Good day, and thank you for standing by. Welcome to the Kinnevik Third Quarter Report 2023 webcast and conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you need to press star one one on your telephone keypad. You will then hear an automatic message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, Mr. Georgi Ganev, CEO. Please go ahead.
Thank you. Good morning, and welcome to the presentation of Kinnevik's results for the third quarter 2023. I am Georgi Ganev, Kinnevik's CEO, and with me today is our CFO, Samuel Sjöström, and our Director of Corporate Communications, Torun Litzén. On today's call, we will walk you through the key events during the quarter, including our most recent investment activity. We will lay out the key valuation changes, and finally, we will track our progress against the priorities and expectations we set at the beginning of the year. But first, as you all know, the market environment in which we operate continues to be very challenging. This, in turn, has affected the market sentiment towards high-growth businesses like ours, and thereby towards Kinnevik. It should escape no one that I am not satisfied with the development of our net asset value and of our share price.
But what matters most in times like these is how we act in the face of these headwinds. As an active owner, we are working closely with our founders and other co-investors to support our companies in navigating these volatile and uncertain times. It's more important than ever to strike the right balance between growth and profitability. It's also important for us and our companies to be able to make difficult decisions in the short term, to create a more resilient portfolio and lay the foundation for strong value creation in the long term. In addition, we are also focused on accreting ownership and deploying more capital in our high conviction businesses at more balanced valuation, and making use of the opportunities that arise in more risk-averse markets.
We are well-positioned to do this due to our permanent capital structure, our strong financial position, and the full flexibility to determine the pace and magnitude of our deployment. Let's now move to page 4 and have a look at the key highlights during the quarter. Our net asset value amounted to SEK 50.8 billion. That's down 6% in the third quarter, and Samuel will guide you through the development of the valuations of our private companies in just a few minutes. One of our key priorities this year is to invest more into our high conviction businesses and maximize the impact and concentration of those businesses in our portfolio. By doubling down in companies like Spring Health, Enveda, and TravelPerk earlier this year, we're doing just that. This quarter, we have deployed more capital into H2 Green Steel and Enveda.
We also have a new addition to the portfolio, a EUR 31 million investment in the clean energy tech business, Aira. I will give you some more color and expand on the reasons behind our conviction in H2 Green Steel and Aira in just a minute. During the quarter, we also released SEK 275 million from our growth portfolio through the sale of our investment in Raisin, the German fintech company we first invested in back in 2018. One part of the portfolio which is seeing particularly strong headwinds is consumer-facing e-commerce. We've seen falling order volumes and a more price-sensitive consumer for some time now, and this quarter, we're writing down our investment in Instabox by underlying 48%. Samuel will talk more about the challenges in our consumer businesses and what they have faced later on.
Moving on to page 5 to give you some more details on our follow-on investments of EUR 75 million in H2 Green Steel. We first invested in H2 Green Steel last year, and they have delivered on several key milestones that were crucial for the validity of the projects. They have secured relevant regulatory approvals, and they have signed considerable volumes in offtake agreements, with over half of the annual production volume already pre-sold. With this funding round, they have now funded a business plan for the completion of the Boden plant, and thereby, risk comes down significantly, but the ambition level remains high. Operations are expected to start in 2025, and the Boden facility is expected to initially, in phase one, produce 2.5 million tons of green steel annually, with the capacity to double those volumes over time.
A key differentiator for H2 Green Steel is that they will operate with significantly higher efficiency and lower costs compared to the incumbents in the steel industry, not to mention reducing carbon emissions by 95%. Decarbonization and the transition towards net zero is one of the most pressing challenges of our time, and in that context, the steel sector represent a significant investment opportunity as it represent 7% of emissions globally, and in Sweden, it represent almost twice that. With an ever-evolving regulatory landscape and an increasing number of companies setting science-based targets. The demand for green steel is expected to far outpace supply for the foreseeable future. Taking a step back, we started looking into the climate tech sector in 2021, and H2 Green Steel is the largest of the six companies we have chosen to back.
This creates a good bridge to talk about the sixth and the newest addition to our climate tech portfolio, Aira, on page 6. Residential heating is responsible for 10% of all Europe's carbon emissions, and we believe it's on the verge of a major transformation. Over the last 18 months, we have assessed several opportunities within the residential energy and heating area at depth, and before Aira, 5 of them reached the end of our funnel, but ultimately, we elected to pass on each of them. What sets Aira apart is their fully vertically integrated model, which we believe is the key to capture the opportunity of electrification in an attractive way. Aira operates in a market which is characterized by high fragmentation, low installation efficiency, and poor customer experience.
By connecting the full value chain, they can offer competitive pricing and higher sales conversion rates, and they have a stronger margin potential, and they can control the customer experience from start to finish. Importantly, with Aira's innovative and accessible solutions, households can save up to 40% on their heating costs, while simultaneously reducing CO2 emissions by more than 75%. As always, in early stage investing, the team is crucially important, and in the case of Aira, we believe they have an exceptionally strong setup. The management team possesses an expertise and experience typically found in later stage growth businesses, very well-placed to execute on Aira's bold vision. We also know the CEO, Martin, well from our previous portfolio companies, MTG and Millicom.
