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Baillie Gifford is right to eye unlisted UK companies

Baillie Gifford is right to eye unlisted UK companies
June 17, 2021
Baillie Gifford is right to eye unlisted UK companies

Despite a recent boom in initial public offering (IPO) activity, there is a long-term trend of fewer companies listing – a problem for private investors looking to access some of the most exciting growth opportunities.

The reasons are clear. Technology makes running many businesses less capital-intensive, accessing capital has become cheaper and easier, and the reporting requirements that come with being listed are enough to put a number of firms off.

This may be more important than ever as we emerge from the pandemic. The speed of change of economies has accelerated and there is a significant amount of technological disruption to come. One particularly exciting area is the innovations gene sequencing will offer to medical science.

“The UK has always had a thriving tech and biotech sector,” says Karl Sternberg, chairman of the investment committee of Christ Church, one of the largest Oxbridge endowments. “What it hasn’t had is a venture capital industry of sufficient scale to support new businesses as they grow.” 

This has been an enduring source of frustration some UK fund managers, who have shared concerns that many promising companies in the UK get snapped up by US private equity or other big tech businesses, leaving some growth untapped for UK investors.

However, there are encouraging developments with Sequoia Capital, one of silicon valley’s best-known venture capital firms, setting up an office in London. And Sternberg says there are signs that our universities are getting wise to the value of their spin-outs. He says that Oxford Sciences Innovation has attracted a “top-notch” shareholder list to support Oxford’s biotech, renewables and artificial intelligence spin-outs.

As the infrastructure supporting private companies in the UK improves, retail investors shouldn’t be left out and investment trusts have the ideal structure to offer long-term capital support to businesses. Baillie Gifford UK Growth Trust’s (BGUK) plans to invest up to 10 per cent of its capital in private equity (subject to shareholder approval) is a vindication of the opportunities in this area.

While it’s not easy for investment trust managers to access the most exciting companies, Baillie Gifford has a good reputation for accessing later-stage private companies, which made up a fifth of the Scottish Mortgage Investment Trust (SMT) portfolio at the end of March. Only a handful are in the UK, including money transfer fintech Wise (formerly TransferWise), which increased in value more than 90 per cent over the year to 31 March according to the trust’s annual report.

Edinburgh Worldwide (EWI), also of the Baillie Gifford stable, holds Oxford Nanopore, which has a hotly anticipated IPO planned and Graphcore, a semiconductor designer working on chips for machine-learning algorithms. Baillie Gifford UK Growth's board says that clients of Baillie Gifford have invested across eight UK private companies over the past six years, three of which have subsequently come to market. 

Elsewhere, Chrysalis Investments (CHRY), managed by Jupiter’s Nick Williamson and Richard Watts, has had tremendous success, with its net assets up 90 per cent over the year to 14 June. The trust, which launched in 2018, aims to deliver growth by investing in later-stage private companies (as well as listed companies) with long-term growth potential. 

Hopefully Neil Woodford’s disastrous foray into unlisted companies (within the wrong fund structure) will not have put people off. As Sternberg says: “There is plenty of money to be made by smart but patient investors.”