While most people enjoy a holiday – whether relaxing on an ‘unspoilt’ beach, taking in an ancient monument or tackling a challenging mountain – tourism can pose significant challenges to fragile environments and ecosystems, from coral reef degradation to littering, air pollution and distortion of local housing markets.
‘Capital tourism’ – where non-specialist investors flood into the latest fashionable investment idea, and then flood out just as quickly when sentiment turns – can also cause issues, both for developing companies and for long-term investors. However, for those prepared to look through the volatility, the flight of such capital can be as much an opportunity as a threat.
One area that has seen distortion from such ‘tourist capital’ in recent years is financial technology, or fintech. Many fintech companies are relatively small and are not yet listed on a stock exchange, so are reliant on private capital to fund their growth. Total fintech financing deals between 2018 and 2020 hovered either side of $50bn a year across an average of around 1,800 transactions, but the Covid-19 pandemic sparked a mania for digital solutions (whether in fintech or other areas such as online pharmacies), pushing the number of deals up to over 3,500 in 2021 and 2022, and almost trebling the amount of money raised, to $141bn in 2021, before dropping off sharply to $88bn in 2022.
Tim Levene, manager of UK-listed specialist investment trust Augmentum Fintech (which supplied the above figures), welcomes the return to a more normal environment in fintech after what he calls the “extraordinary fire hose of capital” entering the sector in 2021. “Investors were looking for growth and saw the structural opportunity in fintech, but failed to see the importance of putting the right amount of capital in the right business at the right valuation,” he says.
While growing fintech companies needed seed and early-stage capital, the money pouring into the sector was focused on Series C funding – usually the last funding round before an IPO. “These investors wanted to deploy late-stage capital as they could get more money in that way,” Levene explains. “So companies that were looking for £100-150m were being asked what they would do with £500m-1bn instead.” Too much capital flowing into fintech put pressure on the very companies the money was designed to help develop, and Levene says that seeing that capital now leaving the sector “gives us confidence that there are more opportunities for us and less competition for deals”.
Augmentum Fintech is one of two trusts in the Association of Investment Companies’ new Financials and Financial Innovation sector. It has just passed its fifth anniversary and has produced decent NAV total returns since launch, up 33.5% and 56.6% over three and five years respectively, and flat over a year (a reasonable outcome given the sharp sell-off in growth stocks seen in 2022). However, the one-year share price total return is -15.0% and the shares currently trade at a 35.8% discount to NAV, suggesting the trust itself may have lost some ‘tourists’ in the past 12 months.
Another sector where fund managers have long had to deal with big swings in popularity is biotechnology. Although the business of biotech itself is not particularly cyclical – there is a constant process of researching, developing, testing and marketing new drugs – investor appetite is highly dependent on factors such as regulation, politics and the general attitude towards risk. After a surge of interest in the sector during the pandemic – partly as a result of its pivotal role in the development of Covid-19 vaccines – the tide of capital has sharply reversed as rising inflation and interest rates have pushed investors towards perceived safety.
Trevor Polischuk, co-manager of the Worldwide Healthcare Trust (WWH), says that the biotech sector is now beginning to rebound after the longest and largest drawdown in its history: “It has moved a bit off the floor, but, excitingly, it has a long way to go.” He explains that historically, whenever there has been a macro or fear-driven flight of capital from biotech, it has been followed by a very strong recovery. “Also, biotechnology remains very cheap, and drug pipelines are the fullest they have ever been,” he adds.
WWH is one of two healthcare-focused investment trusts run by specialist fund manager OrbiMed. It has more diversified exposure (with around a quarter of its portfolio in biotech) than its specialist stablemate, the Biotech Growth Trust (BIOG). Over the past year, WWH’s share price and NAV total returns have been 12.4% and 14.6% respectively, while BIOG has returned 10.6% and 11.4%. This is an improvement on BIOG’s three-year share price and NAV total returns of -23.6% and -20.7%, suggesting a corner has already been turned for biotech investors.
To return to a recent theme, M&A activity remains strong in both fintech and biotech, although in most cases – unlike in the wider market – it is trade rather than private equity buyers that are doing the acquiring. Augmentum’s manager points to four out of five exits from the portfolio in the past year being through trade sales, mainly to bigger players in financial services looking to bring fintech expertise in-house. Similarly, most biotech acquisitions are from larger pharmaceutical companies looking to buy in innovation as their existing assets approach patent expiry. This is very far from capital tourism, and should perhaps give investors confidence to dip more than a flip-flopped toe into the waters of these structural growth areas.