In addition, we believe that Kinnevik, with our experience in scaling global consumer businesses, can be a strong strategic partner to Aira and add considerable value as an early-stage investor. Just like H2 Green Steel, Aira is founded by Vargas, a climate tech investor co-founded by Harald Mix, a member of our board of directors. For the avoidance of any doubt, and as per standard Swedish corporate governance processes, conflicted board members are not part of the discussion nor the decision-making process for such investments. Let's now take a look at what our recent investment activity means for the assessment of our company's runway on page seven. With our investments in Spring, H2 Green Steel, and Enveda, we have made significant strides during the first nine months of the year to seize opportunities in our existing portfolio.
Out of the SEK 4.5 billion deployed so far this year, SEK 3.8 billion has been directed to the existing portfolio. Last quarter, we said we expect the follow-on investment to make two-thirds of the total investment in 2023. We are currently working on additional preemptive and secondary opportunities that may push this percentage share even higher. This draws on our priority to make use of the market environment and to increase our exposure to the high conviction businesses and improve our portfolio's concentration. We are on track to allocate more than 80% of our follow-on capital in companies where we have the strongest convictions and where we are creating an ownership. Even excluding VillageMD, around 60% of our private portfolio is invested in companies that are profitable or have fully funded business plans.
Only around 10% of the value of our private portfolio sits in industries whose runways ends within the next 12 months. All this aside, we're seeing more and more interesting opportunities in this market when it comes to new investments. It's an investor's market out there, meaning we have more time to evaluate new opportunities, and we have strong cash position, which we are willing and ready to deploy. With that, I would like to hand over to our CFO, Samuel, to provide you some more details on our private valuations and the development of our net asset value, starting at page 8 .
Thank you, Georgi, and good morning, everyone. From a quarter-on-quarter valuation standpoint, Q3 was relatively straightforward. Another turn of significant multiple contraction and continued challenges in consumer-facing e-commerce. In this quarter, I'd like to take the time to also cover our valuations from a slightly longer-term perspective and touch on the different dynamics we're seeing as our companies and their valuations develop coming out of the pandemic. But let's start with the quarter-on-quarter movements on page 9. We are taking down the fair value of our private portfolio by 7% this quarter, a magnitude in line with the development in its public peers. In SEK, that corresponds to a write-down of SEK 2.3 billion.
Adding the SEK 1.5 billion invested in the quarter, less the SEK 300 million worth of exits, primarily from Raisin, the carrying value of the private portfolio comes down by SEK 1.1 billion to SEK 31.4 billion. This write down is, again, originating primarily from multiple contraction in double-digit % spread across all sectors and categories. But there are also company-specific developments that bear a meaningful impact on our valuations relative to the public comparable universe. The quarter's most notable valuation revision is that we're taking a substantial write down over Instabee investment, catalyzed by a weakened Swedish e-commerce outlook. A notable stability, on the other hand, is that our core software and virtual care investments are flat on average, while enduring multiple compression of around 15% in a single quarter.
I'll be getting back to the parts of the spectrum of our portfolio that these differences reflect later. Looking at the more technical factors, similar to the most recent quarters, the effect of liquidation preferences is coming down this quarter by some SEK 200 million. Why is that? Well, it's because in a handful of businesses, underlying positive valuation changes do not have an as positive impact on NAV until we've caught up to higher valuation levels than where we're marking these companies currently. As we eat into this gap, the effect declines. The flip side of this is, as you will recall, that our valuations did not fall as dramatically during 2022 when we accrued this effect, which peaked at SEK 3.2 billion in Q4 2022.
At quarter end, this effect amounted to SEK 2.6 billion, and it remains centered in a handful of assets representing around SEK 4 billion of NAV, such as Betterment and Job&Talent. The effect from currencies, on the other hand, was fairly small this quarter relative to what we've gotten used to, bearing SEK 130 million negative impact due primarily to a depreciating euro. So all in all, and in short, Q3 was a quarter during which our unlisted portfolio developed in line with its public peers, even when absorbing the significant write down at InstaBee. On the next few pages, I will go through three groups of businesses of our private portfolio that share different sets of characteristics.
But before that, one of our smaller, more emerging clusters that captivates many is the investment in climate tech that we've built up over the last two, two and a half years. By end of Q3, these handful of businesses represented around 9% of the private portfolio by value or SEK 2.8 billion, clearly boosted by this quarter's investments into, into H2 Green Steel and Aira. This group of businesses is beginning to reach a level of critical mass, and we will therefore be breaking out climate tech as its own NAV category, starting in fiscal 2024, along with valuation commentary on the category's more impactful investments like H2 Green Steel and Solugen.
