Apis Capital Global Discovery Fund 1Q21 Commentary

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Apis Capital Global Discovery Fund commentary for the first quarter ended March 31, 2021.

Dear Partners,

Our Global Discovery Fund was up 18.1% net in Q1 2021.

Performance Overview (Gross Returns)

It has been a convincing start to 2021 with the Global Discovery Fund significantly outperforming its benchmark (MSCI ACWI SMID Cap) and the broader market indices. Carrying over from last year, Europe continues to stand out, adding almost 16.4% to gross returns. From a sector perspective, another carryover from 2020 was the Consumer sector which added 8.9% to quarterly returns, after contributing over 31.0% last year. Stock-picking was very strong with all sectors and regions positive.

Notable performance leaders were e-commerce play CDON of Sweden, which added over 3.0%, and KR1 of the U.K. (adding 2.4%), an early VC investor in crypto that began to attract some institutional followers. Overall, there were seven positions which added over 1.0% to returns, among them MaxCyte and MVB Financial, which we highlight below.
Underperformers in the quarter were minimized, with the worst being Gravity (detracting 0.7%) and BHG Group (-0.5%). We ascribe this underperformance mostly to a hangover from an outstanding 2020 rather than any significant negative fundamental developments. We continue to hold positions in both names.

Portfolio Outlook And Positioning

The first quarter of 2021 has been predictably volatile. The markets are shifting focus away from safe, defensive businesses to those that have survived the lockdown and are likely to recover strongly as economies reopen. Adding a crosscurrent, however, is the ongoing effect of spectacular stimulus which has levitated all manner of speculation from SPACs to intergalactic tourism plays. During the first quarter we witnessed the market move its focus away from these more speculative areas.

Apis Capital Global Discovery Fund

It appears that the prospect of re-opening will bring with it some sanity – possibly a direct result of fewer stimulus checks being sent to day traders. The outlook is hardly clear, however, as both the U.S. Federal Reserve and ECB have committed to keeping the current level of extremely low interest rates for at least another year or two. Furthermore, the bugaboo of higher inflation has already been dismissed, as any spike up (which appears to be underway) is explicitly regarded as temporary. With caution being thrown to the wind, it seems the market’s “tailwind” of central bank monetary stimulus will continue for the foreseeable future even if inflation perks up. As always, we build our portfolio bottom-up while due consideration is paid to these macro factors. With this in mind, we have leaned into our more cyclical longs within the global small- and mid-cap universe and continue to unearth unique, undervalued long ideas outside the crowded mainstream.

Investment Highlights

MaxCyte Inc. (U.K./U.S. – $1bn market cap)

MaxCyte Inc (LON:MXCT) is a U.K.-listed company headquartered in the U.S. focused on electroporation with a dominant position in a growing market. This is a new method of cell engineering being widely adopted by many of the leading cellular therapy companies. While they have a small drug pipeline themselves, MaxCyte’s focus is on selling tools to other cell therapy developers for use in development and manufacture of their products. MaxCyte dominates the industry of non-viral cell engineering, having 12 strategic partners which include the leading companies such as Gilead, CRISPR Therapeutics, and Allogene. Industry experts estimate this category of therapeutics, of which there are nearly 800 already in clinical trials, at over $50bn by the end of the decade, up from less than $10bn today. Assuming a mid-single digit royalty rate and a modest increase in market share, we model recuring revenue rising into the hundreds-of-millions of $USD for MaxCyte. Moreover, their partnerships have yielded a growing milestone pipeline of approximately $950mm (nearly equivalent to today’s market cap). These payments are expected to begin contributing meaningfully to revenue in 2021 as the pipelines advance through stages of clinical development.

Although the company is a possible future leader in the cell therapy industry with “dare-to-dream” potential, MaxCyte has been off investors’ radar with a listing in London and, until recently, garnered very little broker attention. With the catalyst of an expected move to the Nasdaq exchange later this year and a huge growth opportunity, we think the shares have plenty of room to run.

MVB Financial Corp. (U.S. – $400mm market cap)

MVB Financial Corp (NASDAQ:MVBF) is a regional bank based in West Virginia. This may sound like a far cry from the types of names we usually invest in, but there is a true “Apis” angle here. MVB is one of the only banks catering to the sports betting and online gambling ecosystem, effectively serving as custodian for the millions of dollars of customer deposits amassed by these online betting platforms. An online betting platform needs to hold customer’s deposited funds and winnings in separate, segregated, and secure bank accounts and needs to be able to facilitate withdrawals when customers want to cash out. MVB was able to move quickly once legislation banning sports betting was overturned in 2018 due to its CEO’s familiarity with the industry through a personal endeavor of his own, an NFL news website licensed by NBC Sports. This gave the company a first-mover advantage since most large banks like J.P. Morgan or Bank of America would not (and, in many cases, still won’t) work with these platforms because many states still have not officially legalized sports betting. MVB currently has 17 sports betting customers, including many of the most popular platforms, and many more in the pipeline. Its experience with these customers led it to recognize a similar opportunity to accept deposits from cryptocurrency exchanges which, like the gambling companies, have been turned away by many of the larger banks.

These relationships have provided MVB with a significant and growing source of non-interest-bearing deposits, which the bank uses to grow the loan book, make accretive acquisitions, and contribute to its Fintech investment portfolio. Non-interest-bearing deposits grew over 150% in 2020 and are now over one-third of total deposits, a meaningful competitive advantage particularly in the current rising rate environment. Net interest margin has expanded every year since 2014 and earnings per share have grown at a 56% CAGR over the same period. Furthermore, management is well aligned with insider ownership at 14.5%. These dynamic aspects of the company are seemingly unappreciated by the couple of regional banking analysts that follow it. At 16 times this year’s earnings and 1.6 times tangible book value, MVB probably doesn’t screen as cheap to traditional financials analysts or investors; however, we think this name remains undervalued compared to many of the more widely recognized online gambling “picks and shovels” plays, many of which trade at more than 30 times earnings or aren’t yet profitable. If the market starts to appreciate the true “fintech” nature of MVB and its position in the online gambling and cryptocurrency ecosystems, we believe it could garner a much higher multiple.

Apis Capital Global Discovery Fund NASDAQ:MVBF

Historical performance

Apis Capital Global Discovery Fund

As always, we encourage your questions and comments, so please do not hesitate to call our team here at Apis or Will Dombrowski at +1.203.409.6301.

Sincerely,

Daniel Barker

Portfolio Manager & Managing Member

Eric Almeraz

Director of Research & Managing Member