Over the last few years, the IP spin out industry has boomed. Outfits such as the IP Group and what was Imperial Innovations has benefitted from a huge influx of money into the university/government research lab spin out space. Valuations shot up and well-known investors such as Neil Woodford have publicly embraced this most specialist bit of the VC space. Allied Minds came to the market a few years ago with what sounded like an irresistible sales pitch. It had a range of exclusive deals with government research labs to spin out new technology and turn them into unicorns. At one point the shares were trading at many multiples of NAV and everything seemed to be set for a repeat of the IP Group long-term rally.

And then it all started to go wrong. Investor’s started to freak out about the very concentrated bets this investor was taking, worrying that its spin-outs might lose momentum and be worth next to nothing. In particular investors’ concerns have focused on key portfolio business Spin Transfer (STT) which comprises roughly just under a third of likely NAV. The share price has sunk and those of us who bought in not long after the IPO are nursing big losses.

In normal circumstances, I would have quietly disposed of the shares but frankly, the amount of money I’ve got left in Allied Minds never seemed to warrant selling out. Yet the share price kept heading south.

In the last few weeks though I’ve found myself looking again at Allied Minds, this time in a more positive light. The last time I looked, its shares were trading at only a notch over 80p a share – a long way from the peak of over 700p a share back in 2015. Strangely though I’ve been thinking about actually increasing my holding in Allied Minds.

I’ve been quietly taking a look again at this IP transfer business and although the risks to valuations are increasingly obvious, it also seems that the potential for upside has been massively underestimated by the market. First the raw statistics. At the current 82p a share ALM is trading at not that much above the valued of cash. By my calculations, ALM at the end of the last financial year had $158m in cash on the balance sheet against a market cap of £195m.

The chart above shows Jefferies own estimates for the portfolio of tech businesses – just three businesses Precision Biopsy, SciFluor and Spin Transfer account for nearly two-thirds of all the portfolio value. STT in particular has been worrying investors for quite some time. Analysts at Jefferies put out a note earlier in the year which highlighted why they thought that Allied Minds was worth much less than the market believed – at the time they reckoned ALM’s likely real net asset value was closer to the 118-125p price range.

“We continue to base our assumptions for STT’s value on a significant down round during 2018 (due by end March on the delayed timetable). Our estimate is for a $50m round, at a pre-money of $50m, and 40% subscribed by Allied Minds (hence reducing its holding to around 44% and probably therefore leading to the business being deconsolidated and treated as an investment or an equity associate). None of the numbers are intended to be precise, but rather directional.
We believe that the market now doubts the historic implied value of around $250m for STT (based on the October 2014 funding, since when STT has missed more than one technical and commercial target and lost two industrial partners). A funding at over, say, $100m, pre-money with credible strategic investors (more than financial ones) might now be seen as a positive surprise. However, a complete failure to launch would surely still be seen as a major blow for what remains Allied Minds’ largest single investment.”

Since that note was released, Allied Mind’s share price has continued to decline markedly and in a more recent note Jefferies (much the most bearish bank covering the stock) observed that the “downside risk now seems balanced by the possibility of good news (Fed Wireless mainly)”. Jefferies moved Allied Minds to a Hold from Underperform with a 118p price target. Jefferies also observed that  during 2018, three portfolio companies appeared able to deliver upside surprises and “Federated Wireless should receive FCC authorisation for its spectrum sharing, which could start to be caught up in 5G/IoT excitement as services begin”.

My very rough guess is that at 82p, nearly all the downside is now being factored into the shares. As an investor, you’re now able to buy into an increasingly diversified portfolio of quality US hi-tech assets at close to fire-sale prices. If any of the three to four investments was to surprise to the upside, the shares might start heading up again – possibly even back to the Jefferies price target of around 118/124p. I’ve started quietly buying back again, hoping that the imminent trading update doesn’t contain any nasty surprises.