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Schroder British Opportunities held back by listed holdings

Schroder British Opportunities (SBO) has published its report and accounts for the nine-months ended 31 March 2022 (SBO has shortened this accounting period to nine months to better align its reporting with periodic valuations of underlying private equity investments going forward) and, during the period, SBO’s NAV produced a return of -4.0%. SBO’s chairman, Neil England, says that whilst the trust’s private equity holdings demonstrated strong resilience, this was offset by weakness in its public equity holdings. SBO’s share price produced a disappointing return of -20.0%, as the discount significantly widened during the period from 3.2% at the beginning of the period to 19.3% at 31 March 2022.

Proposed change of investment policy

At SBO’s IPO in December 2020, SBO’s board indicated in its investment policy that it would aim to achieve approximately 50% of public equity investments and approximately 50% of private equity investments, once fully invested. SBO also set an investment restriction stating that private equity investments could account for no more than 60% of its gross asset value at the time of commitment. SBO says that, following its commitment to the latest private investment, and taking into account existing commitments, the allocation to private equity is now fully utilised.

SBO’s board says that, after careful consideration and consultation with shareholders, given the strong pipeline of investment opportunities identified by its portfolio managers, it is proposing to remove the 50:50 allocation guidance and the private equity limit. It says that this will give SBO’s portfolio managers more flexibility to take advantage of further private equity opportunities should they deem them attractive when weighed against opportunities available in public markets and vice versa. The investment restriction that SBO’s portfolio must contain a minimum of 30 holdings is unchanged and it is the Board and the Portfolio Managers’ intention that the portfolio will continue to contain a diverse range of public and private equity investments.

Portfolio manager’s summary

The manager has provided the following key highlights of its review:

  • The Company reported a net asset value (“NAV”) of 104.14p per share as of 31 March 2022, a decrease of 4.0% relative to the NAV as of 30 June 2021 (108.44p per share).
  • In a challenging environment, the private equity holdings have continued to perform strongly throughout the period. In this regard, the revaluation of our largest investment, Rapyd, and the overall resilience of the private equity holdings has been particularly pleasing. Meanwhile, turbulent markets and a progressively challenging economic environment largely contributed to weakness of the public equity holdings, with Victorian Plumbing and Trustpilot weighing on returns despite strong share price performance from positions in Watches of Switzerland and Blue Prism over the period.
  • We continued to seek to invest fresh equity, where attractive, into small to mid-sized British businesses, facilitating and driving their growth. We have now made a total of 15 primary equity investments (IPOs, rights issues or equity placings) since the Company’s launch.
  • We continued to seek out attractive businesses that we believe exhibit strong growth trajectories and added five new holdings to the portfolio over the period (LendInvest, MaxCyte, Velocys, On The Beach Group and Sosandar), while we exited two, and another was disposed of following a take-over.
  • As at 31 March 2022, 83% of net assets were invested across public equities and private equities, of which 35% of net assets were invested in private companies.
  • At the period end, the Company held a total of 37 holdings (six of which were private investments), all of which were made from a bottom-up, rather than top-down approach to investing. With that said, the portfolio was skewed towards investments in the IT Services and Commercial Services & Supplies sectors. After the end of the period, further progress with the portfolio was made, including three new exciting private equity investments in CFC, Mintec and Pirum. At the time of writing, the Company has reached its target allocation of c.50% per cent private equity investments, while delivering this within the deployment timeline of 6 to 24 months from IPO.
  • While the current economic environment may be challenging, we believe this is one of the most opportune times to be an investor, where falling valuations for many businesses are removed from their underlying positive fundamentals.

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