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Trusts’ unlisted headache

Biotech trust Trump benefit may be shortlived

By Dave Baxter, Investors’ Chronicle, November 17, 2022:

Investment trusts typically demonstrate their strength in a crisis. Closed-ended equity income funds shrugged off the dividend cuts of 2020 thanks to revenue reserves, while trusts’ investment framework means they have encountered none of the liquidity problems demonstrated so clearly by the Neil Woodford scandal.

That structure, well suited to hold illiquid investments, has helped investment trusts capitalise on growing demand for alternative assets, of which unlisted companies have formed a part. From an increased focus on private companies within Scottish Mortgage (SMT) and other Baillie Gifford vehicles to the rise of “growth capital” portfolios such as Chrysalis (CHRYS), trusts with exposure to unlisted businesses have proved popular. But a turn in market conditions reminds us that closed-ended portfolios with private holdings can still encounter challenges of their own.

The pain in the price

Chrysalis shareholders are nursing a paper loss of 76.4 per cent for the 12 months to 4 November, with the shares recently trading at an eye-watering 65.8 per cent discount to net asset value (NAV).. Elsewhere, Scottish Mortgage applied a swathe of writedowns to its unlisted holdings in the first half of 2022…

Surviving the storm

From Oxford Nanopore’s gene sequencing specialism to the attempts of wefox to disrupt the insurance industry, investors may still like the premise of such companies – and accept that some fail while a few become huge successes…

A trust’s ability to meet cash demands from its holdings could be crucial here, and in interim results published at the end of June the Chrysalis investment team stressed the need to “reserve sufficient capital to support the existing portfolio while this market dislocation remains” rather than, for example, conducting buybacks.

Portfolio restrictions may cause problems for some. Scottish Mortgage, for one, currently adheres to a 30 per cent limit on exposure to private companies at the time of purchase. QuotedData’s James Carthew points out that this exposure came to 31.8 per cent at the end of September – meaning the team could struggle to provide those private holdings with extra cash for now…

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