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VEF: Undiscovered sweet spot - DNB

Q1 portfolio highlights. 1) VEF’s NAV rose by 4% QOQ in Q1 in USD, as the operating performance of its attractive fintech portfolio more than offset 10%+ FX headwinds and 15–20% peer multiples compression; 2) we expect its Latin American lending portfolio anchors Konfio and Creditas to report 100–200% revenue growth in 2021, while noting strong operating momentum for Indian payment platform Juspay, and would not rule out VEF making the most of this funding window to raise capital, which we believe would act as value catalysts in 2021; 3) Creditas has said it remains on course for a potential IPO in 2022; and 4) with USD44m in net cash, VEF has said it expects to commit ~USD20m to follow-on investments in its current portfolio, and with a lot of capital-chasing assets in the emerging market fintech ecosystem, we would not rule out a portfolio exit in 2021 (CEO Dave Nangle said up to five of its holdings are in some form of discussions with potential acquirors, while its new investment pipeline is also heating up).

14th portfolio holding in Indian asset-backed digital lending platform, Rupeek. VEF invested USD7m in Q1 in Rupeek, which operates in the attractive Indian fintech ecosystem with a proactive regulator, advanced infrastructure, and cheap mobile data acting as key delivery mechanisms in our view. This is a market where 90% of the population does not have access to formal credit. Rupeek offers gold loans (collateralised with gold jewellery), completing the loan underwriting-to-funds transfer within 30 minutes via its state-of-the-art technology and asset-light supply chain. Keeping costs to a minimum through its online-only strategy allows for annual average interest rates of 15–20% (versus the competition in an informal and unorganised gold loan market charging up to 50%). VEF has had success in the past with secured lending marketplace investments (Creditas has a 3-year unrealised IRR of 28% and RoIC of 2.3x). Given the substantial addressable market opportunity (households in India hold 25k+ tonnes of gold worth USD1.5trn combined at current prices, we believe Rupeek should move the NAV-growth needle for VEF in the coming years.

Portfolio at the forefront of sustainable finance. We believe investors continue to overlook VEF’s social impact criteria in ESG (increasing accessibility to and affordability of financial services, especially for under-served segments in emerging markets, i.e. low- and middle-income individuals, and SMEs). We also welcome its proposed return to Sweden from Bermuda, enabling a more modern and ESG-compatible governance structure, which should improve local investor appetite.

We have raised our fair value to SEK4.0–5.3 (3.9–5.1) based on four equally weighted valuation methodologies. In our own valuation assessment of VEF’s portfolio by 2022e, we calculate 25%+ potential NAV growth. We like that VEF offers unique VC exposure to the wealth catch-up from financial inclusion in emerging markets and see ample prospects for it to repeat its value-creation track record (NAV IRR of 31% since 2016).
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