You wait two decades for a new investment trust from popular Scottish fund managers Baillie Gifford, then you get two within a year. After the launch in March 2018 of Baillie Gifford US Growth, we now have Schiehallion Fund. It’s wholly focused on investing in private companies capable of ‘transformational growth’.
Unfortunately, for mere mortal investors like you and me, the launch of this fund is for institutions only. There’s a minimum investment size of $5m.
Schiehallion Fund should join the market on 27th March with a placing price of $1 per share. It needs to raise at least $250m for the launch to proceed. However, it could raise up to $600m if there is sufficient appetite for the shares (update: on 22 March Schiehallion said the placing had raised $477m).
According to Citywire, a spokesman for Baillie Gifford reckons us private investors should look at its other trusts:
“At this stage, private investors are much better off looking for this exposure via Scottish Mortgage (which can hold up to 25% in private companies), Edinburgh Worldwide (EWI) (15%) and Baillie Gifford US Growth Trust (USA) (50%), all of which have holdings of this type, are available on platforms, have ongoing liquidity and are cheaper”.
That said, all three trusts are considerably below these investment limits right now at 16%, 4%, and 9% respectively.
I’m not entirely sure how individual brokers handle these things, but if you did want to buy this fund you may be asked to class yourself as a sophisticated investor and that you appreciate the higher level of risk it entails.
Where the name comes from
The ticker for Schiehallion Fund will be MNTN, as the company’s name comes from a mountain near Pitlochry in Scotland. It’s most famous for being the location of an 18th-century scientific experiment to “weigh the world“. So I guess that’s what Baillie Gifford is attempting to do here when sifting for new investment opportunities.
The fund has no geographic restrictions but I’d expect a heavy US weighting. It’s looking to buy minority stakes in later-stage private companies (defined as those valued at $500m or more) and hoping that they can grow into unicorns (start-ups valued at $1bn or more).
Personally, I think they missed a trick not making the ticker UCRN. But I guess that’s why I’m writing a blog rather than working for a large financial services firm!
The long(er) road to IPOs
Here’s a long snippet from the Schiehallion Fund prospectus (my bold):
It is Baillie Gifford’s view that the prevailing model of dividing investment strategies between private and public investing is broken. An arbitrary line is too often drawn at IPO, with investors seeking exposure to growth on one side of the line or the other, but not both.
Baillie Gifford believes that this … is a more acute problem for investors in public companies, as it has observed that many leading companies are staying private for longer. Data from the National Venture Capital Association’s 2018 Yearbook shows that the median time from first venture funding to IPO for US companies has increased from 5.2 years in 2007 to 7.1 years in 2017. This trend can also be seen in other parts of the world.
In Baillie Gifford’s view, this means in many cases that more value creation takes place before companies become publicly traded.
Baillie Gifford has observed that businesses have been able to use modern technologies such as software and the internet to create business models able to grow in scale more rapidly than before … The combination of these factors, Baillie Gifford believes, reduces the amount of growth and value creation which is accessible for investors in public companies.
Baillie Gifford considers that it is also materially limiting to dedicate an investment strategy solely to private markets. The value of a business may continue to grow at an attractive rate, post IPO… It is Baillie Gifford’s belief that there is real opportunity to be gained by adopting a strategy which discards the boundary between private and public growth investing.
Seems straightforward enough. Get in early, but not right at the start, and hold for the very long term.
Baillie Gifford’s expertise
Through funds like Scottish Mortgage, Baillie Gifford has built a decent reputation for this type of investment in recent years. It set up its Long Term Global Growth (LTGG) team in 2003 to analyse the features of successful public companies. LTGG’s remit later extended to private companies as well.
When it comes to public companies, Baillie Gifford reckons the total growth of its LTGG investments has been 338% (10.5% a year). That compares to 157% (6.6%) for the MSCI All Countries World Index.
Pretty impressive.
Private numbers
Since 2012, Baillie Gifford has invested over $2bn in 50 private businesses. There’s no equivalent gain figure for these, unfortunately. But we are told that 6 have been acquired for an average gain of about 30% and that 15 have since gone public.
