Killik’s Gilligan: The market is being myopic on growth capital trusts

Experienced wealth manager says it's time for the market to correct its short-sightedness after four difficult years for investment trusts focused on fast-growing private companies.

Myopia:

noun

  • the quality of being short-sighted.
  • lack of foresight or intellectual insight.

Investors are suffering from myopia right now. This condition is particularly prevalent in the growth capital investment companies space.

A market that was willing to pay a premium for exciting high growth businesses as recently as 2021 now has very little interest. Back then, investors didn’t worry too much about lack of current profitability and were happy to patiently wait for distant profits promised by business plans and cashflow projections. Not anymore.  

This situation has a lot to do with discount rates, which are tied to interest rates. Much of the value of a growth company lies in its future profitability and the impact of discounting those future profits at a higher rate results in a lower present-day value. The US 10-year interest rate (i.e. the yield-to-maturity on a 10-year US government bond) rose from around 0.5% in August 2020 to almost 5% in October 2023. Valuations of growth companies, discounted at higher rates, declined markedly as a result.

This is not necessarily because the business environment became less attractive. It is largely due to the mechanical impact of higher interest rates, and therefore a higher discount rate, on future income and profitability.

Flows out of UK equity funds are also likely to be a factor. A look at some of the key share registers in the growth capital sector show that UK equity funds have been amongst the biggest sellers.

As with so much market-related behaviour, things often swing from one extreme to another, from optimism to despair.

Trusts in the growth capital sector now trade at discounts to net asset value (NAV) of between 28-55%, according to Morningstar.

In June 2021, Molten Ventures (GROW ) – previously called Draper Esprit – issued new shares at a 7.7% premium to net asset value (NAV), in an oversubscribed fund raise. Now the same shares trade at an estimated discount to NAV of 55%.

However, things are pretty healthy in the GROW portfolio. The company completed realisations from several portfolio companies in the financial year ended 31 March 2025. These included Perkbox, Endomag, Graphcore, M-Files and a partial realisation of Revolut. All these realisations were at or above carrying value.

In the latest full year trading update, the company reported that its core portfolio (61% of the overall) achieved value-weighted revenue growth of 51% over 12 months. The company bought back £15m of its own stock in the last financial year and has commenced another £15m buyback programme in the current year. All of this helps to underline the reliability of the NAV.

Other growth capital names are showing similar signs. Augmentum Fintech (AUGM ), is a provider of expansion capital to business in the financial technology space. AUGM reported 52% year-on-year revenue growth from its top 10 holdings (77% of NAV) in its latest full-year results and, in late 2024, exited one of its holdings, FullCircl, at an 80% premium to NAV.

Chrysalis (CHRY ) also looks to be in good shape. Trading updates in January and at the end of last week highlighted that the three largest portfolio companies (Starling, Smart Pension and Klarna: 63% of NAV) are performing well. 

Starling (digital challenger bank) is well positioned as its banking software, Engine, continues to gather interest. Starling announced last month that it was entering the US market, not with its primary banking offering but with Engine. It plans to sell its banking software to other banks and so the 4,000 or so mid-tier banks in the US look like a fertile hunting ground. 

Smart Pension (pensions and retirement technology) is now used by more than 90,000 employers and 1m individuals. It expects that number to double to 2m by the end of 2025. 

Klarna announced this month, that it had exceeded 11m active customers and has doubled its merchant base in a year, to 60,000. Klarna’s UK revenues grew by 30% in 2024 alone. Despite the positive momentum of these three business, which make up 60% of the CHRY NAV, the shares trade at a 34% discount to NAV. 

Seraphim Space (SSIT ), the growth capital trust investing in spacetech businesses, also looks too cheap at current levels. The SSIT portfolio continues to show strong operating momentum. The three largest holdings, ICEYE, D-Orbit and ALL.SPACE, already do business with defence departments in Europe and the US. The current geopolitical backdrop puts these companies in a strong position.

Portfolio valuations are robust, with two-thirds of funding rounds, in the last six months of reported data, either flat or up compared to previous rounds. Seraphim also trades at a large discount (circa 42%) to NAV.

However, the growth capital sector is not without its risks. Many of these investment companies are relatively illiquid and share price moves of 5% (up or down) in a day are not unusual. The sector can be sensitive to interest rates and if these remain at current levels that could be a headwind.  

But all that said, the technical picture for these names looks interesting to me. The chart above suggests that share prices are forming a base. There are several things that could lead to a re-rating from here: lower interest rates, the reopening of the IPO window, an increase in portfolio exits and increased capital flows into the UK stock market. Now looks like a good time for the market to correct its short-sightedness and reconsider the long-term attractions of these growth capital trusts. 

Mick Gilligan is head of managed portfolio services at Killik & Co and an experienced investment trust investor.