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Stock tips from top fund manager: IP Group

Cherry Reynard
Written By:
Cherry Reynard
Posted:
Updated:
10/12/2014

James Henderson, manager of the Lowland Investment Company and Henderson Opportunities Trust, selects IP Group.

Imagine the scenario: two impassioned experts describing the enormous impact their research could one day make, if only commercialised. Whose work do you choose? The decision isn’t easy – the transition from compelling discovery to successful enterprise regularly fails.

IP Group makes these tough decisions. While top academic institutions have a huge breadth of research to create value, many lack either the expertise or funding to successfully commercialise the technology. IP’s success, they say, is because the support they offer goes further than most other forms of financing (a scarce resource in itself for these types of early-stage technologies).

Both Trusts first invested in IP Group in 2011. It’s an intellectual property (IP) commercialisation company, assessing potential new ventures presented by universities and selecting only the most commercially viable; providing financing, business development, networking and recruitment to bring an idea to market.

Founded in 2000 from a single agreement with Oxford University’s chemistry department, they have grown through a mix of additional partnerships, acquisitions of similar groups and a public listing on AIM in 2003.

There are three aspects to their business model:
1. Sourcing – aiming for the best ideas through long-term partnerships with many of Britain’s leading institutions, plus a few overseas.
2. Business building – aiding business formation by supplying business managers, executives and non-exec’s, through a service called IP Exec. In addition it gives business support for legal, administrative, and other organisational structures.
3. Capital – providing growth capital from its own balance sheet, managed venture capital funds, and other investing groups. When fostering the initial idea they seek to minimise investment; even with the successes they’ve had, 50% have been found to fail following early phase discovery research & development (R&D).

In a recent meeting, two companies topped the agenda.

Pores for thought

Oxford Nanopore is the biggest company by value on their balance sheet, and still private.

Beginning life out of Oxford University in 2005, they have pioneered the production of protein membranes inset with tiny holes (Nanopores), manipulated to target specific molecules such as DNA, proteins, and chemicals.

The commercialisation of this technique has led to the development of compact DNA sequencers and associated disposable reagent cartridges. Its latest product – the minion – is a ready-to-use device the size of a large USB stick that plugs into a laptop and enables the user to sequence DNA for just $1000; a full-scale fixed sequencing machine such as those made by competitor Illumina would cost hundreds of thousands.

It is the portability, cost and speed of these units that has the potential to disrupt markets, offering wide applications from the remote identification of species in jungles to testing for controlled substances at national borders.
Pistol whipping

Perhaps the most intriguing of starting points for IP Group’s initiating ideas, First Light Fusion takes its inspiration from the Pistol Shrimp.

The shrimp defends itself by snapping its claw shut, which produces a bubble. As the bubble collapses sound coverts to light, causing temperatures to soar to over 4000oC. What has happened is sonofusion – or a type of nuclear fusion – and the company’s researchers have been working to replicate the reaction in a laboratory environment.

The concept is game changing. Nuclear fusion is far more efficient than the fission reactions currently used in nuclear power plants, and offers to help ease the world’s supply constraints. Importantly it is also much safer: heat dissipates quickly once the reaction is stopped or if the reactor becomes damaged (versus months with fission) and zero radioactive waste is produced – an appealing proposition in the aftermath of Japan’s Fukushima disaster.

The next phase is upscaling the project: building a reactor to sustain a nuclear reaction and harness the energy produced, due to be situated in the Oxfordshire countryside. The risks significantly increase at this stage as laboratory modelling is far cheaper than designing and constructing a reactor, a bill expected to be £25m in total.

The start of something

In times of market turmoil – such as where we are now -the company has advantages because it operates independently of the economic cycle: what matters is how its underlying portfolio is performing, be it Velocys (see article) winning a larger commercial contract for their Gas-to-Liquids technology or Oxford Nanopore achieving widespread adoption of their DNA sequencers.

We are cognizant of the risks. There’s no doubt as to the ‘blue sky’ potential of the underlying businesses, but owning the group diversifies against the possibilities of individual failures – not uncommon in early-stage technology start-ups – while keeping the trusts exposed to the potential successes.