This is how the 15 that IPO’d have performed (click the chart to enlarge it):
Alibaba has been by far the most successful for Baillie Gifford, followed by Orchard Therapeutics, Anaplan, and Spotify. Looking at its other funds, Baillie Gifford has also invested in the likes of Airbnb, Lyft (going public next month), Slack, and SpaceX.
I found a list of all current unicorn companies although I am not sure how accurate or up to date it is. It has 328 in total. There’s also some fabulous unicorn stats in this article on Visual Capitalist.
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Baillie Gifford seems to be invested in many of those listed already, although it is only down as a ‘selected investor’ for two of them (Indigo Agriculture and the ominously named Darktrace).
Here are the gains/losses for all its 50 private investments to date, in the order they were made:
The key thing to note is that most of the gains come from a handful of investments. That’s true with most individual stock portfolios, but the effect seems to be even more exaggerated here.
To reinforce this point, here is an interesting stat from Meb Faber on Twitter. He says out of 21,000 (presumably US) venture financings from 2004-2014:
- 65% lost money
- 2.5% made 10-20 times
- 1% made > 20 times
- 0.5% made made > 50 times
10 questions are all it takes
There’s some explanation in the Prospectus about how investments are chosen:
Baillie Gifford uses a ’10 questions’ report structure, under which it asks particular questions of itself about potential investee companies, in order to facilitate comparison of investment opportunities. Answering the 10 challenging questions posed during this process is, Baillie Gifford believes, the best way to determine which potential investee companies have transformational growth potential. This report structure has developed over time, and will continue to be refined by Baillie Gifford in light of its ongoing investment experience.
The Company will only invest in private businesses that are considered to have some or all of the following features:
- the potential to grow revenue and earnings multiple fold over the long term;
- scalable business models that should enable those businesses to grow into their opportunity;
- robust competitive advantages;
- exceptional management teams;
- an entry price which significantly undervalues the long term opportunity for the business; and
- an ambition and ability to become standalone public companies.
Nothing overly radical here I’d say, but then you wouldn’t expect them to reveal their secret sauce!
Spreading the risk
No initial investment by Schiehallion should be more than 10% of its net asset value (or 20% if follow-on investments are made).
In practice, the initial investment in most companies is expected to be between 1.5% and 5%. Exposure above 10% is likely to come from subsequent funding rounds in increments of around 2%.
Another stipulation is that Schiehallion shouldn’t own more than 20% of any individual company.
As for the pace of investment, Baillie Gifford expects two-thirds of funds raised to be invested within the first two years and in 20 to 60 different companies.
Premium assured
It’s hard seeing this trust trading at anything other than a sizeable premium for a little while.
I suspect there will be a fair number of private investors would like a piece of the action. And there could be a few institutions who wanted to invest but were unwilling to stump up the $5m minimum.
83% of the shares are likely to go to just six big investors. The largest by far would be the Florida Retirement System Trust Fund with 40%.
These six big-hitters are all likely to be long-term holders, so the supply of shares on the market could be very limited, squeezing the share price higher.
Schiehallion might issue additional shares in order to keep the premium down a little. But I wouldn’t be surprised to see this trust at a premium of 10%+ for a while.
Who’s making the decisions?
In common with many trusts, details on who is actually responsible for the investment decisions are somewhat sparse:
Peter Singlehurst
Peter graduated with a BA in philosophy, politics and economics in 2008 and an MA in philosophy in 2009 from Durham University. He joined Baillie Gifford in September 2010 and is head of the “unlisted equities team”.
Mark Urquhart
Mark graduated with a BA in philosophy, politics and economics from Oxford University in 1992. He spent a year at Harvard as a Kennedy Scholar in 1993 before completing a PhD in politics at the University of Edinburgh in 1996. Mark joined Baillie Gifford in 1996 and was an investment manager in the Japanese equities team, until he co-founded the LTGG strategy in 2003. Mark became a partner of Baillie Gifford & Co in 2004.
