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Schroder British Opportunities: we’re not like other small-cap trusts and launch flops

16 November 2020

Schroders is hoping its mix of public and private investments will persuade investors it has the right vehicle to buy into bargain UK companies.

Schroders has argued the investment trust it is launching to back cheap British growth companies will be a different proposition to the rest of the UK smaller companies sector, which has seen two other launches founder recently.

The FTSE 100 asset manager unveiled key details last week of Schroder British Opportunities, first promoted in September, as it targets a £250m raise. 

The trust will initially invest in listed companies worth between £50m and £2bn, before transitioning towards an equal mix of public and private equity (PE) investments in 30 to 50 firms.  

Reflecting that mix, Schroders’ head equities Rory Bateman and Tim Creed, head of UK and European PE, will jointly head up the vehicle. The latter also co-manages the £260m Schroder UK Public Private (SUPP ), the ex-Woodford Patient Capital trust which Schroders is attempting to steer to a recovery.

Bateman (pictured) said the impetus was an opportunity in smaller and medium-sized UK companies, where valuations or prospects have lately flagged due to the coronavirus pandemic, that looked too good to miss.

‘We’re saying it’s a once-in-a-generation opportunity because the valuations right now that have been thrown up because of the crisis give us the opportunity to invest in these businesses at the right valuation, high quality UK growth businesses,’ he said.

‘We can access companies from across the spectrum, it doesn’t matter whether they’re listed or not, and that opportunity right now is pretty unparalleled. And that’s driven primarily because everyone is pretty much out of favour with the UK. Because of Brexit, because of the pandemic, you name it.’

While hoping to pick up some bargains, Creed emphasised this was not about ‘distressed or turnaround’ situations, but meeting growth companies’ needs for ‘fresh’ equity in this environment.

That means high-growth businesses where, as may be the case in the tech or healthcare sectors, prospects have been boosted by lockdown scenarios. But it also means ‘mispriced growth’, where companies may have been derailed by the pandemic.

‘They’ve had a bit of a hit, but the key thing is when putting a bit more money back into them, we can return them back to that high growth,’ said Creed.

Bateman added that last Monday’s 4.6% jump for the FTSE 100, after a breakthrough with a coronavirus vaccine being developed by Pfizer (PFE.N) and Germany BioNTech (BNTX.O), suggested the value ready to be unlocked in the UK, but they were looking for investments with upside potential ‘way beyond’ that kind of short-term bounce.

Rivals pull out

While the minimum raise for the trust itself to go ahead will be confirmed in a forthcoming prospectus, if met, the trust will begin trading in London under the ticker BSO on 1 December.

Schroders itself will seed 10% of the launch size up to £20m.

That may help the trust avoid the fate of UK Buffettology Smaller Companies and Tellworth British Recovery & Growth, which were both pulled recently due to insufficient investor demand. At a headline level, both had a similar remit to the Schroders fund, minus the private equity element, of backing exciting British firms at bargain valuations.

While acknowledging the thesis that UK shares are trading at historic lows compared to global peers, at the time analysts said investors had seen little reason to back fresh launches when the UK smaller companies sector had a ready supply of established trusts with strong track records, many trading on attractive discounts to net asset value (NAV).   

‘Proof of the pudding’

The managers pointed to several factors making this an idiosyncratic opportunity, rather than just another smaller companies trust.

Creed (pictured) said the first point of differentiation was that they would be investing explicitly for a world altered by the pandemic.

‘We are really looking at companies that are cheap now but are really great companies for today and tomorrow’s world, given how the world has changed,’ he said.

The second point is that few other smaller companies trusts invest in PE, while there are also few PE funds which make direct new investments in this area, especially among those available to retail investors.    

A sustainability element is another differentiator. The team will avoid fossil fuels and ‘sin stocks’, while actively looking for companies which further the UN’s Sustainable Development Goals.

Bateman said the ‘proof of the pudding’ was that the model portfolio had virtually no common holdings with other small and mid-cap funds run by Schroders and, according to an analysis externally, ‘very little commonality’ with other funds on the market.

In terms of the opportunity set, companies worth between £50m and £2bn had this year raised about £5.6bn of public equity by the end of October, according to Schroders. 

Healthcare and tech happy

In terms of the sector mix, they have been finding opportunities across the board in listed equities, according to Bateman. While in the private portion Creed expects to allocate around 30% apiece to tech and healthcare investments. Across the whole portfolio, tech and healthcare are expected to make up about 40% combined.

SUPP currently has well over half of its portfolio in the two sectors, but Creed explained but there was little overlap, with the new trust looking at later-stage opportunities. Further, it will not face the same restrictions on making new investments as SUPP, which has a high debt burden as a result of misfires under former manager Neil Woodford.  

In terms of discount protection, there will be a formal target to limit the discount to 5%, with the board buying back shares if needed. The fund also has an effectively ‘seven-year life’ built in, with a guaranteed option of winding up by May 2028, unless there is shareholder appetite for a continuation vote.

 Schroders’ private equity team have found they can realise most investments over that timeframe. The managers argued that should also subsequently rein in any discount that did open up. 

Private investments will be limited to 60% of gross assets and gearing, or borrowing, to 10% of NAV.

Stockbroker Peel Hunt is acting as the sole sponsor of the IPO.  

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