Scottish Mortgage (SMT) applied a swathe of write-downs to its unlisted holdings in the volatile first half of 2022 as inflation and other macroeconomic worries helped put the brakes on the valuation of tech and other growth-focused companies.
The trust, which had a 30.2 per cent allocation to 52 private companies at the end of June, made 351 changes to valuations across 83 different instruments, with 96 per cent of the private portfolio undergoing at least two revaluations and 44 per cent undergoing at least five. Some write-downs came to around the 80 per cent mark, while the average change in private company valuation within the trust amounted to a 22.8 per cent fall. A small number of holdings were revalued up.
The trust, which has seen its share price fall a third year-to-date, claims to have limited the pain by its investment team often holding preference stock, which can offer better downside protection than ordinary shares, and by not marking up the valuation of private holdings on the back of comparators’ frothy initial public offering (IPO) and special-purpose acquisition company (Spac) activity.
Private company valuations tend to be less volatile than share prices on listed entities and any updates to the former can be subject to a delay, casting some mystery around the underlying value of private equity portfolios. But Scottish Mortgage has sought to keep its own unlisted valuations current by assessing the fair value of its private companies on a rolling three-month cycle.
A variety of events can trigger a revaluation, from changes to the valuations of publicly listed comparator companies to shifts in company fundamentals, follow-on funding rounds, a takeover approach or the intention to carry out an IPO. The valuation process is independent of the trust's investment team.
With private companies such as Elon Musk's SpaceX and battery developer Northvolt sitting among the trust's top 10 holdings at the end of June, unlisted businesses make up an increasingly prominent part of the Scottish Mortgage strategy. However, plenty of attention has also been focused on the challenges faced by listed holdings such as Tesla (US:TSLA) and Moderna (US:MRNA) amid the recent market rotation.
While downward revaluations on unlisteds have been severe, the trust claimed to have avoided the full brunt of some write-downs. The update noted that Scottish Mortgage manager Baillie Gifford “typically holds preference stock, and often the highest-ranking preference stock levels by virtue of us being a late-stage private investor". Preference, or preferred shares, are like senior debt in having greater rights for the owner. Holding these offered a "higher degree of downside protection", the manager added.
The trust pointed to cases where this dynamic appears to have played out. In one case a private company valuation plummeted by 74.2 per cent, compared with a lesser fall of 34.3 per cent for the highest-ranking preferred stock. However, common stock also held by the trust here dropped by a higher 83.1 per cent.
Scottish Mortgage also claimed to have exercised prudence by not marking up the valuation of private holdings on the back of a comparator conducting an IPO or entering public markets via a Spac, often at elevated valuations. “Cognisant that these valuation surges could be short-lived, we took the approach of not immediately marking up the valuations of their private peer group in response,” the update said.
“To put this into perspective, when we examine all the private holdings that have listed since the beginning of 2021, the median share price drop in the share price from their initial public share price to the end of June 2022 has been 79 per cent. However, if we look at the movement from the final private valuation of each stock before the listing price was set by the market, this is a drop of 34 per cent.”
Scottish Mortgage shareholders have seen it carry out revaluations before, including during the volatility of early 2020.