Urquhart also runs Baillie Gifford Long Term Global Growth, described by Citywire as the “open-ended version of Scottish Mortgage”. This fund has returned 128% over the last five years (making it 5th out of 371 open-ended global funds). Scottish Mortgage did marginally better with a 133% net asset gain.
The quickfire round
- The official target is to generate a net return of three times invested capital over rolling 10-year periods. That works out at just under 12% a year.
- This trust is very unlikely to pay any dividends. The companies it plans to invest are generally raising capital (and lots of it) rather than paying it out.
- Net asset value to be updated monthly but the individual companies within the portfolio are likely to be valued only quarterly and on a staggered basis (i.e. one-third revalued each month).
- The year-end is 31 January and the first report is likely to be for the year ended January 2020, shortly followed by the first AGM.
Fees
Baillie Gifford’s funds are generally pretty cheap. They run nine investment trusts right now with an average ongoing charge of around 0.7%. They range from 0.4% for Scottish Mortgage to 1.0% to Pacific Horizon.
Here are Schiehallion’s annual management charges based on its net asset value:
- Up to $650m: 0.9%
- Between $650m and $1.3bn: 0.8%
- Over $1.3bn: 0.7%
The OCF for this trust will probably come in just under the 1% mark once other costs are included.
Watching and waiting
Schiehallion is probably a little bit too risky for me right now, but it will be interesting to see how it does and to discover what companies it invests in. It’s definitely a slow-burner though.
In due course, given its investing brief, I think it’s very likely that we’ll see its performance being compared to Woodford Patient Capital Trust. My money would be on the Baillie bunch!
Disclaimer
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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Was reading this as I’ve been researching the BG US trust, and as you probably know, most of the US investments in MNTN are in the US trust too.
The BG PE side is interesting. The two key appeals are:
1: Normally you need to be an institution to access unquoted companies like this.
2: Even if you can, you pay through-the-nose fees to the PE manager.
On the flipside:
1: I’d like to know more about how they value the investments. Morningstar says, ‘Baillie Gifford has assembled a robust valuation and governance framework around the unlisted investments which gives comfort.’ Where’s the evidence? Or is it just BG saying that. I like something like SYNC where companies are simply valued at investment cost.
2: I’d like to know more about Singlehurst & Urquhart. I know that BG has a strong ‘house style’ and most of them are products of the graduate scheme, so there should be less to worry about individuals, but it’s a different skill set I think, so I’d like to know why I should believe they’re qualified to do this. I’d also feel more comfortable if either manager had at least some experience with a top American PE firm. However otherwise I generally respect the BG methodology.
Then there’s the issue of performance. USA is still new, so I used BG American as a proxy. Over 10 years, a Nasdaq 100 ETF has beaten it (as ever highlighting how difficult it is to outperform most US indices). Over 3 and 5 years, BG American has done better. Unfortunately I don’t know enough to get a sense of why this might be.
The positive argument might be that in the past 5 years, the ‘modern tech’ style has come to the forefront, which favours BG.
The negative argument might be that the past 5 years have seen more ‘silly’ valuations, which has lended itself to BG (let’s not forget how SMT performed in 2008!).
Then there’s the fact that NASDAQ 100 may be being carried by the top constituents like Microsoft, Apple & Alphabet – it has a significantly higher exposure to ‘FAANGs’ than USA. One could question how sustainable this is, though it’s hard to deny that they are outstanding businesses.
Overall I think it’s hard to have strong conviction. Given I’m normally a Fundsmith/Lindsell type, I’ve been trying to find a way of getting a bit more tech/new economy exposure, but have struggled. I don’t really like the pure tech ITs (not enough conviction), Blue Whale is hard to analyse – too new, and I don’t understand how he trades and manages cash. It seems quite possible the NASDAQ 100 ETF is the way to go.
The only (UK managed) American fund that I really believe in is Findlay Park. I think JUSC has been a decent performer, but I don’t really understand their methodology.
Hope everyone’s surviving, and thank you for providing a place to discuss Investment Trusts – most people I know aren’t interested!