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The Schiehallion Fund exceeds launch investment target with 87% of capital deployed at January year-end

During The Schiehallion Fund’s (MNTN’s) financial year to 31 January 2021, its share price and NAV returned 48.1% and 42.3%. Over the period from 27 March 2019 (launch date) to 31 January 2021, MNTN’s share price and NAV returned 80.0% and 47.5%.

When the MNTN was launched, raising gross proceeds of US$477m, its board said it would be reasonable to expect that the company would be two-thirds invested within the first two years. MNTN noted that it has exceeded that milestone, with 87.0% of shareholders’ funds invested in 27 private companies and two private companies that are now public, as at the end of January 2021.

Commentary from manager Peter Singlehurst

“Within the portfolio we have already seen some of the benefits of being early. Companies such as Tempus, Oscar, Scopely, ByteDance, SpaceX, among others, have all been growing quickly and as a result earned the right to raise capital at higher valuations. Some holdings exposed to the travel industry, such as Away and FlixMobility, have been negatively impacted by Covid-19. We have now seen our first holdings enter the daunting world of the public markets. Since the Interim Report both Airbnb and Affirm have successfully listed on Nasdaq. We believe both are exceptional companies with world class management teams and deserve the warm reception they have received from the public markets. It is now that we will be tested on whether we can live up to the patience we speak of.

The ability and desire to continue to own businesses for the long term into the public markets is sadly an uncommon attribute in the world of private company investing. And yet it is this attribute which has enabled us to access businesses on behalf of shareholders. Founders and management teams are looking for partners who can provide continuity of ownership into the public markets. Or to put it another way, they are looking for investors whose time horizons are aligned with their own. We are in a fortunate enough position to be such an investor.

When we look at the history of venture backed businesses, we are often surprised that the dogma of the ‘exit’ post IPO persists. There is no truly great company that has come out of the Venture Capital ecosystem where it would have been the right decision to sell within the first year, or even five years, of a listing. If you had been lucky enough to be a Venture investor in Amazon and sold shares a year after the IPO you would have got about US$7 per share (adjusted for subsequent stock splits). Through much of the subsequent years you might have been kicking yourself if you hadn’t sold at the peak of the dotcom boom two years later where perfect timing could have netted you about US$100 per share. But if you had been truly patient and held on until today, your shares would be worth over US$3,000 each, a gain of more than 400x.

Amazon is of course an outlier, but it is outliers we seek. Finding them is hard, but not impossible. Sadly, owning such a business and enjoying the returns within a traditional ten-year limited life structure is impossible. The permanent life of Scheihallion doesn’t make finding businesses like Amazon any easier. However, it does mean that if and when we do find the next Amazon, there is nothing to stop us, other than our poor judgement, from owning the business over the necessary time frame to truly enjoy the benefits of exponential growth and value creation.

This is why you should not expect us to rush out and sell Schiehallion’s holdings in Affirm and Airbnb the day after the lock ups expire. Both companies will have downs as well as ups as public companies, but so long as we believe there is upside for shareholders we will continue to invest.

Since the interim update we have invested in five new companies; Nuro, Chime, Honor, Jiangxiaobai, and Northvolt. Two of these, Nuro and Northvolt sit at the confluence of forces changing how things and people move. Nuro is a robotics company working on autonomous vehicles customised for delivering goods. Meanwhile, Northvolt is a Swedish battery manufacturer driving down the cost of energy storage and providing much needed supply to the European automotive industry as it begins the inevitable transition to electric drivetrains. What these businesses share is an ability to reduce the marginal cost of moving goods and people, just as the internet reduced the marginal cost of moving information. We have a small but growing hunch that if the first two decades of this millennium were characterised by reducing the cost and friction of the movement of information, then the next 20 years could be defined by changes in how goods and people move.

The last six months has been a fruitful time for building our stakes in businesses, already in the portfolio, that we see delivering and thus want to own more of as our conviction grows. Since the interim period we put additional capital into Oscar, Affirm (both privately and publicly), Scopely, ByteDance, Tempus, SpaceX, and Graphcore. The follow-on investment in ByteDance is particularly noteworthy. Baillie Gifford was one of only a handful of investors globally able to take part in the most recent round. As is well reported, TikTok (which ByteDance owns) has been entangled in a geopolitical web of late, but this does not dim our enthusiasm for the business. We increased our holding and it is now amongst the largest positions in Schiehallion.

As of the year end Schiehallion was 87% invested, providing limited capacity for new investments. Shareholders should therefore expect only a small number of new investments within the existing portfolio. At some point there will be a natural recycling within the portfolio as we realise gains from companies that have maximised their potential. Given our investment horizon is five to ten years and beyond, shareholders should be surprised if this recycling was happening in a meaningful way after just two years. This is one of the reasons the proposed C-share issuance is so important. It will enable shareholders to benefit from the continued flow of opportunities and bridge the portfolio to the point where there might be a more natural recycling of capital from successful investments into new opportunities.”

Seeking fresh capital

With MNTN now substantially invested, it is seeking to raise additional capital, by way of a C share issue. On 18 March 2021, in connection with this proposed capital raising, shareholders approved the issuance of up to 700m C shares on a non-pre-emptive basis. This authority expires on 31 December 2021. Further details about the proposed fundraising will be disclosed in a prospectus to be issued by the company around the end of March.

MNTN: The Schiehallion Fund exceeds launch investment target with 87% of capital deployed at January year-end.

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