QD view – Private Companies Dominate in 2021
It might be too late to start an email with ‘Happy New Year’ now but coming to your inboxes early next week will be our annual review of the investment trust world in 2021.
We won’t give you too many spoilers, but it would be rude not to share a few snippets early. It was a fantastic year against all odds as the pandemic continued to change our lives, inflation fears grew, and supply chain woes hit almost every industry.
The headline figure is that the investment companies sector expanded by a staggering £40bn over 2021 – double the amount seen over 2020. 16 new trusts came to market (the last time we saw double digit IPOs was in 2018) and together these launches brought in £4bn of new money, plus a further £1.1bn later in the year from those that have clearly hit the ground running.
But the cream of the crop was Baillie Gifford’s Schiehallion Fund which returned 103% for investors in share price terms. It also saw the biggest change in its discount/premium rating, with its 11.1% premium as at the end of 2020, rising to a phenomenal 59.3% premium by the end of 2021.
A shift of sentiment towards growth stocks means that this figure has since fallen, but the premium remains high at 33.1%. Of course, trading on a premium means the trust looks expensive relative to the valuation of its underlying assets, but investors are still keen to get a slice of the action, perhaps believing that the NAV is understated. The manager, Peter Singlehurst, has shared his excitement on the current portfolio and opportunities waiting in the pipeline.
He highlighted in the trust’s latest interims the profound shift that has been taking place in capital markets; that is companies are choosing to stay private for longer. The average age of a tech company at initial public offering has doubled over the past 20 years and is now 11 years.
Many exciting growth companies such as Schiehallion top ten constituents Bytedance and Affirm Holdings remain privately owned despite being valued in the tens of billions of dollars and so the opportunity set for the fund is huge. According to CB Insights, 936 private companies are unicorns (valued at $1bn or more) and range across all sorts of industries from artificial intelligence to e-commerce and fintech.
Private companies have long been a part of Baillie Gifford funds’ success stories – Scottish Mortgage can attribute much of its recent triumph to its private holdings – and they are not the only asset management house to feel that the sector, while it comes with risks, appears to be gold dust at the moment.
Schiehallion sits in the AIC’s growth capital sector, whose members usually have more than 80% of their portfolio invested in unquoted companies, but unlike private equity funds, do not tend to take controlling stakes in their holdings. The sector delivered a median share price return of 6.8% over 2021 and not one member fell into the red.
As for the private equity sector itself, it’s safe to say it was one of the shining stars of 2021. It delivered a median share price return of 34% – second only to the Property – UK logistics sector – and the top private equity performer, BMO Private Equity, delivered an impressive 66.2% return. The sector also grew the most in market cap value over the year, by a huge £6.3bn to £19.9bn.
If there was one good thing that came out of the pandemic for the investment world, it’s the increased interest in and awareness of markets from both first-time and more experienced investors. One of the strongest themes has been the desire to help rebuild the economy and invest in start-ups and the like, and if 2021’s numbers are anything to go by, this is where the magic appears to be happening.
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