Schroder UK Public Private Trust (SUPP) has reported annual results for its financial year ending 31 December 2022.
- SUPP has reported a NAV total return of -40.7% and a share price return of -53.3%.
- SUPP’s negative returns were driven predominantly by its largest holding, Oxford Nanopore, whose share price fell by 64.6%, having IPOed earlier in the year. Other major detractors include Rutherford Health, which was completely written off, as well as SUPP’s holdings in IDEX Biometrics and Benevolent AI, whose share prices also fell by more then 60%. The general trend behind SUPP’s performance has been the powerful headwinds ‘growth’ stocks faced and the underperformance of the style globally over 2022.
- SUPP’s private equity holdings saw a decrease in value of 18.9%, contributing 8.6% to the full year decrease in NAV.
- Over the year six new private equity investments were made, one into a ‘growth’ company, Back Market, and five into ‘life sciences’ companies.
- The board has introduced a continuation vote, which will be held during the 2025 AGM, and will give shareholders the opportunity to review the performance of the manager over the five years since its appointment. Shareholders will be given the opportunity to vote on whether SUPP should continue in its present form.
- The board has also introduced a share buyback policy, spending an amount equating to 25% of all net cash realisations from the portfolio inherited from the previous portfolio manager received between now and the 2025 Annual General Meeting. Given the uncertainty in the nominal amount this will equal, the board has also signalled its intention to purchase shares equal to at least 5% of SUPP’s capital in the 2023 and 2024 calendar years.
- SUPP ended its financial year on a 45.8% discount, and currently trades on a 53.4% discount. Over the financial year the board repurchased 4.4m shares, equalling £0.8m.
- The board has taken steps to change SUPP’s name to Schroders Capital Global Innovation Trust plc to more accurately reflect the changes in investment objective.
- On 30 September 2022 SUPP changed its valuation agency from Link Fund Solutions to Schroder Unit Trusts Limited. Link had failed to correctly value one of SUPP’s holdings earlier in the year, leading to a c.£21.8m overstatement in SUPP’s NAV.
SUPP’s investment management team commented:
“Within the context of a challenging backdrop of higher interest rates, inflation and volatile markets, as well as a continued overhang of inherited holdings, we are not complacent about the challenges that lie ahead. As outlined above, while we have made significant progress in transforming the portfolio into one which is gradually reflecting the opportunity set we see, it would be wrong to suggest that the job is anywhere near complete. It is a work in progress. We know significant further efforts will be required to fully capture the opportunity, to make further realisations, and to fully restore the reputation of the Company in the eyes of the investing public.
“Nevertheless, the Company is now on a path that the broader Schroders Capital business has been following successfully for twenty-five years, with the Company’s extended geographical focus allowing us to capitalise on our global network and invest in the most innovative venture, growth and life science opportunities, when viewed on a risk return basis, no matter where they are in the world.
“We are supportive of the Board’s proposals described in the Chair’s Statement, including the introduction of a continuation vote at the 2025 Annual General Meeting, giving shareholders the opportunity to review our performance over the five years since we took over management. We believe the Company is well placed to deliver on these proposals and generate long-term capital growth by making new and follow-on investments with more than £16.1m in cash and £83.7m in public equity investments as at 31 December 2022, supported by a healthy pipeline of global venture/growth stage companies. We know where it is the path is heading, and we are confident that the journey represents a compelling long-term growth opportunity. Now it is time for us to deliver that opportunity.”
[QD comment: “It continues to be a painful ride for SUPP’s shareholders, having once been subject to the poor allocation choices of Neil Woodford, they are now subject to woes of growth stock investing. While the Schroder team do have a monumental task laid at their feet, untangling the mess that was SUPP’s legacy portfolio, this is their third year at the helm so the grace period is coming to a close.
The direction of SUPP’s NAV return is not entirely unexpected, given the battering growth stocks have taken, but the magnitude of SUPP’s NAV decline certainly is. SUPP’s NAV has fallen by more than twice that of the MSCI ACWI Growth Index over 2022. A widening discount is expected, but private equity investing is meant to offer a more stable NAV. It is noteworthy that dedicated private equity strategies are reporting far shallower NAV declines, if any at all. Oakley Capital, for example, has reported a 24% increase in its NAV over the same period and, with SUPP having increased its unlisted target to 75% of its NAV, these sorts of comparisons are increasingly justified.
It seems that SUPP has had a particularly hard time in 2022, combining painful NAV losses with a sharp discount widening. Under the circumstances, it is encouraging that the board is not resting on its laurels. It has taken the initiative to hold a continuation vote and to be more disciplined in its share buyback scheme. The continuation vote should help to focus the managers’ attention as it gives them a possible deadline to demonstrate that they can generate value for shareholders from this strategy. The removal of Link as valuer was expected. We think that the valuation error with SUPP’s largest holding, Benevolent AI, that was revealed last September (it failed to use the publicly quoted price of the company and, instead, used its purchase price when calculating the NAV for five months), was the last straw (various question marks arose regarding Link’s valuation choices during the period when Woodford Investment Management was at the helm). However, we would like to have seen the trust retain an external valuer, as it is a basic tenant of good governance. We imagine that cost-savings for the trust can be achieved by bringing this more in house but, given the existing uncertainty regarding private equity valuations in the current climate, and SUPP’s difficult history, we think that some might see this as a retrograde step.
However, if the team can stay the course long enough to see the headwinds behind growth investing reserve, there is considerable potential upside, both from a recovery in the NAV and a narrowing of the discount. These could generate some eye watering returns. Nonetheless, it may also take considerable courage to ‘buy the dip’ in this case, as the threat of liquidation could also see further NAV declines.“]