The Scottish Mortgage board says it frequently questions Baillie Gifford about the level of resource available to the trust.
Stages of development
Another of Bhide’s concerns is about Scottish Mortgage’s increased propensity to invest in unquoted companies. At present, the trust can invest up to 30 per cent of its assets in this space.
Because unquoted companies are not priced daily on stock markets, some investors fear that when the assets are revalued in portfolios, the valuations will be much lower and that will lead to future, further declines in the net asset values of the trust.
Numis director of investment companies research Ewan Lovett-Turner believes that many of these fears are overblown. He says: “[The] frequency of revaluations is the most active/frequent of anyone in the industry. They are not venture capital majority stakes, requiring large operational teams, operational influence, board seats, etc — which requires large teams.
“Instead, they invest in minority stakes in established businesses that happen to still [be] private. To do this I think they have appropriate resources.”
But Investec director of investment company research Alan Brierley, who placed a “sell” recommendation on Scottish Mortgage shares in January, says nothing has changed.
“We have previously expressed concern about the valuation lag, the disconnect that exists between late-stage VC investments and listed companies with similar higher-growth characteristics, and the post-IPO performance of recently listed VC-backed companies,” he says.
“From November 2021 peaks to end-2022, the Pitchbook VC-Backed IPO index and Baillie Gifford Long Term Global Growth fund (a proxy for listed exceptional global growth) fell 65 per cent and 57.2 per cent respectively. While the Morningstar Pitchbook Global Unicorn index was off just 1.5 per cent, many valuations are still anchored at last fundraising rounds.
“Ultimately, though, there will be price discovery, and for many this may be brutal. So far this has been limited to companies that have run out of cash, but the reduction in valuations may gather momentum as audited year-end numbers begin to feed through for those funds where there is a valuation lag.”
Baillie Gifford says it has an independent valuation process for the unquoted holdings.
Mick Gilligan runs the model portfolio service at Killik & Co, and at present his clients tend to have about 1 per cent in Scottish Mortgage.
He says: “I think they have enough capacity. A big part of the rationale for investing in private companies is that more companies are staying private for longer and, in many cases, it is the only way to get exposure to some really disruptive businesses with large addressable end markets.
