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Baillie Gifford
Updated 16 Jun 2023
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Disclaimer

This is a non-independent marketing communication commissioned by Baillie Gifford. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.

From Barcelona to Paris, from Amsterdam to Vilnius, Europe has no shortage of fantastic small- to mid-cap businesses, often in industrial or business-to-business areas.

Defining success as growing as big as US’s Amazon or China’s Tencent can mean missing out on what’s happening lower down the value spectrum. It’s an exciting place for the specialist active investor, but to focus on its rich opportunities, you need the right frame of mind. Here are three companies that prove the point.

CRISPR Therapeutics

This Swiss-based firm is rooted in a 2011 discovery by co-founder Emmanuelle Charpentier. She shared the 2020 Nobel Prize in Chemistry with Jennifer Doudna after they discovered a way to adapt the body’s immune defence system to ‘edit’ faulty genes that cause disease.

The technique is called CRISPR-Cas9. It is the first to permanently change the gene, making further treatments unnecessary. It’s faster, cheaper, more accurate and more efficient than previous gene therapies.

The implications are massive. CRISPR Therapeutics has developed a treatment for sickle cell disease, which affects millions worldwide. Its genetic makeup is well understood, making it a good proving ground. Patient trials look hopeful.

The firm could apply CRISPR-Cas9 to many other conditions. And each success will earn money to finance proof-of-concept work on more complex afflictions.

At a time when investors have been reluctant to back early-stage companies, CRISPR Therapeutics’ nearly $2bn of cash and lack of debt put it in a strong position. Sickle cell disease is just the beginning. The firm aims to provide treatments for cancers and diabetes in collaboration with global pharmaceutical giants such as Bayer and Vertex.

The impressive chief executive, Samarth Kulkarni has studied successful and unsuccessful biotech companies of the past. He knows how to avoid focusing too much on science and forgetting to build a long-lasting commercial business.

Topicus.com

Netherlands-based Topicus.com builds, manages and buys companies that provide specialist software to other businesses and the public sector.

These are the companies that develop workplace systems for specific purposes, from managing the availability of hospital beds or doctors’ appointments to streamlining the accounting processes of spas, golf clubs or beauty salons.

Topicus acquires these firms, sharpens their operations, cuts spending and reaps recurring revenues. The approach has proved remarkably successful and scalable in North America for Canada’s Constellation Software, from which the European Topicus was spun out and merged with another Dutch company.

The method is just getting going in Europe, a potentially more exciting growth market.

Why? Because in the US, the leading golf club management software, for example, will already be installed in clubhouses across the country. In Europe, a different product might lead in each market, catering for local languages and nuances.

That means a lot more companies and a lot more scope for deals.

So far, Topicus’s Netherlands-based operation covers 23 sectors containing 136 companies, with a combined total of 44,500 customers.

The firm is hoovering up these small operations and plugging them into a much bigger network, helped by the influence of Constellation, as a major shareholder.

tonies

For all the PlayStations and Xboxes targeted at older kids, their younger siblings still play with toys their parents loved.

Two German dads set up tonies after becoming disillusioned with what was on offer. They came up with a soft, unbreakable cubic speaker containing a Bluetooth receiver.

When you put a character model – also known as a Tonie – on the device, it plays stories, lullabies or other music. The founders created figurines of their own, others came from licensing deals, including the Gruffalo, Peppa Pig and Barbie.

There’s no screen, intentionally. It’s all about engaging and giving kids control. They can change the track and raise or lower the volume. It’s simple enough for toddlers.

Businesswise, it’s also a nice ‘razor-and-razorblade’ model, where you sell a piece of hardware and then get recurring revenue from consumable items.

By April 2022, the company had sold over 3.5 million boxes and 40 million figurines. Everyone buying the speakers buys multiple Tonies – there’s one sold every two seconds. As kids get older, they want different content, and the list of figures and content keeps growing, which keeps them engaged.

There are all sorts of ways this business could evolve, perhaps a licensing model whereby any toy could be ‘tonified’ with an embedded chip to trigger content. The company is still young, and not much needs to go right for it to double in value over the next five years. The firm initially targeted German-speaking parts of Europe but has since ventured further afield. The US is the huge opportunity, and tonies’ management is making good progress in that market.

Chris Davies
Joint Manager, Baillie Gifford European Growth Trust

Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the FCA.

A Key Information Document is available by visiting bailliegifford.com

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