Dear Investor,

 DMXASF’s NAV increased 5.3% (after fees and expenses) for the month of October, bouncing back from its 6.0% decline in September, and broadly in-line with the ASX 200 Total Return Index which recovered 6.0% this month.

Portfolio Commentary

The month was busy in markets and for us, with AGMs, quarterly updates, and management meetings, including at conferences. As usual across a fundamentally diverse portfolio of 40+ companies, we had a wide range of outcomes over the month. Software/IT names like Ansarada and Energy One each fell 9% – the latter being impacted by a very small capital raise, in which we participated, recently completed. Other detractors included DataDot and AF Legal which each fell 15-17%, while our small remaining position in troubled EML Payments was again halved.

Strong contributions from key holdings offset declines and drove a positive overall result for the month. ELMO Software rose 107% on the back of a private equity takeover offer. Note that while we did add to our holding at lower levels, much of our holding was purchased closer to the takeover price than to the company’s distressed recent lows. And we’re not happy with this takeover development – discussed below. Academies Australia rose 32% as market participants continue to anticipate a flood of returning overseas students. DDH, Smartpay and ReadyTech each rose 13-16%, with the latter too being subject to an announced private equity takeover approach subsequent to month-end. Perhaps in the context of private equity picking over high growth quality software names, each of AVA Group and Janison recovered 31-35%.

The DMXCP report highlights some of the current economic challenges many of our businesses are presently facing, and sets out our thoughts on these. Additionally, it includes detailed commentary on two commonly-held companies – Laserbond and AVA Group – all of which is included as an Appendix to this report.

Disappointing Takeover Developments

It’s human nature to feel good about receiving takeover offers at premium prices. The experienced dopamine surge overwhelms any sense of logic in terms of what the takeover means for that specific investment, as well as conceptually for a rationally-managed portfolio. We’ve recently received offers/expressions of interest for each of PTB Group, Nearmap, ELMO Software, and – in early November – ReadyTech and now PropTech. In the short term, these all result in a “better” NAV outcome than having not received the offers. But in the long-term, we’re losing quality investment opportunities and companies that have the potential to become multi-baggers. (Why else would private equity want them?!)

From a broader portfolio perspective, the dynamic is threatening and challenging. Consider the construction of a diverse portfolio/basket of say 20 companies that have that long-term ‘multi-bag’ potential, but perhaps also a high degree of risk on an individual stock basis. If private equity comes along and picks over this portfolio, conducting in-depth due diligence (deeper than passive external investors can go), and removes five of the best from that portfolio – yes – in the short term, one receives a nice premium. But over time, it becomes increasingly difficult for the remaining future winners to make up for the duds. In a sense, a form of Winner’s Curse: the best opportunities get taken away.

A further risk emerges from this: reinvestment. We’re not as concerned about this problem as we do have a 40+ portfolio of opportunities, and a strong pipeline of prospective opportunities. But it shouldn’t be minimised. For each PTB Group that leaves, we lose years of cumulative knowledge and experience of analysing the company, engaging with management, and assessing its potential. We then replace that holding with something that we inherently probably won’t be as intimate or confident in, and hence our risk profile increases. Again, this dynamic isn’t of major concern to us as we do have a broad portfolio and opportunity set. For someone running say a 10-stock portfolio, this would be very problematic.

As a final note on the subject, we’d probably call out boards and short-term oriented institutional investors who we feel could all probably have a bit more guts in these situations. Just because a takeover offer is “fair” from a theoretical valuation perspective, doesn’t mean boards and institutional investors should simply sell. We have no issue with management here. We get it from their perspective. First, they often get to roll their investment over into the private entity. ELMO’s CEO gets to hold on to his shares while if the offer is successful, we’ll be forced to sell ours! Second, they will likely be compensated well in their new private environment. Third, they don’t need to spend potentially 20%+ of their time on investor relations. And finally, they don’t have to worry about their share price and ability to raise capital if needed to accelerate the growth and development of their business. But boards: they represent us as shareholders and we think they should hold firmer in these situations. And large institutional investors: they’re too fixated on monthly reporting cycles, and relative performance, and value too highly the short-term win at the expense of long-term multi-bag potential.

In Summary

Despite any frustration or disappointment around potentially losing some of our holdings, we do have a broad and fundamentally diverse portfolio of highly prospective companies. We continue to diligently assess these, as well as new opportunities, both as part of our ongoing management process, as well as to selectively look to add to and establish positions if and as we are required to rotate capital from these takeover subjects.

If you’d like to discuss the portfolio or the potential to invest or add to an existing investment, please contact Michael any time at michael.haddad@dmxam.com.au or 02 80697965.

Thanks for your trust and support.