For now, on to the historically larger categories of businesses that I'd like to give some color on, spanning our fast-growing core in software and virtual care, through our maturing value-based care companies, to our more challenged consumer e-commerce businesses, whose share of our portfolio has dwindled after the pandemic. With that, we're on page 10. These are our five largest virtual care and software businesses: Clio, Cedar, Spring, TravelPerk, and the more recent addition, Mews. This pillar of ours represents 35% of our total private portfolio and 90% of our investments in these two sectors. In Q3, these businesses faced 15% multiple contraction on a valuated average basis, with aggregate fair values for the group still remaining flat quarter on quarter, thanks to continued growth and controlled burn as they progress towards profitability.
From the much more interesting longer term perspective, these companies have faced around 70% forward multiple contraction since end of 2021, but by growing top line by around 3x between 2022 and 2024, depending on how you weigh them, and by meaningful profitability improvements as well as some FX tailwinds, the effect on our fair values has been less violent on average. In 2023, again, on a value-weighted average basis, these companies are doubling revenues, and they are more than doubling gross profit. In 2024, we expect them to grow by closer to 65%, and their 2024 EBITDA loss margin is expected to come in at 15%-20% on average, spanning break-even to -30%. In this quarter, we're valuing these businesses at 10x revenues or 15x gross profit on average.
That is a valuation level coming in line with public high growth software companies in 2024, with our companies showing as strong or stronger capital efficiency or Rule of Forty metrics, as it's often referred to. Naturally, these are companies where we're supportive of them working to improve profitability in a substantial way, but more importantly, we're mindful of them not overcompensating and unnecessarily compromising on the longer term growth opportunity that their respective potential and their respective markets provide. We have deployed SEK 1.8 billion into these businesses during 2023 to date, primarily through our investments in Spring, but also TravelPerk, and we are working hard to unlock opportunities to invest even more capital into these five.
Those investments may come in the form of primary equity to fuel higher or longer term growth than what we're expecting from them now, or in secondary equity to grow our influence in these companies, as the case was with Spring in the previous quarter. And as importantly, managing to convert these opportunities will help accelerate our portfolio's exposure to this group of companies, which is, as you know, a top priority of ours. Looking then at another category, one which has come further in shifting from high growth to near-term profitability during the last two years, while also working against significant multiple compression. And that's our two large value-based care companies, and that means we're on page 11. In Q3, we're taking down our fair values by 11% for VillageMD and 5% for Cityblock.
Levels which are within the range we're seeing in public, more traditional healthcare providers. Looking back, since end of 2021, VillageMD and Cityblock have faced 50% multiple contraction, but they have grown at a respectable rate and are almost doubling in size over 2023 and 2024 combined, while making progress on their respective path to profitability. And to be clear, that growth pace is on a pro forma basis for VillageMD's acquisition of Summit CityMD. Now, you will have noted Walgreens' report last week, where it guided towards 10%-17% growth in its healthcare segment, with a midpoint EBITDA guidance of break even in their fiscal 2024, ending in September next year.
Now, that's not quite what we envisaged when the merger of VillageMD and Summit was announced late last year, but it is in line with the expectations we reset last quarter. So yes, VillageMD has faced its share of challenges, but we have trust in Walgreens' plan and the ability to execute on it. CityBlock, on the other hand, has performed above expectations in 2023, on top line, on gross profit, and on cash flow. Year to date, they have taken large steps towards profitability, and we expect them to break even on an EBITDA basis in late 2024. All the while, we see them outgrowing the more mature peer universe by 5x on top line in 2024, and by upwards of 10x on contribution profit.
They also enjoy having a significant net cash position, multiples more than their expected burn until reaching cash flow profitability, which clearly de-risks this path. So VillageMD has arguably reached the far right end of the S-Curve distribution of our portfolio, while CityBlock is a few steps behind and still growing at a high pace, but not with quite the pace that we saw in 2020 and 2021. And that's all very intentional. And I think intention is what brings us to the last category I wanted to touch on in showing the different types of businesses that form our portfolio. And that is a category where growth has slowed after the pandemic for other than intentional reasons. And I'm talking about our consumer-facing e-commerce businesses, and we're on page 12.
These businesses have probably had the toughest time of all our portfolio companies over the last two years, facing powerful multiple contraction while their markets have been, and are still, swinging back after pandemic-fueled consumer behavior and a topic consumption market. You all know online grocers faced a reversal of pandemic trends first and most forcefully, but their outlook is now stabilized somewhat, and our companies will face easier comparables growing into 2024. Omio, our consumer-facing travel booking platform company, not included on this page, naturally saw the opposite pattern. The effect on other e-commerce categories has been slightly less drastic than the case has been in groceries, but it has crept up over the last few quarters. In Sweden, e-commerce is down in single-digit % in terms of Swedish crowns, boosted by inflation.
In terms of parcel and delivery volumes, it's down by more than that, in particular in certain subcategories. The consequences of this have escalated recently, and the outlook for retail's always important Q4 is uncertain. This has impacted our near-term outlook for InstaBee materially, and it's why we, in this quarter, are taking down our underlying valuation of the company by 48%. That this is the category of companies in our portfolio that has had the toughest time, shows also in the longer-term numbers. Forward multiples have come down by 50% since end of 2021, and by more so at our grocers. But at the same time, their respective markets have contracted materially, causing these four consumer-facing e-commerce businesses to be expected to grow top line by a meager 10% over 2023 and 2024 combined.
