This quarter hasn’t really been a “quarter” for us given the fund launched on 10th May so we really had only 6 weeks to the end of June. On the macro level, it’s been interesting to say the least. Investors adjusted to the probabilities of a soft landing, a hard landing and no landing, whipsawing as the data transpired on when and how quickly global policy rates would begin their descent, all while volatile data points kept central banks from acting.

The US is a clear case in point - markets came into the year expecting six cuts in 2024 whereas futures pricing now suggests one or two before the end of the year. Not only was this a large and quick repricing but equity markets continued their upwards march, apart from a brief correction in April, due to a combination of strong economic data, sticky inflation readings and hawkish Fed speak. This volatility is set to continue in the US particularly given the upcoming presidential election.

For Minotaur, we’re mostly steering clear of the US given valuations appear stretched. We prefer markets that offer “convexity”, with the potential for positive returns and controlled risk of losses. Europe appears to be one place you can get this. Companies in the MSCI Europe index derive ~25% of their revenue from the U.S. and ~30% from emerging markets. This means investors potentially benefit from hotter growth in either region at cheaper valuations than the S&P 500 and lower volatility compared with emerging market stocks. Eurozone equities are trading at a 36% discount to their US peers, vs. a 21% discount on average in the past 20 years, or 2.3x standard deviations below the long-run average.

A country that we continue to highlight as a land of opportunity is Japan. The resurgent Japanese stock market saw the Nikkei 225 Index finally surpass its 1989 peak this year. A pick-up in Japanese inflation has allowed companies to lift prices, boosting revenue and earnings, while rising wage costs look to be offset by a greater consumer propensity to spend. Increased government spending and export growth also underpin the case for Japanese equities. We remain big fans of the region seeing positive earnings revisions, continuing corporate governance reform and capital efficiency.

On thematics, AI, energy and decarbonisation, and healthcare continue to dominate and what’s fascinating is how these themes intersect and overlap. Companies are still focused on using AI for operational efficiencies rather than driving top-line. A Morgan Stanley survey of CIOs found that AI remains a top priority but adoption is still early days with 26% of CIOs expecting first projects to enter production after 2025. The increased AI adoption has led to a focus on energy - semiconductors were seen as the key bottleneck six months ago but energy and electrical components have since emerged as critical bottlenecks too. Utilities and electrical equipment companies are being reviewed as key enablers. AI is also expected to account for a third of data centre power by 2025 with a growing need for transmission, energy storage and renewables. AI applications in healthcare are expected to drive company performance through R&D productivity, innovation and drug discovery, and efficiency gains.

Two of our top five positions are discussed later on and demonstrate how these macro and thematic perspectives dovetail. At a high level, Italian subsea cable operator, Prysmian, reflects our constructive view on Europe and decarbonisation while Japanese V-tuber company, COVER corp, is a Minotaur case study in finding unique opportunities in Japan. Despite the top-down underpinnings, both stocks offer idiosyncratic opportunities which also speaks to why they are core holdings.

Software and technology is at the heart of everything we do here at Minotaur. Traditional funds management has been run pretty much the same way for 2-3 decades whilst the pace of technological change is accelerating. Artificial Intelligence (AI) and Large Language Models (LLMs) are making it possible for code to understand natural language in an unprecedented way. Minotaur takes all the processes that your traditional fund manager usually implements but we supercharge them by making them software-first, resulting in better and more efficient investment outcomes. In our view, not using GenerativeAI in your process is analogous to modelling a company’s valuation with a pen and paper rather than using Excel.

We use this tech at every step - from helping us interrogate theses for idea generation, to helping triage ideas to aiding our portfolio construction by being more thoughtful about how adding a company might impact our exposure to certain risk parameters.

