VGI Partners Global Investments : Investor Letter - Year to June 2022

For personal use only

VGI Partners

Global Investments Limited

ABN 91 619 660 721

39 Phillip Street

Sydney NSW 2000 Australia T. [phone] www.vgipartners.com/lics/vg1

26 July 2022

ASX Market Announcements Office

ASX Limited

Exchange Centre

20 Bridge Street

Sydney NSW 2000

BY ELECTRONIC LODGEMENT

VG1 Investor Letter - Year to 30 June 2022

VGI Partners Global Investments Limited (ASX:VG1) is pleased to make available the enclosed Investor Letter.

The letter provides details on the performance of VG1 for the twelve months ended 30 June 2022 and commentary on current positioning.

Authorised for release by:

Ian Cameron, Company Secretary

Investor contact information:

Ingrid Groer, CFA

VGI Partners Global Investments Limited

Phone: [phone] (inside Australia) [phone] (outside Australia)

Email: [e-mail]

onlyInvestor Letter

26 July 2022

useD ar Fellow Investors,

For the twelve months ended 30 June 2022 (FY22), VGI Partners Global Investments Limited (ASX:VG1) generated a net return of -27.3%.1 This has been a humbling year for performance and represents the largest decline the portfolio has incurred since its inception. Two-thirds of this decline can be attributed to three long positions in the portfolio: Pinterest, Amazon and Qualtrics. We discuss these positions in

more detail throughout the letter. Pleasingly, the portfolio's short positions were strong positive personalcontributors, generating substantial returns while also helping to insulate the long investments from the

broader market sell-off.

Over the last six to twelve months we have seen a dramatic recalibration in the price of risk. The primary question now is whether the current inflationary environment will prove persistent or transitory as demand destruction kicks in. This will have significant implications for discount rates and, therefore, valuation levels of all assets. Central banks are laser-focused on forcing inflation lower - this is well flagged and is now market consensus. The key question in our mind is how much further monetary tightening can be tolerated before highly indebted Western governments and their consumers begin to reel from the pain. We remain mentally prepared for a scenario where rapid rate rises are just as quickly unwound and Quantitative Easing is re-instated to support recessed economies and fragile consumers.

Already we have seen the air come out of many bubbles like crypto and SPACs and all before the Fed even withdraws excess liquidity from the system via Quantitative Tightening. There still remain some pockets that have been slow to adjust to the new reality - one being the venture capital space where we have only seen a handful of markdowns relative to what one would expect. We have already seen meaningful valuation multiple reductions across many sectors, however the risk now is we start to see corporate earnings come under pressure as demand destruction begins to take effect. Some of the aggregate labor

Fordata, at least in the US, has already started to decelerate and anecdotally we are seeing a broad range of c mpanies, especially technology firms, become more cost vigilant to preserve profitability.

Despite this backdrop, the indiscriminate equity market sell-off has created some compelling opportunities. Over the last six months we have initiated several new positions - many of which are digitally-enabled businesses that possess increasing competitive advantages, impressive growth runways and are trading at attractive valuations.

We strongly believe that structural growth is going to become increasingly scarce and hence remain focused on owning businesses where we have high confidence in their competitive moat, industry structure, addressable opportunity and pathway for multi-year growth in free cashflow.

1 Past performance is not a reliable indicator of future performance and should not be relied upon as an indication of the future performance of any fund or strategy.

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July 2022 Investor Letter

The current environment has drastically cut the flow of equity funding to listed and unlisted corporates, especially to digital businesses which show little evidence of compelling unit economics despite reaching scale (for example food delivery, Buy-Now-Pay-Later and property iBuying) and those competing with onlyestablished incumbents (such as digital payments). It follows that the competitive environment is dramatically improving for many established digitally-enabled businesses and it is the well-funded incumbents with attractive unit economics and high switching costs that should thrive. Within the software space we are likely to see a divergence between 'must-haves' and 'nice-to-haves'. This is one of the areas

where we have been focusing our efforts and believe a number of portfolio holdings fit this criterion.

In summary, we continue to focus our efforts on owning attractively priced, high-quality businesses that are competitively well positioned and operating in industries exposed to long-term growth. We also continue to concentrate capital in our highest conviction ideas - as such our Top 10 holdings represent useapproximately 72% of total portfolio long capital. Our largest holdings are largely unchanged although we have made some adjustments over the past six months, including the divestment of Yakult, some new

additions (such as Deutsche Boerse) as well as beginning to re-build our holding in Palantir.

Merger with Regal Funds Management

Before we discuss the portfolio in detail, we would like to make a few comments about the recent merger

of VGI Partners with Regal Funds Management.

personalAt the end of March, we were pleased to inform investors and shareholders that VGI Partners and Regal Funds Management had entered into a Merger Implementation Deed, combining two well-established

i vestment management businesses and creating a market-leading manager of alternative investment strategies. Following receipt of the required regulatory and shareholder approvals in May, the merger completed on 3 June 2022, with the new combined entity renamed 'Regal Partners'.

We are pleased to report the merger has progressed well. The VGI Partners investment team continues to manage the VG1 portfolio, while the opportunities for VGI to leverage Regal Funds Management's existing corporate platform and operating infrastructure are well underway. The key expected benefits of the combination have quickly begun to materialise, most notably in a reduction in time spent by the VGI Pa tners investment team on non-investment related activities, alongside continued opportunities to access Regal's specialist investment expertise and operating capabilities.

Both VGI Partners and Regal share very similar philosophies around alignment with our investors, with key investment staff retaining meaningful shareholdings in the merged entity and substantial personal investments in the underlying funds and listed investment vehicles, including VG1.