With very limited growth to offset multiple contraction and with a loss of scale hurting profitability, this has been the main driver of the significant, almost 70% cut in fair values during 2022 and 2023 to date. This, in turn, is what has caused our private portfolio's exposure to these companies to be cut in half during the same period, from 14% in end of 2021 to 7% of the carrying value of our private portfolio in the NAV we're posting today. Now, this organic change in portfolio balance coming out of the pandemic, together with our more forceful capital reallocation within the portfolio, is what combines to shape a more resilient and attractive portfolio looking ahead. With that, I'd like to end with the full NAV's development in the quarter, also considering our public investments and net cash position on page 13.
So again, we're taking down the fair value of our private portfolio by SEK 2.3 billion, and adding the SEK 1.5 billion invested in the quarter, less the SEK 300 million worth of exits, primarily from Raisin. The private portfolio comes down by SEK 1.1 billion to SEK 31.4 billion at the end of Q3. Recursion's share price continued to swing up and down, ending the quarter largely where it started it, and GFG had another soft quarter. Tele2 was down SEK 0.8 billion with a tough start to the quarter, with concerns around CapEx and cash flow growth, which were somewhat debated after the results of the recent spectrum auctions. And this morning, they reiterated their guidance for 2023 and the medium term.
All in all, NAV was down 6% in the quarter to SEK 51 billion, of which SEK 7.6 billion being our net cash position. Pro forma Tele2 dividends we received last week, our net cash position amounts to SEK 8.1 billion. So to sum up, a weak quarter characterized by multiple compression, but with further steps taken to concentrate the portfolio into a smaller number of high-conviction, high-performing businesses.... and to end the year with a more promising and rewarding portfolio balance than we started. And with that, I'd like to hand it back over to Georgi for his concluding remarks.
Thank you, Samuel. Let's now go to page 15 to take stock of our priorities and expectations for 2023. As we have said a few times by now, the environment in which we operate is highly challenging. I'm not satisfied or proud with how these challenges have impacted development of our Net Asset Value, and of course, our share price. But against that backdrop, we must differentiate between what we can control and what we cannot. We cannot control the market, but we can control how we work with our portfolio companies to make them more resilient. We cannot always control which companies asks for capital, but we can control who we allocate it to. And our main priority remains to increase our portfolio concentration, making sure we increase exposure to the high conviction businesses and decrease exposure to the poor performers.
This happens organically as the poor performers are struggling in this environment, and their value decreases in relation to the rest of the portfolio, but it's also done by disciplined and forward-leaning capital allocation. In our high conviction businesses, we're instigating transactions and actively working to accrete ownership, either through primary equity that allows our performing companies to accelerate and maintain growth, as you just heard Samuel explaining, or in secondary equity to increase our influence. All the while, we are unsentimental around our poor performing businesses and requires significant measures to change their trajectory for them to be investable. Valuations don't always reflect the underlying performance of companies, and in the face of significantly contracting multiples and a slowdown in growth, we have written down our private assets significantly since the peak in late 2021.
But even so, with today's reported valuations, we post an IRR of 22% in the group of companies which we have invested in since 2018 and onwards. We believe in our strategy, and we continue to execute on it with determination and grit. With our strong financial position, our active ownership model, and strictly disciplined capital allocation, we're making sure we're laying the foundation for long-term value creation. We're as ever grateful to the shareholders that support our continued rebalance of our trajectory for the coming years. And with that said, we're now ready to answer your questions. So operator, please open up for Q&A.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. This will take a few moments. Now we're going to take our first question from the line of David Johansson from Nordea. Your line is open. Please ask your question.
Hi, good morning. I have three questions. First, on your new company, Aira. Could you talk about this investment from a governance perspective, and given the role of one of your board members, couldn't there be a risk here? And, and second, what do you think the roadmap for this company is ahead? That would be the first one.
Okay. Hi, David. So firstly on the governance piece, as I said, during the presentation, any conflicted board members, in this case, it's both Harald and Sanna, they have not been able to read any documentations around our investment thesis, they've not been part of the decision-making process. Any follow-on investments in the future, potential ones, I would say- I should say, they will not be included in that discussion either. So I am 100% confident that we have no risk on the governance side. On the contrary, our close partnership with, I mean, the Swedish kind of venture arm as such, but also Vargas as a climate tech investor and how we can leverage that network internationally is extremely powerful for Kinnevik.
There are a bunch of international investors coming in now in Aira, and I'm sure that that company will also be able to attract more capital over time internationally, also based on our close relationship with them since before. So I have no kind of issues with the governance piece. Talking about their roadmap, they have communicated today that they have secured almost SEK 1 billion in this funding round, in a quite difficult climate. That in itself, I think, is an important milestone. They have acquired a factory that are able to produce heat pumps according to kind of a new way of working. So there will be fewer models, if you will, very different from the market today, that will be able to streamline everything from production to installation and sales.
