Schiehallion (MNTN ) shares have jumped nearly 18% since annual results earlier this month reassured investors on the prospects for its portfolio of mostly unlisted growth companies.

Since the start of November, the dollar shares have more than doubled from 44 cents to 90 cents, although they are down 4% today as markets worry about US inflation and Middle East tensions.

Nick Greenwood, manager of MIGO Opportunities (MIGO ) who added Schiehallion to his basket of cheap closed-end funds late last year, has just highlighted how it was his best holding last month. 

‘Despite the shares drifting during February the trust has performed exceptionally since it hit its lows in November. The combination of a buyback programme and some reassuring updates regarding their portfolio companies have seen the shares
return over 50% from our original purchase. At the end of the month, the trust traded on a 33% discount, and we believe there is scope for further progress from the portfolio,’ Greenwood said in his latest monthly commentary.

With the discount narrowing  from a one-year average of 39% to 22%, the re-rating has been impressive although the shares remain below their March 2019 flotation price and a third of their $2.93 peak in November 2021.

Full-year results on 8 April confirmed the £1.2bn late-stage private equity portfolio eked out a 0.9% rise in net asset value in the year to 31 January, but with the shares sliding over 22% as the market questioned unquoted company valuations despite fund manager Baillie Gifford’s regular reviews. 

Perfect storms and perfect gains

Peter Singlehurst, Baillie Gifford’s head of private companies and the investment company’s manager, the underlying NAV performance was driven by ‘a mix of public market uplifts and increased valuations in private holdings’.

Nasdaq-listed holding Affirm, the buy-now-pay-later fintech group founded by PayPal co-founder Max Levchin and the third largest position, had a great year, rising 408%, while second-largest holding, UK-listed foreign exchange technology group Wise (WISE), climbed 272%, and Oscar Health, a health insurance company listed in New York, rallied 64%.

Singlehurst said unlisted holdings, such as software company Bending Spoons, which is the fifth largest holding in the fund, and top position SpaceX, the spacecraft and rocket manufacturer led by Elon Musk, ‘experienced strong increases in their valuations’.

Bending Spoons’ valuation increased 150% in the fourth quarter after a successful integration of its recent acquisition and a new funding round which valued the business at $2.55bn. SpaceX conducted a substantial secondary tender offer over the year that valued it at$180bn, making it the second most valuable start-up in the world behind ByteDance, the Tik Tok operator that is the fund’s fourth largest position.

Singlehurst said Schiehallion’s top 20 companies generated an average 40% revenue growth on over 40% of gross margins, and by capital weighing, over one fifth of the fund’s holdings were profitable.

However, there were some companies that faced ‘challenges’, with Singlehurst highlighting US freight company Convoy, which shut operations in October.

‘Convoy struggled with a perfect storm of a contraction in capital markets and a freight recession, which impacted revenues,’ he said.

‘The company explored both raising capital and being acquired, but was ultimately unsuccessful.’

Singlehurst said while it was a ‘disappointing’ outcome, investing in private markets mean the failure of a company ‘is not unexpected on occasion’.

While Schiehallion spent $20m buying back its own shares over the year, Singlehurst said there were ‘continued opportunities to put more capital into existing investments’ and he topped up investments in Databricks and ByteDance, with the latter being ‘more susbtantial’.

Echoing recent comments by Scottish Mortgage manager Tom Slater, Singlehurst noted that ByteDance made headlines due to the threat of a potential ban of TikTok in the US, but what reports failed to mention was ‘the scale and profitability of ByteDance’s domestic Chinese businesses, where its Toutiao and Douyin apps generate substantial cashflows’.

‘Our investment case for ByteDance rests on the domestic opportunity, with some optionality around the international monetisation of TikTok,’ he said.

‘We purchased shares in a secondary transaction at a compelling price given the growth and profitability of ByteDance.’

While the pace of new investments had ‘naturally slowed’ as the company bought back its shares, Singlehurst said his team was still hunting across the globe and that ‘over half of our current pipeline is generating top-line growth in excess of 50%, and more than a third is profitable’.

‘We are operating in a highly bifurcated market,’ he said. ‘Companies seem to be either significantly over or underpriced.’

The overpriced companies are ‘clustered around the heartland of Silicon Valley and the venture capital ecosystem’ so Singlehurst is looking elsewhere to find ‘real value’.

With significant dry powder sitting in venture capital funds, he predicted they would ‘over-deploy in the coming year’ into familiar areas, creating overlooked opportunities the manager hoped to exploit.