To really bring this to light, we do the following:

• Idea generation: We feed in ~5,000 news articles a day to LLMs and have engineered proprietary prompts that we use for these LLMs to deliver us a list of stock ideas and a small paragraph as to why they have been selected, according to a certain thesis we hold as a fund manager. There are ~60,000 listed companies in the world and even 10,000 if you limit it to billion-dollar plus market caps. This screens the global equity universe for us. We call these “idea funnels”.
• Idea triage: We have coded our software to come up with an idea score for the stock which is based on how much it would contribute to the diversification and lowering of risk in our portfolio. This gives us a number which we use to rank the stocks in these idea funnels, helping us solve the prioritisation problem faced by fund managers. Because we are properly scanning the whole world for ideas we think we can find the 10x’ers in the world that will contribute to a meaningfully diversified portfolio.
• Snapshot: Our software generates an automated ~2,000 word report on any given stock detailing what the company does, its revenue and earnings drivers, what makes it interesting, the bull and the bear case and its capacity to double in 3 years or 10x in 10 years. We do this through a series of prompts interrogating specific data sources that we have fed into the LLMs. This cuts down the amount of time we might have otherwise wasted looking at stocks that won’t generate the sort of returns we desire.
• Portfolio construction: Our software shows us in real-time what adding, increasing, decreasing or exiting any given stock would do to our portfolio in terms of our risk metrics (volatility and potential drawdowns) and factor exposures. e.g. We can increase our top holding from say 5% to 10% and see how that impacts our portfolio’s parametric Value at Risk and portfolio factors like growth, momentum, and size.

We are able to do this because of the uniqueness of our fund managers. Thomas is, as far as we know, the only fundamental fund manager in Australia with strong capability to code and develop software. He has built our proprietary software system since the company was founded in November last year. Armina has seen firsthand how the founders of Australia’s best technology companies think and act, having managed money for one of the Atlassian founders. Thomas and Armina also have a depth of networks in the start-up and technology space, across both entrepreneurs and investors, that is unrivalled by other fund managers.

This distinct capability also means we can iterate as the technology develops. Each quarter we hope to tell you about how we are innovating our own processes. This quarter, we've optimised our AI infrastructure by transitioning to more advanced language models. For our large-scale analyses, we switched from GPT-4 to GPT-4o, halving our costs while doubling processing speed. For simpler tasks, we moved from GPT-3.5 to GPT-4o-mini, achieving a 70% cost reduction while improving output quality. These advancements enhance our ability to efficiently source ideas and conduct preliminary research, supporting our core fundamental analysis. We are not dissimilar to other companies which, when surveyed, have reported:

• A 55% productivity increase for developers using AI coding tools;
• A 14% average increase in productivity for roles using AI assistants;
• A 40% decrease in time taken; and
• An 18% increase in output quality for knowledge workers.

In fact, we believe our productivity gain is higher because of a smaller, more focused team with the ability to implement straightaway. The use of software contributes to a ~5x efficiency gain per FTE for Minotaur Capital.

It’s not just AI but tech more broadly. This quarter we have made the following improvements by adding the below capabilities to our software, Taurient:

• An area where we can explore thematics and not just single stocks
• The ability to find IR websites and automatically identity financially relevant documents
• The ability to scrape subscribers for YouTube channels relevant to our stock holdings
• The ability to search our trove of news articles that we are collecting every day from RSS feeds and scrapers for news that's specific to a certain topic or sub-topic for a stock or generally
• The ability to automatically recalculate NAV in real-time

It is well established that the world must undergo an energy transition particularly given the pace of technological development. There is a lot of talk about energy sources but less focus traditionally on how we transmit energy. Cables facilitate underground transmission of energy from one place to another. They are the highways of energy and yet investors don’t seem to naturally think about them as beneficiaries of the energy transition. Prysmian does the whole end-to-end transmission of electricity from the point of generation to transmission (high voltage) to distribution (medium voltage) to end users (low voltage).

The high voltage (HV) space in particular requires highly technical nous and experience. There are only three companies in the world that can do subsea high voltage direct current (HVDC) cables and they are all listed - Prysmian, NKT and Nexans. These 3 companies hold an 86% combined share of the HV market and there are high barriers to entry due to:

• The need for a track record of projects with similar technologies
• High capex related to factories and vessels
• Technology risk - especially with the market shifting into new technologies (e.g. >220kV HVDC)
• Risk aversion of the major customers in the space - the Transmission and Distribution Operators' (TSO and DSO) - to wanting to work with new players. They have a high preference towards established operators for critical infrastructure projects for obvious reasons.

Prysmian is an example of a company that showcases the power of combining our software, Taurient, with our own insights. We manually added the stock to our “Idea Triage” funnel but Taurient’s idea score put it at the top of the list. Given the combination of the AI saying we should prioritise work on it and us having prior, deep knowledge and unique insights on the company, adding it to the portfolio made a lot of sense.