So consumers will have a kind of simple, easy-to-understand value proposition, financed, which means that there is no kind of upfront cost, and you're able to reduce your heating cost and massively decrease your CO2 footprint. And we think that the vertical integration of Aira and their way to produce the heat pumps, sell the heat pumps, support the heat pumps, is actually what is needed to push this transformation.
Understood. And on VillageMD, you have talked about your potential exit plans for this company. Do you see the risk of that plan being delayed now with the weaker commentary from Walgreens? And maybe also who you think the potential buyers could be of your 2% stake here? Thank you.
... I think, the main delay, if you will, according to our early expectations, is probably the weak market overall. I mean, it's no, no secret that Village had ideas to go public, but in a market like this, it's quite difficult, right? And of course, a major acquisition or merger, like the one with Summit, also takes some times, before the company gets control and everything, and can produce kind of a joint new business plan that the market will appreciate. So I think from that perspective as well, there's a delay. We think a public, an IPO is kind of the main default exit path, if you will, but there could also be, you know, any type of seller that would like to have this exposure or even Walgreens.
We would discuss with potential buyers, obviously, but given our strong financial position, there is no rush.
Okay. Thank you. And just lastly, on InstaBee, one of your co-investors appeared to make a different judgment when valuing this company. It would be interesting to hear your view on the valuation difference, currently, and also a bit on the runway situation. I believe you've said previous, previously that InstaBee has runway through profitability in 2024. Is still this your view? Thank you.
Hey, David, it's Samuel. So with regards to our, our public co-investor, Creades, and where they end up in their valuation process, I mean, all I can say is we have our process. We don't make compromises on it. Clearly, we discuss developments in our investees with our co-investors and how these developments might affect how much a business is, is worth. But we don't set each other's valuations, nor do we align with them clearly before quarterly reports. So I just summarize it as we have a slightly different view on valuation in this specific quarter. It's probably within some form of margin of error. What I would say that we share is a long, long-term enthusiasm about, about the company and where it's headed, even though e-commerce is going through a rough patch.
With regards to the runway, I think we're gonna have to get back to you. Clearly, Q4, as I mentioned, is a massively important quarter, and we'll see how that pans out, and we'll take it from there.
Okay, thank you. That was all for me.
Thank you. Now I'm going to take our next question. The question comes from line of Derek Laliberte, from ABG Sundal Collier. Your line is open, please ask your question.
All right. Good morning, and thank you. So I'd like to follow up on VillageMD. We've seen a couple of larger downgrades from you of late there. What would you say from this point are the main risks to your valuation? Is it operational performance, or is there perhaps that Walgreens decides to do another sort of shift and operational shift, or could there potentially be a risk that you could be substantially diluted if the company needs more to raise more funds at some point and lower future, at lower valuation levels? Thank you.
Hey, Derek, it's Samuel. I think what's driving the valuation this quarter really is peer multiples and not much else. The company is to date performing in line with the expectations we reset in Q2, and you saw Walgreens guiding for the same expectations a week ago or two. I think what's gonna drive valuation from here on out is profitability, and we understand Walgreens and Village are very focused on that. How they reach that, it seems like we're looking at options to streamline the footprint. They're shutting down unprofitable markets and unprofitable regions. So I mean, we're not too worried here because you should also recognize that the Village and the healthcare segment is a very large part of Walgreens' equity story now.
It's really their growth engine, considering where their retail business is at. So it's about, you know, executing on the plan. We think risk is arguably lower in this sort of maturity level of a company, and it's just about execution really from here on out on the EBITDA.
Great. I understand. Okay, and then on Village also, then, on profitability, do you see a path forward for the company to strengthen the gross margin meaningfully in any way? And how would that go about?
Yeah, I think the gross margin and the contribution margin are sort of the key determinants for which markets are the most attractive. And those markets with the lowest gross margins and contribution margins, we would expect are sort of at the top of the cutting block, if you may. So we see very strong proof points in the stronger markets that this business is able to get to EBITDA profitability within a year, for sure.
Okay, great. And I was wondering if you broadly could speak on H2 Green Steel, what your thoughts are on the... There's been some like heavy criticism surrounding the timeline of the project being way too optimistic. And if delayed by a couple of years, so how would that impact financing and valuation from your perspective, broadly speaking?
Yes. Hi, Derek. So I mean, start by saying, yes, it's a very ambitious plan, for sure. We know that, being up and producing kind of green steel in 2025 and scale up, over the next coming years will mean that they are first in the world... to be able to produce green steel and with these volumes. As far as we look at this now, the business plan for Boden is fully funded, and that's what's most important. In this phase one, as I said, they will be able to produce 2.5 million tons of green steel, with the potential to double that capacity over time. That's the plan we are following.
I mean, these are important milestones, obviously, along the way, so we will be able to track it quarter by quarter now to see how they are progressing. But many of the binary risks that we saw when we did our initial ticket are now resolved. And so there is less about those kind of binary risk and more about the execution risk in building this plant.
