A sign of how far Schroder UK Public Private (SUPP ) has fallen is that discount hunter City of London Investment Management (CLIM) has recently amassed a 16% stake in the former Woodford Patient Capital Trust.

But for Mick Gilligan, head of managed portfolio services at Killik & Co, the arrival of CLIM – which is not to be confused with City of London (CTY ) investment trust run by Janus Henderson’s Job Curtis – is an encouraging sign.

Activist investor

Essentially the appearance of CLIM, a UK fund manager listed on the London Stock Exchange as the City of London Investment Group (CLIG), means the bombed-out SUPP shares might not have much further to fall.

CLIM specialises in buying out-of-favour closed-end funds in the UK and around the world when their shares stand on steep discounts below their underlying net asset value (NAV). The investor keeps a low profile, despite being a big holder of well-known trusts such as Templeton Emerging Markets (TEM ) and Scottish Oriental Smaller Companies (SST ), but is known to like the margin of safety that comes from buying shares cheaply.

It also isn’t averse to putting pressure on investment companies to take steps to narrow the discount and lift the share price. Its emergence as SUPP’s largest investor, having increased its stake early last month when fund manager BlackRock was selling down, may well be linked to the SUPP board’s decision to offer a continuation vote in 2025. If that fails, the trust will be wound up and all the hidden value in its investment portfolio slowly extracted.

None of that has escaped the attention of Gilligan who has also recently added to Killik portfolios’ position in the shares which last month reached an all-time low of 11.7p. The release of annual results on Monday has seen the value rise a little to 13.3p, but that still represents a near 87% loss for investors who bought the then Patient Capital at its £800m launch at 100p per share eight years ago.

That CLIM has been able to buy so many shares at a discount of more than 50% demonstrates that many investors have thrown in the towel, which to Gilligan makes the trust interesting. 

Not without promise

While SUPP, which is set to be renamed Schroders Global Innovation Trust, has suffered a series of disappointing results, Gilligan said ‘the trust still holds some businesses that have excellent long-term growth prospects’, notably DNA sequencing group Oxford Nanopore (ONT) and electronic device refurbisher Back Market.

‘The portfolio is in transition and the new portfolio managers and board have made some progress,’ he said.

‘Debt is completely cleared, problem cases have been written off, some new investments have been made and shares have been bought back.’

Under Schroders, Gilligan also said SUPP now ‘mainly comprises later-stage revenue-generating companies’ and is working to shed the legacy of Woodford’s small, early-stage investments by promising to use 25% of all cash realisation from the legacy portfolio to buy back shares between now and 2025.

Enormous private equity discount

The wide discounts of many trusts investing in private companies indicates investors are suspicious of private equity. However, Gilligan’s analysis shows SUPP’s private equity positions are effectively given hardly any value at all in the low share price.

He said the latest NAV published by SUPP was 28.9p per share. Assuming ‘that unquoteds still represent 61% of NAV and quoteds 39%’ as was the case at the end of 2022, Gilligan said, ‘if we then apply a 10% discount to the quoted element we get to a figure of 10.1p for this component,’ he said.

‘The current market price of SUPP shares is 13.2p. So assuming quoteds can be exited at 10% below current level, the unquoted component trades at 3.1p, an 82% discount to NAV. That is a big margin of safety.’