Schroder British Opportunities continues to edge forward

Schroder British opportunities (SBO) has announced its annual results for the year ended 31 March 2024, during which its NAV per share increased by 2.5% from 107.32p to 110.05p, which follows an increase in the previous year of 3.1% and 12.3% since inception. Its chairman, Neil England, comments that this steady growth is despite portfolio valuations being affected by market sentiment towards growth companies and, in the case of the private portfolio, lower multiples in the comparator groups used. He adds that the UK equity market, and investment companies in particular, remain largely out of favour with investors and UK pension funds and that growth companies requiring cash to fuel that growth saw their ratings suffer as interest rates increased. That has been sustained in many cases, despite forecasts of lower rates as UK inflation falls back into a lower and more normal range. Gains in the private portfolio were offset by losses in the listed equities portfolio.

Private portfolio

SBO says that its private equity portfolio has continued to perform well, in part due to its manager’s focus on growth capital and buyout areas of the market in contrast to venture capital and pre-IPO areas, which have been more negatively impacted by rising inflation and interest rates. It adds that, of its nine private investments as at 31 March 2024, seven of these businesses are exceeding or in line with performance expectations and that, in aggregate, these companies are demonstrating strong sales growth (24% LTM sale growth) and robust margins (46% EBITDA margin), whilst being valued at a discount to public comparables. SBO’s private portfolio represented 65% of its NAV as at 31 March 2024 and produced a fair value gain of 6.3% over the year.

Public portfolio

Overall, SBO’s public equity holdings detracted from its performance despite being helped by a take-over bid for City Pub Group by Young & Co’s Brewery, which represents the sixth quoted portfolio company to be bid for since SBO’s inception. SBO’s chairman believes that not only does this endorse the strength and potential of some of its portfolio holdings but also demonstrates external interest in growing UK companies. SBO’s public portfolio represented 23.9% of the company’s NAV as at 31 March 2024 and produced a fair value loss of 2.3% over the year.

Discount management

SBO’s discount narrowed during the year from 36.2% to 27.8%. The board is confident in the valuations process and says that there is little logic to this discount other than to cite market sentiment to private equity investment companies generally. It adds that the discount does not reflect the aggregate operational performance of the company’s unquoted holdings since inception. While the board does consider buybacks, it has to balance this against hold appropriate reserves to fund potential follow-on investments in the private portfolio. It says that given the current pipeline, particularly from companies that want to stay private for longer and taking into consideration the current size of the company, it has chosen not to buy back shares throughout the year.

Board recognises size issue

SBO launched in 2020 when the IPO market was very challenging and this impacted the amount raised. The board says that it is considering several options to increase the size of the company to increase its appeal to wealth managers and to improve its liquidity.

Outlook

SBO’s chairman comments that the current economic environment continues to be challenging with many company valuations trading at close to historic lows. The UK stock market represents one of the cheapest equity markets in the world and the UK mid-cap sector looks particularly attractive in his view. Interest rates remain stubbornly high for now but UK inflation numbers are better which suggests a more positive medium-term outlook for growth companies. The current portfolio of predominantly UK companies is growing strongly, with the majority in line or ahead of expectations.