Okay, cool. And finally, regarding your latest investment in Aira, I understand you're optimistic and obviously around this, but I mean, given the sort of more nearby, so to speak, investments in Aira and HTGS, follow on, should we read this as you're sort of struggling a bit to find attractive opportunities on the global market here, despite valuations having come down meaningfully, which should create opportunities, just simply so speaking?
Not at all, Derek. I mean, again, going back to Aira, first of all, these two investments are very, very different. They happen to be founded by the same people originally, which I think says something about the innovation we see right now in Sweden. And going outside our border, investors and climate tech companies in general, I think they are super impressed what's happening here. I think it's a bit a shame that we don't share that appreciation in Sweden, actually, but that's just a side note. When it comes to other opportunities, we looked at a number of businesses that are in the same space or sector as Aira, so basically residential heating or electrification.
So we looked at Enpal in Germany on solar side, we looked at EinsKommaFünf, we looked at a bunch of companies, and we decided not to proceed with those investments because of various reasons. And we believe that Aira is the one having the most ambitions, ambitious plan to actually do this fully vertically integrated, that was mentioning before, which we think is a prerequisite in order to really disrupt this market. So you can have a product that is streamlined not only to produce, but to sell and to maintain. And that's, that's why we took the decision to invest in Aira.
And lastly, we are also coming in early on in this business, which means we're backing the business from the start, and we can therefore build a different type of position when it comes to ownership and influence, compared to some of the other electrification companies we have looked at.
All right. I appreciate the clarity. Those are all my questions. Thanks.
Thanks, Derek.
Thank you. And now we're going to take our next question. Just give us a moment. And the next question comes from the line of Joachim Gunell from DNB Markets. Your line is open. Please ask your question.
Thank you, and good day. So two questions from me. As you likely plan to have a slightly higher investment pace than the SEK 5 billion you targeted earlier this year, can you just comment a bit on if this run rate also represent what you have intended for 2024? And basically, what you will have to see in terms of, say, improved exit conditions, et cetera, and also when, in order to maintain that momentum also into next year?
No, I think it's a relevant question. But again, we are also not, you know, we don't have a budget that we strictly have to follow. It could be SEK 4 billion of investment one year and SEK 6 billion another, right? So calendar years for us is just a measure when it comes to talking about our quarterly reports. We always assess what we have in our funnel. We look at those opportunities we mentioned, secondary opportunities in companies like Spring, all the time. And this year, I think in particularly, what comes really on top of the plan we have is really the Spring transaction in Q2. So that is what comes on top. And we did not see that we had to decrease our ambition and the other areas because of Spring.
If this will have an impact of 2024, we'll see. But right now, we are continually seeing that we will invest around SEK 5 billion a year.
Thank you. And, the final one, perhaps for, for Samuel. Can you provide any commentary about what share of the private portfolio is now profitable on either a net profit or cash flow basis? I know that you are searching for or prioritizing growth as long as unit economics are attractive, but any commentary there would be helpful.
Sure, Joachim. Actually, I think let's pause that question and get back to you in connection with the Q4 report, considering we're in budget season now, and I'll be able to give you a much more accurate estimate.
Understood. Thank you.
Thank you. Now we're going to take our next question. The next question comes from the line of Cino Ricciuti from Handelsbanken. Your line is open. Please ask your question.
... Hello, thanks for taking our questions. Just, just a follow-up on InstaBee. Do you feel that you need to take any actions now, or do you want to wait until after Q4?
What do you mean by actions?
Given the developments in the company, if you feel you need to do anything in the company.
Yeah, yeah. I mean, there's been a lot of things that have been done all the time, right? So-
Mm.
If we look at the integration of InstaBee and Budbee and Instabox, we're very happy with the cost decrease we've seen, and our thesis around combining these companies have proven to be correct. But what has changed is basically the weaker market. So the volumes that we and the company was hoping for in the beginning of the year has not been materialized because of the weak e-commerce market. That's the difference. So what has been done during this period is that the company has been even more kind of on top of the cost base, obviously, and accelerated kind of synergy streams between combining these two businesses. That has been taken, and I believe it's the correct thing.
Okay. And a question on secondary market transactions. You say that you're working on preemptive secondary opportunities. Has there been, like, a change in the past quarter on the opportunities on secondary markets, or is it about the same?
I think that when it comes to secondary opportunities, obviously, that it will be in a company not needing primary capital, right? So that's the first thing. So they need to be, you know, profitable or with a very strong cash balance. That's first to say. Secondly, to buy secondary, you know, shares in companies that are either profitable or have a very strong cash position and a proven business model and a great development is not easy. So you need to find sellers that think that the timing is right for them, either because they are very early-stage investors or because they need to free capital for other investments in their portfolio. So I think it's a lot of different kind of parameters we need to understand.
But when we say working on it, we are today assessing all the best-performing companies and looking at the cap tables to see if there is a chance for us to buy shares in those businesses. But it could also be an opportunity for us to do an investment with primary capital for these companies to actually further accelerate the growth and take market shares in difficult times like this, for long-term value creation. So there's a combination, but we would like to concentrate that on the companies where we have the highest conviction.