Prysmian came to our attention from Arms' time at Grok, the private investment firm of Atlassian co-founder Mike Cannon-Brookes. One of Grok’s most ambitious undertakings is Suncable, a project which aims to export solar energy from the Northern Territory to Singapore via a >4,000km HVDC subsea cable. As part of that DD Arms did a thorough analysis of Prysmian and saw firsthand the structural imbalance in HV due to ongoing capacity shortages, forcing transmission and distribution operators to book production slots through large tenders now for installations planned in 2026-31. The structural demand/supply imbalance equates to five years' worth of backlog for all three key players. We like Prysmian over the other two as our DD suggested that the company has the best technology and experience and also has funding support from its cash-generative telco business which is important given the highly capital intensive nature of HVDC subsea cable projects. Pure-play competitor, NKT, tends to need to tap the markets on a fairly regular basis.

Although it was subsea cables that brought Prysmian to our attention, the company benefits in all areas of its transmission business given the material acceleration we have seen in power demand driven by electrification trends such as EVs and charging, heat pumps and data centres. Utilities in Europe and the US drastically need to update the power grids, with significant queues building to connect new renewable energy sources to the grid and an ageing infrastructure that will struggle to cope with load growth. The major EU utilities are already targeting 10%+ growth in regulated assets and this does not factor in the needs from data centres and AI. The US is also struggling with a fragmented grid across 13 regions and 3 separate networks. Over $15B of funds and grants for transmission and the grid have been set aside to support projects in the US.

Prysmian is the only listed cable manufacturer with high exposure to the US market and especially medium and high voltage transmission. The group has key relationships with large Utility companies. In particular, there is significant potential for E3X technology and advanced conductors, singled out among grid enhancing technologies by the regulator and seeing strong momentum with several recent partnerships announced. Prysmian announced an EBITDA target for Power Grids of €410m by 2027 but we think this is undercooked, in line with the company’s traditional conservatism.

These favourable market dynamics combined with a knowledge of the skill level and acumen that was apparent in the company’s high and middle levels of management piqued our interest. Financial analysis showing the strength of the company’s balance sheet and FCFs, led to viewing Prysmian as a high quality stock and one where we feel that the Projects/High voltage business is highly underappreciated by the market.

Prysmian has a medium-term EBITDA target of €2B in 2027 from ~€1.5B in 2022. Given the market dynamics, we believe the company has the potential to generate closer to €3B. This is supported by the fact that the company has historically been conservative with earnings estimates by orders of magnitude and we see this continuing. On a conservative EBITDA multiple (assuming no re-rating in the stock) as well as some probability-weights on the bull and bear-case scenarios, we believe there is at least 30% upside on the stock with limited downside risk.

A blue-haired shark girl, a time-traveling detective, and a rapping reaper walk into a bar. This isn't the setup for a joke – it's a glimpse into the world of VTubers managed by COVER Corporation. In just five years, COVER has grown from A$1 million to A$300 million in revenue through this innovative entertainment concept. VTubers, or Virtual YouTubers, are content creators who use digital avatars to livestream content, and COVER has become one of the most prominent agencies in this space.

To understand COVER Corp's business model, think of it as a blend of K-pop talent management and WWE character creation. Like K-pop agencies, COVER Corp (under the brand Hololive) will scout, train, and manage digital stars. Like WWE's approach, each VTuber is developed with a distinct backstory, personality, and visual design, creating a diverse roster of digital entertainers. This commitment to character depth, akin to wrestling's concept of 'kayfabe', enhances each VTuber's brand appeal and merchandising potential.

The economics of talent-based businesses hinge on a crucial factor: the ability to add value to the talent they represent. This principle applies across various industries, from funds management to entertainment, where organisations must demonstrate their worth to both attract and retain top performers. The decision for talent to align with an organisation rather than remain independent is predicated on the belief that the whole will be greater than the sum of its parts. When analysing talent-based businesses like COVER Corp, it's essential to scrutinise how the company enhances its talent's potential. Central to this value proposition is the management team, whose vision and approach can make or break a talent-based enterprise.

