IP's graduate initiative is worth backing
Even hardened investors still dream now and again of discovering a '10 bagger' - the wonder company whose stock rockets stratospherically because it has found a miracle cure for the common cold or a hit Saudi-style gusher in the South Downs.
Back to school: By teaming up with universities IP can tap into £800m of research and development cash
However, often as not, in chasing that jackpot payout, you are left nursing hefty losses and wishing you had paid more attention to the small print that warns that shares can go down as well as up.
Personally, I'm still a sucker for the occasional penny share that promises to be the next Microsoft. But I can tell you very few of them have paid out. And not one of them has returned enough cash to cover the previous investment disasters.
With the current market pandemonium it pays to play it safe. This week's pick - IP Group - I think does just that, while offering the opportunity to buy into some really cutting-edge science and technology.
IP has a rather chequered history, having started life as intellectual property investor IP2IPO in 2000 just as the dot-com bubble burst. That it has hung around and gone from strength-to-strength in the intervening years shows it has solved the early teething problems and found a sustainable business model.
So what does the company do? In very basic terms it invests in university projects that it hopes one day will be spun out into profitable companies.
This is not just a pipe dream. So far 65 businesses have been created from its exclusive agreements with 10 top British universities.
A total of 13 of them are now quoted on the stock market, the biggest of which is Modern Water, a desalination specialist valued at £62m.
Recent fundraising rounds have unearthed gems such as Xeros, which is developing a virtually waterless washing machine, and Revolymer, the creator of non-stick chewing gum.
So far so good. But on the face of it there doesn't seem to be much difference between IP and the ten-a-penny venture capitalists that bankroll risky start-ups.
To understand IP, you have to go back to the beginning when it sewed up its first deal with the University of Oxford, which gave it access to the institution's innovations for the next decade.
It has since negotiated exclusive agreements with nine other universities, including Leeds, Southampton and Glasgow. But these partnerships run for 25 years compared to the 10-year Oxford tie-up.
Don't underestimate the value of IP's multiple alliances. Combined, the 10 seats of higher learning have access annually to £800m of research and development cash.
To put this in perspective, only four other British firms spend more on R&D every year and they are multinational companies such as the drugs company GlaxoSmithKline and the aero-engine maker Rolls-Royce.
IP has been clever by embedding itself with a 'partnership director' at each uni, who dispenses advice on patenting post-graduate projects and the thorny issue of raising cash and staffing the boardroom of an academic start-up.
In return for this help, IP gets free shares in any company created from the process and the right to invest at a pre-agreed price.
This might look like a deal heavily weighted in favour of the company. But before you get too misty-eyed for the poor professors who are seemingly being fleeced by the slick City types, you should remember IP only makes cash if a new spin-out firm is successful. And of course academia's efforts at bringing companies to market has been nothing short of woeful. So there is incentive on both sides to make this relationship prosper.
Which brings us to the issue of valuing IP Group. There are very few comparable companies out there. What stands out, however, is the IP model palpably works - even in a credit environment as severe as today's. Recent fundraisings have shown it still has access to a ready pool of cash from private investors now that the equity markets have been drained by the ailing banks.
It has found financial backing for latest projects Revolymer and Xeros and yet still holds £40m on its balance sheet - a funding base that has remained stable for some years now.
That cash, together with IP's investments, were calculated to be worth around £216m at the end of 2007, which means the shares (up ½p at 110½p ) are trading at a 30%, or £60m premium to the company's net asset value.
Now I balked at this until I was told that before the recent market turmoil, IP traded at a £150m premium to the NAV.
Followers of the company say the premium rating is justified because it has access to more than two decades of research emanating from Britain's 10 leading universities - that's £16bn worth of R&D.
The trick will be to get the share price to track the NAV higher. The firm's investments are forecast to grow by 10% this year and advance by around a quarter between now and the end of 2010. Brokers reckon fair value for this stock is somewhere between 185p and 275p.
My advice: Stay away from the micro-cap miners and biotechs and take a punt on this little gem if you fancy a little flutter on the future. But as always set a stop-loss of 15-20%.
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