Welcome to the September 2020 newsletter for the Waterhouse VC Fund.
The Fund specialises in gambling assets and businesses that are related to the gambling industry. We aim to leverage our unique expertise and existing assets to generate yield and capital growth for investors over the long-term.
Since inception, $100,000 invested in the Waterhouse VC Fund has risen to $346,600, as at 31 August 2020.
A year in review
This month we review Waterhouse VC’s first full year of performance - and what a year it has been. The fund returned 247% gross return for the year, with very strong performance from our highest conviction positions.
Our early success demonstrates that investing in the gambling industry is a sound strategy which capitalises on our unique advantages as a fund manager. We believe that gambling industry exposure should be at least a small part of every well-diversified portfolio. The Waterhouse family has been involved in gambling and related industries for over 100 years, and the family’s experience, contacts and capital give it access to deals in the market that a normal fund manager would not appreciate or have access to.
An example of this special access is our investment in ASX-listed BetMakers Technology Group, which we’ve covered previously in our February and August newsletters. BetMakers is an attractive software company in the business-to-business (B2B) sector of the gambling industry. They supply mission-critical data to corporate bookmakers, and some large racing authorities. If it wasn’t for their data feed, the time and effort these organisations would have to invest in putting up their fixed odds markets and collecting integrity data would be astronomical.
They also have other products that provide some exciting growth opportunities in their own right, which we’ve covered previously. BetMakers is critical to the sector in Australia and increasingly overseas, which would be very hard to properly assess without deep industry knowledge. The company’s market capitalisation is now almost $300m after surging six times in value in 12 months. It remains a core holding in the Fund. At Waterhouse VC, we take long-term positions in companies benefiting from structural tailwinds, and let them grow in weighting within the portfolio.
Our investment in London-listed Flutter Entertainment, the owner of the Paddy Power brand in Europe and Sportsbet in Australia, was predicated on them repeating their Australian growth strategy in the US, a market with the potential to be many times the size. When it comes to the business-to-consumer (B2C) market, we like companies in regulated markets that are going to win the scale war. Flutter has the balance sheet, marketing budget and team size to beat out the smaller challenger brands, of which there are many. Their merger with The Stars Group, covered in our November 2019 newsletter, only strengthened our conviction. Despite more than doubling from its March low valuation, the combined group is still trading at only five times annual revenue, growing revenue in the low double-digits and converting 30% of revenue to EBITDA. Flutter shares many favourable business characteristics with high-flying ASX growth companies, but trades at a fraction of their valuations.
We believe that even though the US market is fragmented now, it won’t look that way in the long-term. The US regulatory environment is unique, and each state is gradually legalising and regulating in their own way. When a large portion of the US population can bet legally, the operators who can afford to lock up national media will see greater returns to marketing and lower customer acquisition costs. This is the driving force behind the recent partnerships between gambling and mainstream sports media companies, such as NBC & PointsBet, ESPN & DraftKings + Caesars, CBS & William Hill, FOX & Flutter, and Barstool Sports & Penn National.
Another London-listed investment is Playtech, the world's largest supplier of technology to online gaming operators. In our June newsletter we covered the software products they provide for online casinos, sports betting and other digital gaming companies. Playtech shares are worth roughly the same amount as a year ago, but are up over 50% since our initial purchase in May this year.
Company updates from the recent reporting season have confirmed that online gambling businesses have been resilient to the disruptions caused by the pandemic, and in many cases have been enormous beneficiaries of stay-at-home orders around the world. This theme has much longer to play out and supports our underlying belief that the gambling industry can thrive in any economic environment. Further, while the pandemic has hurt gambling businesses that rely on foot traffic for their revenue, like casinos, pubs and stadiums, we’re watching how these businesses can adapt to the new environment. In the US, the casinos are accelerating their online plans in a massive way.
It has been a great first year with many lessons learnt about running a wholesale investment fund. We are taking things one step at a time but are expanding the team to satisfy our aim to transition to a retail fund over the next three years.
For wholesale investors that want to follow gaming’s global growth, please follow us for updates on Twitter @waterhousevc.