“SMT is very different from most VC investors in that its time horizon is extraordinarily long and so may not be under the same level of pressure that other VCs are. I think Scottish Mortgage is well suited to investing in such companies, given its resources and time horizon.
“My main concern about SMT would be that it is close to its unquoted limit and this might hamper its ability to make further follow-on investments.”
Gilligan’s view is that while Scottish Mortgage invests in unquoted companies, those tend to be quite mature businesses, rather than the very early-stage entities invested in by venture capital businesses, which makes the comparison between the two rather otiose.
Buying time
An issue for funds that invest in unquoted assets is that, if performance means the fund shrinks in size, then the unquoted assets become a larger proportion of the total assets of the trust and could breach the 30 per cent limit.
Despite those risks, the Scottish Mortgage board has been deliberately shrinking the size of the trust by buying back more than 36mn shares.
The board justifies this by saying that share buybacks benefit shareholders in the immediate term by narrowing the discount. This boosts the share price of the trust as it effectively creates a major buyer of the shares in the market.
This is relevant because the buybacks may soon have to stop since every time the trust shrinks in size, the proportion held in unquoted assets rises and increases the risk that the unquoted limit is exceeded.
In the event share buybacks have to stop, that would be expected to put downwards pressure on the share price.
Scottish Mortgage reached a size that meant it was in the portfolios of a huge array of clients. As the share price tumbles, where it is at present will either be viewed in future as an attractive entry point, or as another peak on the way down for a fund that has been one of the most popular, but also most innovative in the market in recent years.
David Thorpe is investment editor at FTAdviser
