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Tesla going private would lift Scottish Mortgage’s unlisted holdings to 18.5%

8 August 2018

Investment trust’s holdings in unlisted companies would rise to nearly a fifth of its £7.6 billion of assets, should it continue to back Elon Musk’s electric car maker as a private company.

Scottish Mortgage Trust’s holdings in unlisted companies would rise to nearly a fifth of the investment trust’s £7.6 billion of assets, should it continue to back Tesla as a private company.

Elon Musk, founder and chief executive of Tesla, stunned investors yesterday by announcing on Twitter plans to take the electric car-maker private.

Musk, who has had a stormy relationship with Wall Street, said he had secured funding for a $70 billion takeover, priced at $420 a share.

His statement came hours after it was reported that Saudi Arabia’s sovereign wealth fund had built a stake of between 3.5% in Tesla.

Trading in Tesla (TLSA.O) shares was temporarily suspended on Nasdaq but ended up 11% or $37.58 at $379.57.

‘My hope  is *all* current investors remain with Tesla even if we’re private,’ Musk tweeted.

Musk said he would create a special purpose fund to enable shareholders to remain invested in Tesla. ‘Already do this with Fidelity’s SpaceX investment,’ he tweeted in reference to the US fund manager’s stake in his private space exploration company.

As a top four shareholder, fund manager Baillie Gifford holds 7.8% of shares in Tesla. Most of this is held in its flagship Scottish Mortgage Trust (SMT ) which had 5.7% of its assets in the electric car maker at the end of June.

Although Scottish Mortgage co-manager James Anderson criticised Musk for his attack on British diver Vernon Unsworth last month, his remarks were all the more telling given the loyalty that he and co-manager Tom Slater have shown to the visionary technology entrepreneur.

Despite Musk’s increasingly erratic outbursts, Tesla’s second quarter results a week ago beat expectations with slightly wider than forecast losses offset by evidence of better cash generation and the company finally hitting its weekly target of producing 5,000 of its Model 3 vehicles. 

Assuming Scottish Mortgage retained its holding, Tesla’s move to a private company would lift the investment trust’s exposure to unlisted stocks from 12.8% to 18.5%.

Although this would be well within the 25% limit approved by shareholders two years ago, it could restrict the managers’ plans to invest in other growth companies before they reach the stock market.

It could also revive the debate over the wisdom of having so much of the portfolio in illiquid, private companies. 

However, Anderson and Slater have consistently argued that doing so exploits the long-term structure of investment trusts, whose fixed pools of capital mean fund managers don’t have to sell holdings when investors withdraw their money in large numbers.

They have also made the case that investing in unquoted companies is important when so many of the world’s fastest growing businesses are eschewing a stock market listing, in part because of the short-term pressures that Musk has faced.

So far, with Scottish Mortgage shares having doubled in three years and trading on a 2% premium to net asset value, no one appears to be complaining. 

Tesla would be far and away the biggest unlisted position in Scottish Mortgage. It has 37 private holdings, the biggest of which are 0.9% positions in Grail, the cancer specialist spun out of Illumina (ILMN.O), the DNA sequencing giant and the trust’s second biggest public holding; and Uptake Technologies, a Chicago-based ‘unicorn’ using artificial intelligence to develop enterprise software for businesses. Other unlisted investments include Airbnb and Funding Circle. 

In an email to Tesla employees Musk stressed his aim was not to buy out other shareholders and take control of a company in which he is the largest owner with a near 20% stake. He said he wanted Tesla workers to remain shareholders and insisted there was no plans to merge the car company with SpaceX. He also added that no final decision had been made.

In words that would chime with the Scottish Mortgage managers’ view of the world, Musk said: ‘Basically, I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible, and where there is as little change for all of our investors, including all of our employees, as possible.’

Going private would be temporary with the company returning to public markets when it was further advanced in its long-term ‘mission’, he said. ‘In the future, once Tesla enters a phase of slower, more predictable growth, it will likely make sense to return to the public markets.’

Investment company news brought to you by Citywire Financial Publishers Limited.

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