Schroder UK Public Private says that over the course of 2021, it generated an NAV total return of 37.4%. However, the share price rose by just 6.8%. The board is considering its options to narrow the discount, including using share buybacks. More cash is available to fund these now – gearing was cut over the year from 31.6% to 0.7%, but buybacks will still be weighed against potential returns from investment opportunities.
Change of strategy
The company has traditionally focused its attention on venture and growth stage UK companies and continues to see significant opportunity in the UK in terms of quantum and quality of investments. However, the board is proposing to remove this restriction to enable the manager to invest into the best companies, when viewed on a risk/return basis, no matter where such companies are located in the world.
Part of the argument is that the manager has “unparalleled” access to a global universe of top-quality opportunities – which is a bold claim, that the board bases on Schroder’s own network and via its relationships with many of the world’s leading venture capital firms as a result of its 25 year history of investing in venture capital funds in the US, Europe and Asia.
Subject to shareholder approval, the company plans to consider global investment opportunities in private equity that, typically have the potential to deliver greater than 2x returns over the medium term, broadening its existing investment focus beyond UK companies.
The statement says that the manager has a track record of delivering 3.0x net realised multiple on direct/co-investments within its global portfolios (as of Q3 2021).
The company would continue to focus on direct investment and co-investments in the venture/growth space. The reasoning is that smaller, earlier stage businesses typically have the potential to outperform larger more established companies, exhibiting superior growth and seeing a larger potential uplift in valuation multiples as they scale.
The strategy will be to make future investments in such businesses alongside a strong syndicate of experienced, credible co-investors or investor syndicates, and target those businesses with clear future funding requirements to reach profitability.
The company will target around 75% of the portfolio to be in private equity, with around 25% in public equities. The majority of public holdings are expected to be a consequence of private holdings going on to IPO.
A resolution has been included in the notice of the Annual General Meeting to seek shareholder approval for the change.
[This is interesting because we had assumed, wrongly, that the direction of travel was a merger with Schroder British Opportunities and a continuing focus on the UK. UK businesses are still in need of growth capital, but perhaps the board feels that the UK focus is contributing towards the discount.]
Extracts from the managers’ report
Highlights –
- Performance primarily driven by the successful initial public offering (“IPO”) of Oxford Nanopore Technologies (“ONT”) which resulted in a fair value gain of £104.6 million.
- Considerable progress achieved in repositioning the portfolio with £166.0 million of realisations enabling full repayment of the bank loan1.
- Completed first seven new investments since our appointment as Portfolio Manager, totalling £51.7 million – four new private equity investments (£29.9 million) and three new public equity investments (£21.8 million).
During the period, the number and composition of holdings was impacted by the following events:
- Immunocore’s completed initial public offering.
- Sale of four holdings and three partial holdings to Rosetta Capital.
- Sale of Kymab (with the remaining contingent payments still held in the portfolio).
- Sale of Inivata to NeoGenomics Inc.
- Sale of Kuur Therapeutics to Athenex, Inc.
- Sale of Netscientific plc.
- New investment in Tessian.
- New investment in Johnson Matthey.
- New investment in Revolut.
- New investment in Spirent Communications.
- New investment in Petershill Partners.
- ONT’s completed IPO.
- New investment in Attest Technologies Ltd .
- New investment in Ada Health GmbH.
- Sale of Athenex.
- Rutherford Health de-listed on 24 January 2022
As of 31 December 2021, the company ended the period with 35 holdings including 11 quoted holdings and 24 unquoted holdings.
SUPP : Schroder UK Public Private considers going global