Gotcha. Just a final question on Oda. You made a small investment there and lifted the value. Could you just give a quick comment on the development of the company?
Sure. Yeah, as you say, we invested SEK 50-60 million in the quarter, and that adds to our carrying value. The underlying write-up is in the region of around 18-19%. And why is that, you ask? Well, look, Oda has had a very turbulent time behind them. They launched in Germany and Finland, and then they retreated back into Norway with an option to expand internationally again, but perhaps in a more asset-light way. So we've taken a lot of pain this year. I think with the write-up this quarter, we're still down around 40-45% year-to-date. What's happened now really is that we see them regaining their footing. The price war in Norway has abated. They're back to healthy, you know, 20% growth rates.
They're showing positive EBITDA certain months, thanks again to their world-leading fulfillment efficiency. And it's these developments that we believe warrants what's a pretty significant markup in percentage terms, this quarter.
Okay. That was all for me. Thanks for taking the questions.
Thank you. Now we're going to take our next question. The next question comes from the line of Oskar Lindström from Danske Bank. Your line is open. Please ask your question.
Good morning. Three questions from my side. The first two are around your investments and net debt level. If I understood you correctly, I mean, you had a goal of investing roughly SEK 5 billion this year, and then you said the Spring transaction is a little bit on top of that. Do you foresee sort of continuing investing at this pace? And does that mean that all else equal, you would be sort of... Your net cash cushion would be down to SEK 2 billion-SEK 3 billion by the, you know, by this time next year? That, that's my first question.
Okay. Hi, Oskar. So, I mean, it depends how you see it, right? First of all, we give guidance because we think that we have these type of opportunities in and outside our portfolio, right? But it also comes with exits. So this quarter, you see that we exit in Raisin, which is, again, a way for us to recycle and reallocate capital. So it doesn't mean that we have SEK 5 billion of net investments. We can actually recycle capital as well.
Do you foresee sort of doing significant exits that would, that would dent your, your SEK 5 billion roughly investment target?
I foresee us to do exits when we see that the timing is right. We have an attractive portfolio, and there are potential buyers, as we are looking for secondary transactions in some of our best performing companies, we would be able to sell as well. We have no kind of clear names to share if you understand, but we absolutely have that tool in the toolbox.
All right. My second question is more around sort of short-term and valuation. I mean, given your current share price right now, the market seems to be sort of applying a 60%-70% discount to your unlisted fair values. I mean, do you feel it's problematic to sort of trade cash for investments in unlisted assets at this type of a situation? Or what's your thinking around that and how it impacts valuation?
Hey, Oskar. Look, I think the way we're gonna try to address the discount is by improving how we communicate why we have valued our portfolio in a particular way. To be honest, I think we've improved quite a bit from where we're coming from, and we're gonna keep improving going forward as well. Clearly, we'll try to stick to a given format through a fiscal year, but come Q1 next year, hopefully, we can give the market and you guys some more sense and some more feel on how we reach our assessments, and that will help bring confidence back into those marks.
It doesn't at all affect our appetite in investing in our existing portfolio or in new private businesses, the fact that we're trading at a discount. That would be a bit odd.
Yeah. All right, thank you. And then my final question is around Aira. Could you please explain a little bit how this business is, you know, is it significantly different from NIBE, for example, here in Sweden? And was buying shares in NIBE ever an option?
Not really, Oskar, because the main difference here is that you have a full value chain, right? Production is one thing, right? But you have the sales model equally important, how you package these things, how you finance these products, and therefore how you convert sales into contracts. And once you have a customer onboarded, you will then have a relationship with them, like a recurring revenue over a long period of time. So the way you maintain these services and do maintenance and so forth is also extremely important, right? That is what Aira will provide, or is actually providing already in a few kind of test markets, which is very different from what we see today.
There are producers of heat pumps, yes, for sure. There are resellers, typically businesses around plumbing, and there are a lot of customers out there thinking that this is a very complicated decision to make, and are quite costly as well because we have to pay upfront for the solution. So Aira is nothing like that, but I think a new way of taking this value prop to the end customer.
But just to understand, it will have its own production of heat pumps?
That's correct.
but that factory-
We acquired a factory that will be used for producing heat pumps. Now, initially, it actually has started with OEM, so models from heat pumps manufacturers that you're able to add your technology. So there will be kind of measurement technology, as I said, maintenance technology and so forth, in the household. Those things can be added also in the OEM machines, but over time, they will include that in a fully integrated product.
Will this require more cash in order to set up the factory, or is it all set now?
That's, that's set with this funding, so they will be-
All right.
Able to produce heat pumps. They have the factory already, but with the funding now, which is SEK 1 billion, they will be able to produce heat pumps. What's important then to understand, which is very different from this climate case and some of the other capital-intensive businesses we have also backed, is that we can invest as they grow. That is more kind of traditional expansion capital that you will see in any type of fast-growing, more asset-light type of business. So the company has now a plan to producing, selling, heat pumps according to the, to the value prop, I just explained, and then if we want to further increase the ambition level going forward, then there might be a discussion on, on, on continuing to fund this company, as with many of our fast-growing consumer businesses.
