Royalty finance is a £50 billion industry in North America but it remains relatively new in the UK. This possibly gives Duke an advantage as the only UK-quoted royalty company.
It effectively provides capital to businesses with repayment terms of between 25 and 40 years, earning long-run interest fees. It also takes a share of revenue streams earned by portfolio companies.
But while the model may be interesting to many longer-term investors, it faced its share of challenges during this year’s Covid crunch. Duke agreed to provide financial aid to five of its portfolio companies through the pandemic. Yet the impact on Duke revenues was relatively modest, falling just 7.5% to £3.6 million for the six months to 30 September.
Four of those five portfolio firms have since bounced back into better financial health, while Duke elected to increase its equity stake in lieu of cash support in three. Duke expects to see enhanced cash income in future years from its increased equity share.
The company reduced operating costs and executed an exit of Dublin based B2B technology platform business Xtreampush which delivered an internal rate of return (IRR) of 22%, while Duke retains warrants over 3% of the company’s share capital.
Total income which includes a non-cash upward revaluation of the fair value of the portfolio increased 20% to £7.1 million. This reflects a recovery from the ‘significant’ write-downs that the company made in response to the pandemic.
Duke said that it had a ‘robust pipeline of new opportunities’ and is currently evaluating 14 potential investments worth a combined value of £65 million.
Operational cost savings and paying the dividend in shares means the ended the period with 40% more cash at £5.6 million resulting in net debt of £14 million.
Duke has available liquidity of around £20 million for new deployments and follow-on investments currently at a late stage of due diligence.