Popular Baillie Gifford trust proposes to increase limit on unlisted firms

Having exposure to unlisted firms is a growing trend among investment trusts.

Edinburgh Worldwide (LSE:EWI) is proposing to increase its limit on unlisted companies, from 15% to 25%. Its current exposure is just under 11%.

The trust, which regularly features among interactive investor’s top 10 most-popular investment trusts each month, says that private companies are becoming an increasingly relevant part of its investment objective, which is to invest in a global portfolio of initially immature entrepreneurial companies, typically with a market capitalisation of less than $5 billion at the time of initial investment.

Edinburgh Worldwide, which has been managed by Douglas Brodie since February 2014, notes the trend of companies staying private for longer.

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One driver is that up-and-coming companies have more financing options, with a notable increase in private equity firms over the past two decades playing a big part in this. Adam Coffey points out in The Private Equity Playbook: “At the end of 1990, there were 312 private equity firms in existence. By the end of 2017, that number had grown to 5,391 firms with current assets under management totalling $2.83 trillion.”

Advancements in technology mean that many companies have less need to go to public markets in search of large capital injections.

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Henry Strutt, chair of Edinburgh Worldwide, says: “Accelerating improvements in technology are reducing the capital and time needed for young businesses to both experiment with and scale their product offerings. For many new entrepreneurs this is delaying the need for a public fundraising or resulting in some really exceptional companies entering the stock market when they are larger and more mature, and the rising availability of private capital is serving to compound this shift.”  

Moreover, the global smaller companies trust points out that in 2006, 18 private companies globally had valuations of more than $500 million with an aggregate value of $18 billion. Whereas, at the end of 2020, there were 923 companies with valuations of more than $500 million, and an aggregate value of $2.2 trillion. 

The proposed widening of the unlisted companies limit will be put to a shareholder vote on 2 February 2022.

The proposal was made as Edinburgh Worldwide reported its annual results, which cover the period to the end of October.

The trust has comfortably outpaced the index and its rivals over the long term, but performance has lagged over the past year.

Figures for its latest financial year show the trust’s net asset value (NAV) per share increased by 18.3% and its share price rose by 11.1%. The comparative index, the S&P Global Small Cap Index total return, increased by 35.9%.

Strutt points out that this is the first financial year of relative NAV underperformance in five years. 

Investment trusts are best structure for unlisted exposure

With their closed-end structure and stable base of assets, investment trusts are an ideal vehicle for investing in unquoted companies. As trusts hold a large number of companies, risk is reduced should a business fail.

The Association of Investment Companies’ (AIC) Growth Capital sector is a home for funds that specialise in taking non-controlling stakes in private companies. The six trusts in the sector are Chrysalis Investments Limited (LSE:MERI), Petershill Partners (LSE:PHLL), Baillie Gifford-run Schiehallion Fund (LSE:MNTN),  Schroder British Opportunities (LSE:SBO), Schroder UK Public Private Trust (LSE:SUPP) and the Seraphim Space Investment Trust (LSE:SSIT). 

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As mentioned above there’s been a growing trend of equity investment trusts widening their investment universe to have some exposure to unlisted companies. Research by analyst Peel Hunt earlier this year looked at 22 equity investment trusts adopting this approach, including RIT Capital Partners (LSE:RCP), Fidelity China Special Situations (LSE:FCSS) and a number of Baillie Gifford trusts.

Scottish Mortgage (LSE:SMT), the FTSE 100 member with assets of more than £20 billion, has 18.8% spread across 50 unlisted companies. In August, shareholders approved proposals from Baillie Gifford UK Growth Trust (LSE:BGUK) to change its mandate to allow it to invest 10% in unlisted companies. Baillie Gifford China Growth (LSE:BGCG) can invest up to 20% in unlisted firms.