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A tough 2020 for Schroder UK Public Private

Schroder UK Public Private (SUPP) released its annual results to 31 December 2020, with its NAV dropping by 29.2%. The shares were down 19.2%.

In her last statement as chair of SUPP, the retiring Susan Searle noted: “The valuation at 31 December 2020 is clearly disappointing. During the year, the company’s quoted holdings saw a decline in value of 42.4% contributing 12.7% to the reduction in NAV. The largest single negative contributor to performance was Rutherford Health, which is listed but valued by the AIFM as an illiquid investment as it takes into account the lack of market trading in the shares. Overall, the company’s unquoted holdings saw a decline in value of 15.6% contributing 14.8% to the full-year reduction in NAV. In Q4, the change in valuation comprised one significant positive contributor, reflecting the sale of Kymab to Sanofi, and several other smaller negative revaluations.

The disappointment of some of the valuation writedowns in the portfolio should not detract from the progress which has been made by Schroders during the year under review. Two key objectives for Schroders for 2020 were outlined in the 2019 Annual Report. These were ensuring that the key value-creating portfolio companies received the appropriate level of strategic support to maximize the company’s investment return, and proactively seeking to pay down the debt obligations.

Both objectives were designed to place the company in a position to rebalance the sector and company weightings over the longer term. A significant amount of groundwork was laid during the year and some evidence of this has been seen in a number of positive announcements made since the year-end.”

Some promising post-period progress towards valuation events for several companies

SUPP’s management report included the following: “As evidenced in this report, 2020 has been another challenging year for the company on several fronts. However, within the constraints of the situation inherited at the time of our appointment, our focus as manager has remained resolutely on addressing the key objectives for 2020; (1) ensuring that the key value-creating portfolio companies receive the appropriate level of strategic support to maximize the company’s investment return, and (2) seeking proactively to pay down the debt obligations. Both objectives were designed to place the Company in a position to rebalance the sector and company weightings over the longer term. This process was made harder by external factors that created one of the most challenging market periods we have experienced in recent history. However, we feel that significant progress has been made over the last twelve months to transition the company into a position of strength.

On the first of these two objectives, we are pleased with the progress achieved with several companies progressing towards important valuation creation events, both within the 2020 financial year but most notably post period-end. Key developments include the sale of Kymab to Sanofi, Inivata’s strategic partnership and investment from NeoGenomics with an option to buy the company outright, the IPO of Immunocore on Nasdaq and Oxford Nanopore’s intention to float. These developments improve both the outlook for the Company’s NAV and the liquidity profile of the portfolio going forward. We also navigated the period within the financial constraints inherited, honouring the company’s existing financial commitments and selectively investing in new follow-on opportunities.

Secondly, on the paydown of the debt, we are excited to report that following the completion of both the Rosetta basket and Kymab sales generating gross proceeds of over £115 million, the company is now in a net cash position having fully repaid its outstanding debt which stood at £113 million as of 31 December 2019. This represents a tremendous leap forward in the repositioning of the fund which will enable us to support the strongest opportunities within the company’s existing portfolio, whilst at the same time being able to invest into new high quality, high conviction opportunities, both public and private.

Our current aim is to invest in two new private companies and two new public companies during 2021, and we have started curating an exciting pipeline of innovative UK businesses for consideration. In this regard, our strategy will remain true to the Company’s origins, leveraging our extensive sourcing capabilities in the public and private markets, but complemented by Schroder’s structure of strict governance and control processes.

The core tenets of the company’s strategy will continue to be:

(1)      Focused on high-quality UK innovation. We will be looking to invest in world-class innovative businesses founded in the UK. These will be companies with disruptive innovations, significant growth potential, high-quality management teams and supported by highly credible co-investors. The significant weighting to UK companies will continue to be a core strength given the opportunity set that we see in the market.

(2)      Mindful of diversification by stage and sector. We will look to build out a balanced portfolio of venture, growth, and public companies across our core sectors. While we expect the existing portfolio to naturally transition from private to public investments, new private investments in the portfolio will typically be targeted at the ‘growth’ stage where the companies are already generating revenue with proven unit economics and scaling towards profitability. For the avoidance of doubt, we will not be looking to target early-revenue companies that require numerous rounds of further financing with a particular reliance on any one shareholder.

(3)      Prudent debt utilisation. We intend to use the Company’s debt facility prudently to improve operational efficiency and minimise return dilution. The facility will only be used on a short-term basis to fund expenses and investments, but only when there is visibility of paying down the incremental amount within twelve months from future realisations (based on a probability-weighted assessment). Lastly, it is the Company’s intention to keep the loan balance below 10% of gross asset value. At the time of writing, the Company’s revolving credit facility can provide additional liquidity of up to £55m in addition to the company’s cash on hand.

Other areas of the strategy that we intend to consider in more depth in consultation with the Board include opportunities at the pre-IPO, cross-over stage between public and private markets, where the company is uniquely positioned given its hybrid investment strategy and more active implementation of sustainability as a tool to enhance value creation within the portfolio. As referenced in the Approach to Sustainability section of this report, we see active incorporation of ESG and alignment with the UN SDGs as an important part of the investment process and something that we will target when making new investments. We also intend to engage more deeply with portfolio companies to ensure that environmental, social and governance matters remain front of mind and help provide guidance on strategy and reporting in this regard.”

SUPP: A tough 2020 for Schroder UK Public Private

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