FTSE 100-listed Big Tech investor Scottish Mortgage Investment Trust PLC (LSE:SMT) returned to positive growth in its latest financial year thanks to a solid run on Nvidia and ASML shares.
But the trust’s significant investment in unquoted companies remains a bone of contention among stakeholders.
Betting on unlisted equities is part of Scottish Mortgage’s identity, with key investments including Elon Musk’s SpaceX, Swedish battery manufacturer Northvolt, TikTok owner ByteDance, media firm The Brandtech Group and US fintech company Stripe Inc.
Unlisted investments account for more than a quarter of Scottish Mortgage’s asset portfolio (as of 31 March) and the above five investments constitute around half of all private company exposure.
According to Scottish Mortgage’s annual results, average unlisted company valuations rose 9% over the financial year. This fell below the total portfolio’s 11.5% NAV increase in the same period.
While not a drastic undershoot, Stifel analysts called the unlisted portfolio a “drag on performance”, adding that “in the case of companies which were written-down over the year, which included around half of the unlisted holdings, the average writedown was -34%”.
What’s the deal with unlisted valuations?
The contention lies in the lack of transparency in these unlisted valuations.
Without the real-time transparency of the stock market, unlisted equities are only repriced every three months. But even here, subjectivity comes into play.
Scottish Mortgage’s deputy manager Lawrence Burns explained the trust’s process in a May 2023 blog post: “The aim of the valuations process is to hold private companies at ‘fair value’. In other words, the price we believe we would get were we to try to sell our shares.
“This process is carried out by Baillie Gifford’s Private Company Valuations Team which takes advice from an independent third party, S&P Global.
“Valuations are then approved by Baillie Gifford’s Valuations Group which comprises five voting members all independent of those making investment decisions.”
A rigorous process that nonetheless is subject to interpretation rather than transparent market forces.
For instance, is ByteDance’s fair valuation the same today as it was three months ago, given the heightened prospect of TikTok being banned in the US?
It goes both ways. Is Stripe’s recent expansion in the UK unaccounted for in its fair market valuation?
It would take a fresh funding round or exit to make a fundamentally accurate assessment of either.
One thing is clear though- Scottish Mortgage’s discount to NAV has steadily recovered from more than 20% in mid-2023 to less than 8% today.
Scottish Mortgage was last at a premium to NAV in early 2022 – Credit: Scottish Mortgage
AJ Bell’s investment director Russ Mould recently wrote: “A significant share buyback programme recently unveiled by Scottish Mortgage has done wonders to narrow the discount… “There has also been a wider improvement in investor risk appetite and many trusts with unquoted assets have bounced back.”
Perhaps the opacity of unquoted investment is not such a big deal after all.