Scottish Mortgage seeks tweak to invest more in private firms

The xAI and SpaceX logos. Last month Elon Musk merged the rocket company with his artificial intelligence start-up xAI. Credit: Samuel Boivin/NurPhoto via Getty Images.

Scottish Mortgage Ord (LSE:SMT), which invests in a range of disruptive growth businesses, is seeking shareholder approval to amend its investment policy to have greater flexibility to go beyond its 30% limit in private companies.

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

Due to an uplift in SpaceX’s valuation last December, the global portfolio surpassed the 30% limit (holding 35.5% at the end of January), which means fund managers Tom Slater and Lawrence Burns cannot add to existing private holdings or take advantage of new opportunities.

The board is seeking to address this by introducing an “Additional Private Investment Capacity” of up to £250 million. This will allow the fund managers to make a small number of both follow-on and new investments in private companies until the portfolio’s private exposure naturally moves back below the 30% limit. The date for the general meeting in which approval will be sought is 10 April.

In a two-part video interview with interactive investor, published last week, Burns noted that in the event of its largest holding SpaceX listing on the main market, this would see the unlisted exposure fall back below 30%.

He said: “I think the key thing to bear in mind is how quickly that situation can change. If you read the current press reports, it will be that SpaceX is looking to IPO in the middle of this year or late this year. If that happens suddenly, the opportunity, the ability to invest in private companies is something entirely back on the table.”

In regards to SpaceX, Burns was tight-lipped regarding whether its position size had become too big. “At the moment, SpaceX is an active discussion,” he said. “We see that there’s huge potential in the future, but that has to be weighed against the fact that there is now a very large holding in the trust.”

Overall, Scottish Mortgage holds stakes in 53 private firms and 48 publicly listed companies. Its second and third largest private firms are ByteDance and Stripe, which account for 4.1% and 3.9% of the portfolio. Newer private holdings include AI disruptor Anthropic and RedNote.

• Best-performing funds and sectors since ISA launch in April 1999
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• Fund Focus: have value funds become momentum plays?

In part two of our interview, Burns says that the trust’s ability to invest in private firms is one of the advantages it has over a global index fund or exchange-traded fund (ETF).

He said: “I think indexes are great and I think they have some drawbacks. The first drawback is that they are created from all the companies that have been successful in the past - they’re based on past success.

“Scottish Mortgage provides two key advantages versus an index fund. The first advantage is that we’re hunting for the next trillion-dollar company, and so we’re giving you exposure to future winners, not the winners of the past.

“The second big advantage is that companies are staying private for longer, and therefore if you’re investing in a tracker, you’re not getting exposure to some of the latest AI companies such as Anthropic. You’re not getting exposure to SpaceX, for example, and the tremendous rise that it’s had.

“And that, I think, becomes a really important missing component from trackers. So, Scottish Mortgage is able to provide both public and private exposure [to] those future companies, and that, I think, is two really important differences from what an index fund can provide.”