The manager has also been supportive of recent initiatives taken by the VG1 Board and the VG1 Board's Forst ong focus on capital management. This includes having a defined dividend policy and VG1's policy to target a fully franked dividend yield of 4% p.a. is a good example of this. VG1 has paid two fully franked

dividends during FY22 (5.5c in September 2021 and 4.5c in April 2022).

In addition, a second element of capital management includes the provision of an active on-market share buy-back program whenever shares are trading at a discount to Net Tangible Assets. This not only provides greater on-market liquidity but can also be highly accretive for shareholders. Many VG1 shareholders would be aware that VG1 launched a buy-back program in August 2020. Post the merger completing in early June 2022, the pace of the buy-back has materially increased. Over 36m shares, or approximately 9% of VG1's shares, have been bought back since the program began two years ago.

We thank investors and shareholders for their kind messages of support through the merger process and look forward to providing more updates through future briefings and letters.

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Source: VGI Partners.

July 2022 Investor Letter

Portfolio Update

Below we provide an update on our key holdings, the reasons we own them and why we are excited about onlyeach investment.

Current Portfolio

The table below shows our Top 10 holdings as at 30 June 2022. Consistent with our concentrated approach, the Top 10 holdings account for 72% of total capital.

		Top 10 Long Investments	% of Portfolio
use	as at 30 June 2022
Amazon.com Inc.	13%
CME Group Inc.	11%
Mastercard Inc.	9%
Cie Financière Richemont SA	9%
Olympus Corporation	7%
		SAP SE	6%
		Française des Jeux (FDJ)	5%
		Pinterest Inc.	4%
personal		Twitter Inc.	4%
	Deutsche Boerse AG	3%

Amazon (~13% weighting)

Amazon remains our largest holding - we are more excited about our investment in Amazon today than we have been in a long time.

Amazon continues to grow the depth and width of the moats around its key business operations being 1) e-commerce - Amazon remains the undisputed leader in global e-commerce, 2) cloud computing - Amazon Web Services (AWS) is the number one provider of cloud computing services globally and 3) advertising - Amazon Advertising is now the 3rd largest digital advertising platform in the world.

ForAmazon's share price has declined in line with the broader market sell-off along with concerns over the gr wth outlook for the e-commerce business, and the impact on profitability associated with excess fulfillment and transportation capacity alongside inflationary pressures. We view the e-commerce concerns as short-term headwinds which the business will navigate over the next six to twelve months. Most importantly, we believe the company's vertically integrated position in e-commerce is now materially stronger and scalable given the growth in its fulfillment and logistics footprint (Amazon Logistics already exceeds the capabilities of FedEx) and its Amazon Prime membership base (over 200m subscribers which generate $35bn in high margin subscription revenue) which acts as a powerful flywheel for the e- commerce and advertising business. Eventually we think the Prime membership base will be leveraged by new business operations that offer strong growth potential such as the Satellite Broadband business (Kuiper Systems) and Amazon Health.

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July 2022 Investor Letter

In our view, Amazon's current share price is easily underpinned by AWS alone. We have this view for two main reasons: 1) we are still in the early stages of cloud adoption and 2) AWS continues to gain share in the most important cloud service, Database Management Systems (DBMS), which represents circa 40%

onlyof AWS revenues. With respect to cloud adoption, readers may be surprised to learn that Delta Airlines, one of the major US airlines, only this month selected AWS as its preferred cloud provider after a nearly 18-month process of modernising the company's applications to migrate them to the public cloud. AWS CEO Adam Selipsky said last month that only 10% of Information Technology has shifted to the cloud today and AWS could become the largest business at Amazon. DBMS revenues continue to shift to the cl ud from on-premise, and AWS market share has grown from 9% in 2017 to 24% in 2021 (according to Gartner), rapidly displacing the incumbent Oracle, a trend which we expect to continue. AWS has numerous other ecosystem services beyond DBMS, and collectively, we expect AWS revenue growth to exceed current market expectations over the next several years.

useWe think the new CEO Andy Jassy is a fanatic and his primary financial objective, as stated in each result release, remains the same as when Jeff Bezos was CEO - "Optimise Free Cash flow Per Share!" We believe Amazon's free cash flow will be optimised primarily by increasing operating profit dollars and effective management of working capital and capital expenditures. We expect operating profit dollars to increase as price and efficiency initiatives start to offset inflation, labor productivity improves, and excess logistics capacity is reduced through offering Amazon Freight and Buy with Prime services - as a result

Amazon is beginning to monetise the excess capacity in its fulfillment and transportation network, thereby personalturning an operating expense into a new revenue stream, similar to what it did with AWS.

We also believe that capital expenditures for Amazon's fulfillment and transportation network have peaked and will decrease substantially over the coming years. Whilst we anticipate elevated capital expenditures for AWS medium-term to support robust growth, we see decreasing capital intensity for AWS over the long term, as Amazon continues to make more efficient use of its hardware and the sales mix within AWS shifts towards software and services.

CME (~11% weighting)

CME is a business we have owned in our global strategy since 2008 and has grown into the portfolio's s cond largest position on the back of additional recent purchases and relative share price performance.

The CME business is one we have written about on numerous occasions and, as many of you would know, o erates the most important derivatives exchange platform in the world, consisting of the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (NYMEX). On top of this, CME also owns other key assets related to FX Trading & Infrastructure and a

Forst ategic shareholding in Standard & Poor's (S&P) Index business.

A key profit driver for CME is its interest rate franchise which includes derivatives covering the entire US yield curve. The below chart highlights the growth (or lack there-of) in daily interest rate volumes from pre- Global Financial Crisis (GFC), to today.

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