Wonderful. Thank you. Those were my questions.
Thank you.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. Now we're going to take the next question. The question comes to line of Andreas Lundberg from SEB. Your line is open. Please ask your question.
Thank you and good morning, guys, Andreas with SEB. You're talking about you're not happy with the share price. Short question here: Why are you not taking action and buying back your own stock? Thank you.
Hi there. Firstly, because we don't have a mandate today, that's a discussion between, between, of course, our board and our shareholders. But even if we had a mandate, I think it's important to remember three things. So when we buy or when we invest in our companies, we can increase the influence, which I think in itself can be very positive if we believe we are a valued partner. Two, we change the concentration when we specifically invest in one business, as you saw in Samuel's slide, slides. And three, we can provide one specific company if there's a primary transaction with more capital to grow. Those are the three things you won't get if you're buying your own stock.
Having said that, with this type of discount we see today, we should, of course, you know, look at buying our own portfolio across the line versus doing a new investment. I think that's a job we need to do, so we understand the IR difference. But anyhow, that would entail a mandate, firstly.
Thank you.
Thank you. Now we're going to take our next question. The next question comes from line of Stefan Wård from Pareto Securities. Your line is open. Please ask your question.
Thank you. I have three areas I would like to ask about. One is the exit. I use the slide, the S-Curve slide that we had at the latest CMD update here in Stockholm, where Village, Job&Talent are in the sort of scale and profits area. I was under the impression that Cityblock might be there as well, but would you say Village, Job&Talent, and Cityblock are the most likely entities that you could exit over the next, say, 12-24 months?
Well, Stefan, I think that sort of assumes that it's easier selling a profitable business than an unprofitable business, and that might very well be true in this type of market. VillageMD, yes, probably the most mature business we have. Having said that, Job&Talent is actually profitable today. I mean, we're expecting 10%-15% cash flow margins next year from that business, and EBITDA a bit higher than that. And we really see no reason not to believe that Job&Talent could get to the level of the more sort of mature public peers that are doing, call it 20-25% EBITDA.
So it's not necessarily the case that, you know, just because Job&Talent is now more of a, an EBITDA sort of CAGR type of investment, that doesn't necessarily mean that it's sort of on the selling list. But as you say, it might make it slightly easier in this market. But you also see this quarter, we're taking around SEK 300 million out of Raisin, and that's further to the left on the S-Curve. So there can be transactions in that part of the spectrum as well.
Great, thanks. Another follow-up question on Village. Judging from the Walgreens report, I was under the impression that Village is quite close to EBITDA breakeven already, and that we could expect that early in 2024, both from the rapid improvement quarter-on-quarter, but also what they seem to or at least as I interpreted what they communicated for that company. Is that in line with your view, Samuel?
Yeah, definitely. Again, Walgreens fiscal year ends on 30th of September. So over the next 12 months, Walgreens are expecting Village to be breakeven on EBITDA basis, and we see no reason not to believe in that.
Okay, perfect. Thanks. Then I had a question on. Just to understand, when you do new investment like the one in H2 Green Steel, the way I read that, you did it at a valuation of SEK 30 billion, roughly, and my impression is that it. I just struggle with what sort of required return or what potential you see for that type of investment. The way I interpret what you said earlier, without being too specific, it looks like maybe like 3x return on that investment. Isn't that a little bit too low for still quite a high risk and a little bit peculiar investment in that sense? Could you help understanding on your required return assumptions for that?
I think the return assumptions would be higher than what you just mentioned. Generally, when we take that type of investment with a certain risk, we're looking for a higher reward, for sure. And I think now, looking at Green Steel with almost SEK 130 billion of contracted value, which is more than half of their annual production, we also know that the risk is significantly lower. So the question is when they can actually deliver green steel and being first in the world doing that in a market where there is a great demand and very, very low supply. That's kind of our idea here. So no, it's a relatively high risk project for sure, but it's also a relatively high reward when they succeed, I should say.
Hmm. Okay, thank you. And then my final question is on the 10% of the value of the unlisted portfolio that is not fully funded, and with the way I interpreted it, not fully funded and will run out of cash within the next 12 months. That's 10% of the book value that you used in the latest report. Is that the way we should think about the sort of risk exposure there?
That's correct, Stefan. To be clear, in terms of the capital need from us to sort of satisfy or call it pro rata or more in those coming funding events, then we're talking a few hundred million SEK. And out of those few hundred million, there's a lot of companies where we'd be more than happy to continue backing them. So just because, you know, you're at the last 12 months of your runway doesn't mean you're necessarily in our call it low conviction bucket.
Hmm. Okay. That's very helpful. Thanks a lot.
Thank you.
Thank you. The speakers are now for the questions. I would now like to hand the conference over to Georgi Ganev for any closing remarks.
Thank you very much for listening and for your question. And as a reminder, we will report our results for the fourth quarter and full year 2023 on the first of February, 2024. Thank you. Have a nice day. Bye-bye.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.