COVER Corp exemplifies this principle through CEO Motoaki "Yagoo" Tanigo, a critical factor in the company's meteoric rise. In an industry where executives often become lightning rods for controversy, Yagoo has become a beloved figure among both talent and fans. His leadership style, which prioritises respect for creators and balances corporate interests with artistic freedom, has resulted in exceptional talent retention and growth. At the recent Anime Expo in Los Angeles, Yagoo's appearance sparked fan frenzy typically reserved for the talent themselves – a stark contrast to how executives in traditional media companies are often perceived.

This leadership approach is driving COVER Corp's ability to attract and rapidly grow new talent. The recent launch of COVER Corp's new HoloJustice group provides a compelling example. One performer saw her YouTube subscriber count grow from 12,000 under a different agency to 240,000 under Hololive in just a few days. This significant audience growth demonstrates the company's ability to create and promote digital talent effectively. As a result, COVER Corp has become highly attractive to aspiring VTubers, fielding thousands of applications from independent creators each year.

While some may view VTubing as a passing trend, it's worth considering the trajectory of game streaming. A decade ago, watching others play video games online seemed niche to many. Today, Twitch boasts 240 million monthly active users. VTubing appears to be following a similar path to wider acceptance. The avatar is simply a medium; the real draw is the entertainer's ability to engage an audience for extended periods, much like any successful streamer.

The appeal of VTubing for the talent goes beyond novelty. It's making content creation more accessible in intriguing ways. For female streamers who often face unwarranted focus on their appearance, virtual avatars shift attention to personality and content. Additionally, the digital anonymity offers protection against some of the internet's less savoury elements.

This growing acceptance is evident in COVER Corp's global expansion. While VTubing originated in Japan, it's rapidly gaining traction worldwide. The recent launch of HoloJustice, COVER Corp's first majority-European group with three European members and one American, showcases their commitment to expanding beyond their Asian stronghold. This strategic move into Western markets demonstrates COVER Corp's ambition to become a truly global entertainment company, positioning them to capture a larger share of the growing VTuber audience across diverse regions and cultures.

This global expansion is just one facet of COVER Corp's multi-dimensional growth strategy. The company's value proposition extends far beyond initial talent acquisition and audience growth, as evidenced by the dramatic increase in revenue per VTuber from A$400,000 in March 2020 to A$3.5 million in March 2024. This impressive growth stems from successful diversification beyond streaming, which now accounts for only 25% of revenue, down from 40%. Concerts (19%), merchandising (41%), and licensing (15%) have become significant revenue drivers. Take Mori Calliope, the rapping reaper VTuber, as an example of this diversification. While she engages in traditional streaming activities like playing Red Dead Redemption 2, her success extends far beyond that. Mori has achieved billboard-charting albums and recently provided the end credits song for Warner Bros' new anime, Suicide Squad Isekai. These accomplishments showcase how COVER Corp develops talent across multiple revenue streams. Notably, although the talent behind Mori also performs under her own name, she has found greater commercial success with her Hololive persona, underscoring the value COVER Corp can add to its VTubers' careers.

COVER Corp Revenue Growth (JPY Millions)

We believe COVER Corp's growth story has more chapters to unfold. The company is guiding to 22% net profit growth this year (to March 2025), but we believe this will prove conservative. Trading at a forward P/E of 23x, the stock appears attractively priced given its growth profile and market position.

The world of VTubing might seem unconventional at first glance, but then again, so did the idea of social media or streaming video games not too long ago. With its strong management, innovative business model, and position at the forefront of a growing trend, we believe COVER Corp represents a compelling investment opportunity in the future of digital entertainment.

To bolster our conviction, we've enhanced Taurient to monitor engagement metrics across COVER Corp's entire VTuber roster. This capability provides us with data-driven insights that go beyond traditional financial reporting, allowing us to accurately assess the company's growth trajectory and the success of their talent development strategies in real-time.

The top 5 holdings of the Minotaur portfolio are a Polish games developer, a Singaporean bank, a French construction materials company and the two stocks we dived into in this quarterly, being an Italian subsea cable operator and a Japanese Vtubing company. We think an investor would be hard-pressed to see the same level of breadth in any other global equities fund in Australia. But we don’t compromise depth, for breadth. In fact, the increase in our efficiency driven by AI still allows us to go deep. We think improvements will only continue with our fund focused on continual learning and adaptation through AI and technology. As Plato said, “The direction in which education starts a man will determine his future in life.” We hope that this aim for continual improvement in breadth and depth will augur well for the future of our fund.