Summer 2019: The latest with the MD Platinum Global Private Equity Pool

July 24, 2019

Please join Craig Maddock, Vice President, and Edward Golding, Assistant Vice President with the Investment Management and Strategy team, as they discuss MD Platinum Global Private Equity Pool performance, investments, trends and new MD Platinum offerings.

 

*Disclaimers

 

Transcript

Craig [00:00:05] Welcome to the Q2 2019 MD Platinum Podcast. My name is Craig Maddock and I'm the Vice President and Senior Portfolio Manager of the Investment Management Strategy team. For 50 years MD has empowered Canadian physicians to reach their long-term financial goals. Now MD Platinum expands physicians investment opportunities as we provide exclusive access to institutional investment opportunities in the form of Global Private Equity and our current offering, Global Private Real Estate. Joining me is Ed Golding, the Lead Portfolio Manager for the MD Platinum Global Private Equity Pool and the MD Platinum Global Real Estate Pool.

Ed [00:00:40] Thank you Craig. It's a pleasure to be here. First off, I was looking to discuss how the Private Equity Pool has performed since its inception in July of 2018. As of March 31st 2019, the pool has invested $9.75 million and the investments are valued currently at the end of the first quarter of 2019, at $10.3 million. This implies an internal rate of return of 13.8% and a total value, to paid in capital ratio, of 1.06x. The main driver of positive returns since inception are - One - an increase in the value of a secondary investment in New View Capital Fund. Two, an increase in value in a preferred equity investment in BMC Software. And three, an increase in value of an investment in the common equity of Asurion, a provider of cell phone insurance. In addition, all primary investments are currently valued at their cost. The pool is still in its investment phase and no holdings have been sold, as of the end of Q1 2019. Craig maybe you can provide a high level summary of the investments we have made, as of June 28 2019?

Craig [00:01:46] The pool began operations in July 2018 and there's been a tremendous progress in the number of investments over the past eleven months. At the end of June, the pool had committed 19 investments totalling just over $39 million which equates to 38% of the total capital committed to the pool. Of that 39 million, 23 million are commitments to primary funds which are new private equity funds managed by third party managers. Almost 6 million are commitments of secondary funds which were private equity funds that are of an older vintage and are traded on a secondary market. And 10 million are commitments to direct investments, in other words investments into specific companies. From a geographic perspective, 17 million is committed to the U.S., abut 3 million in Europe, a little over 4 million in the Asia Pacific and around 15 million to global investments. When we look at things from an industry perspective, we've invested about $9 million in software and technology companies, almost $4 million into insurance companies. Another almost 3 million to healthcare and then generally about 21 million to a number of diversified industries. And while we have committed 38% of the pools capital since inception, the actual amount invested so far is just under 15 million, which equates to about 14% of our total commitments. Ed, maybe you can get more specific and do a deep dive into one of the investments we've made on behalf of our clients?

Ed [00:03:00] In April 2019 we invested $1.1 million of our clients capital to a company called Luckin Coffee in the last financing round before the company went public in May 2019. The initial investment was in the form of a preferred equity, with a pre-money valuation of $2.75 billion. Within a month of closing its final private round of financing, Luckin Coffee went public by raising over $645 million by issuing almost 38 million shares at an IPO price of $17 per share. The public float represents approximately 16% of the total shares outstanding. MD's investment of $1.1 million in the pre money financing, was converted into just over 79,000 common shares, at a cost of $13.86 cents per share, which represents a discount of 18.5% of the IPO price. As of today, July 8th, Luckin stock price was $19.13 and which represents a 38% return on the investment so far. Luckin Coffee is China's fastest growing coffee chain which has already emerged as Starbucks China's most formidable challenger in the freshly brewed market. Luckin it was founded in late 2017 by a highly experienced serial entrepreneurial team led by Jenny Qian and Charles Lu. Luckin differentiates from most other competitors with its focus on function instead of social networking. As a result, over 85% of Luckin's outlets are small format pickup stores located in major office and commercial buildings, staffed with only two to three employees and no seating. This provides a major structural cost advantage relative to competitors such as Starbucks. To optimize its large network of small format pickup stores, Luckin was built as an app only company and does not have any cashiers in his 2000 plus stores. Customers place orders on Luckin's dedicated mobile app and then pick up in-store when the app pushes an alert that the coffee is ready. Luckin's coffee and light meal quality is also on par with Starbucks China, with high quality control on raw materials, I.T. system driven inventory ordering and fully automated coffee machines - with real time data collection to monitor quality. We made this investment on behalf of our physician clients due to several compelling reasons. One: disruptive business model enables significant cost advantage and accurate customer capture. Two: big data capability supports front end customer engagement and back end data operation. Three: highly experienced serial entrepreneur founding team. Four: profitability upside via economies of scale, cross-selling and further operation optimization and Five: Luckin's fast expansion and capital scarcity and China's PE market in 2018 leaves little room for competitors to catch up. With our thesis being very positive, it is our expectation that the holding period for this company is approximately two and a half years with an exit in 2021. Since Luckin is now a publicly traded company, the exit on this investment will be the sale of the shares on a publicly traded stock exchange. Luckin coffee is a venture capital investment and venture capital investments are investments in new start-ups with a high growth profile. Over the two and a half year investment period, we are projecting very strong net revenue growth positive EBITDA by the end of 2021. And with the assumption that investors are willing to pay mid teen EBITDA multiples, the implied share price at those multiple levels would generate a very healthy return for our physician clients. With that I'll turn it back to Craig to wrap things up.

Craig [00:06:33] Well Thanks ED. With that we are at the end of this quarter's podcast. As a reminder our MD Platinum Global Real Estate Pool is currently available for sale and closes on July 31st. Please contact your advisor for details to see if this new investment is suitable for you.

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