, barriers, trainers, trial form and more. These factors are obviously critical to analysing any race, but in a competitive market you need a deep understanding of the game to know the select few factors in each situation that will uncover mispriced bets.
In the world of investing, it’s not that different. Investment analysts pore over the same ‘factors’ like earnings growth and valuation multiples, looking for a solid investment. These are important, but a deep understanding of the industry and investing principles is required to find mispriced bets over the long-term. Recently, the Fund has added what it believes is a mispriced bet to the portfolio by exploiting a reliable yet continually overlooked factor in great investments: insider ownership.
Extensive research shows that companies with high insider ownership, in the ranks of executives, directors and founders, deliver outsized share price returns of 4-10% per annum. It’s no guarantee, but there are many reasons it works. Managers with “skin in the game” tend to prefer building wealth through the long-term appreciation of their company’s share price, rather than excessive cash remuneration, aligning their incentives with shareholders.
These companies are repeatedly mispriced because the managers make decisions that sacrifice short-term earnings for long-term value, and tend to run more conservative balance sheets. Further, due to the lack of free float in the shares, they are omitted from major index funds and the products that track them.
The company we invested in, Aspire Global, 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.
The target market includes established operators who want to outsource their technology to reduce costs, land-based gambling businesses establishing an online presence, and non-traditional players with large online customer bases (e.g. media businesses) who want to operate in the gambling space. Aspire typically has revenue share agreements with their customers.
Aspire Global’s product offering and partners, from the Q3 2020 investor presentation.
B2B companies like Aspire compete and excel by enabling their partners to offer the best product experience. Competition is fiercer than it has ever been, with operators expected to deliver an ever-wider selection of games, competitive bonus programs and increasing levels of personalisation to hit their acquisition and retention targets (not to mention profitability!). We find owner-managers deliver exceptional products due to their passion for the customer problem and willingness to challenge industry norms.
Astute acquisitions
In late 2019, Aspire acquired Pariplay, a gaming studio and aggregation platform. Pariplay makes it easy for operators to add casino games from several suppliers via one integration, cutting the labour costs associated with adding and changing game suppliers. Pariplay offers over 100 games from 34 vendors - a huge and growing content portfolio. Since the acquisition, Pariplay has increased revenue by 40% and EBITDA by 93%. Pariplay has also extended its market presence by entering three new European markets and the U.S.
Late last year, Aspire acquired B2B sportsbook provider BtoBet for €20m in cash. In the first nine months of 2020, BtoBet recorded revenue of €5.0m and EBITDA of €1.8m (36% EBITDA margin). Annualising the first three quarters, Aspire is paying circa 8.3X FY20 EBITDA for BtoBet. Paying such multiples for businesses growing EBITDA at >50% is rare, which is why we appreciate Aspire’s management team. We think Aspire has made smart buys in long-term growth segments of the industry, and positioned themselves as a “one-stop-shop” to start winning bigger deals with global operators.
In Q3 2020, group revenues grew to €40.1m, up +20% year-over-year. EBITDA grew to €6.6m, up +26% over last year, with EBITDA margins expanding from 15.7% to 16.4%. Most importantly, B2B revenue (76% of the group) was €30.3m, growing even faster at +33% year-over-year. On a rolling 12 month basis, Aspire’s revenue is €149.8m and EBITDA is €23.2m. Thus, the business is currently valued at 1.2X EV/Revenue and 7.9X EV/EBITDA. Management is targeting €32 million of EBITDA over FY21, valuing the business at an attractive 5.8X forward EV/EBITDA if achieved, versus the median for its peers of 10X.
Aspire Global’s Q3 revenue and EBITDA performance, from the Q3 2020 investor presentation.
Growth drivers
Insiders at Aspire own 67% of shares, with the founders remaining involved with the business. Aspire has many exciting growth opportunities in front of it, and we back this aligned management team to execute on them over the next 3-5 years.
We expect Pariplay to continue adding games to its aggregator platform, via both partnerships and its in-house studio. This business recently announced their first partnership in the United States, a key milestone in the expansion strategy.
One of the larger tailwinds behind the company as a whole is the legalisation or re-regulation of gambling. This has occurred in Aspire’s core European markets, and (as we’ve covered at length) is occurring now in the United States. We expect the company to announce larger customers for its platform solution in 2021, in the U.S. and Europe, and to launch new products to existing partners. With a strong product offering and fast-growing end markets, we back the aligned management team over the long-term.
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 Aspire Global 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 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.