The meeting took place yesterday (11 January) and Jefferies analysts Matthew Hose and Fiona Huang said the managers’ presentation regarding the trust’s ten largest private equity holdings reassured them of the “robustness of the valuation process”.
Scottish Mortgage top ten unlisted holdings deep dive reassures analysts
Scottish Mortgage was publicly criticised by former board member Amar Bhidé during a high-profile conflict with then chair Fiona McBain, accusing the trust of being unable to properly manage its exposure to illiquid investments.
This came after several months of analyst concerns over SMT’s PE allocations after its self-imposed 30% exposure limit was breached several times during the year, due to declines in value of its listed equity portfolio.
SMT then released a deep dive into its ten largest unlisted holdings in October, and lead manager Tom Slater defended and clarified the investment methods to Investment Week.
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The three largest PE positions in SMT are SpaceX, Northvolt and ByteDance, which comprise 10.5% of the trust’s net asset value as of 30 November 2023, of which Hose and Huang noted the “conservative” carrying valuations when compared with the most recent transactional data points.
They added SpaceX’s $155bn valuation contrasted with the $180bn value implied by the recent tender, while Northvolt’s $10bn valuation compares to an indicated potential IPO value of $20bn.
Additionally, ByteDance’s $248bn valuation compares to the $268bn value implied by the recent share buyback programme.
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“While the ultimate acid test of the carrying valuations will remain listings of the private holdings, this disclosure, together with the overall average movement in the marks (-3% in the year to 30/11/23 versus over 24% from the Nasdaq composite), offers good evidence of the robustness of the valuation process,” the pair said.
“In turn, easing concerns over the private markets, particularly as public equity markets recover, are likely reflected in the recent re-rating of the shares.”
Performance turning point
Hose and Huang also reported that Slater and co-manager Lawrence Burns had identified an “inflection point” for the trust as several of the headwinds faced by growth equities the past few years begin to subside.
They said: “The overarching theme was presented that the multiple headwinds for growth stocks over the past two years, namely valuation compression, downward earning revisions and a deceleration of growth, have reversed.”
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Improving profitability and free cash flow, along with strong structural growth drivers, were highlighted by the Edinburgh-based managers.
“Here, the useful disclosure was that SMT’s public companies have seen 115% growth in aggregate free cash flow over the 11 months to 30/11/23, from £49bn to £106bn,” the analysts added.
According to the Association of Investment Companies, the trust is currently trading on a 9.96% discount, slightly wider than the AIC Global sector’s 9.15% average discount.