The fund managers of Schroder British Opportunities (SBO ) believe the £74m portfolio of private and public companies has been unfairly lumped in with private equity trusts, dragging the shares down to a 33% discount to net asset value and leaving them with a market value of just £50m.

Speaking to Citywire after the publication of annual results, two of the team’s four co-managers, Tim Creed and newly promoted Uzo Ekwue, said the market had not taken into consideration the fact that the small private portfolio of nine direct investments are all profitable or very close to being so.

Importantly, the trust launched at the end of 2020, building its portfolio largely after Covid, and in many cases following Russia’s invasion of Ukraine, so the managers could invest with ‘the knowledge of what’s been happening around the world, as opposed to one being hit by the world.’

An underlying investment return of 3.1% over the 12 months to the end of March lifted net asset value (NAV) to 107.3p from 104.1p. The modest gain belied a 10% rise in the value of the unquoteds holdings, all but one of which saw uplifts to their original valuations, and on aggregate grew sales by 40%, with a pre-tax profit margin of 45%, reflecting the ‘resilient characteristics’ and ‘maturity’ of the portfolio.

The NAV gain marks nine consecutive quarters of growth for the trust, with 74% of total investments profitable, highlighting the focus on growth capital and buyout areas of the private equity landscape, rather than racier venture capital and ‘pre-IPO’ parts of the market.

Last year, the trust abolished the 50% limit on private investments, increasing the weighting from 42% a year ago to 65%.  

Creed, who heads the PE side of the portfolio and is also lead manager of the recently renamed Schroders Capitala Global Innovation Trust (INOV ), said Schroders’ independent valuation team had conservatively given the private assets lower pre-tax profit multiples, but higher pre-tax profits, meaning they are growing at a rate that should see their value rise and, in time, attract a higher valuation multiple which will increase the value even more, and, hopefully, rerate the shares.

Key drivers of performance on the private side, include water treatment group Culligan International merging with Waterlogic in November. A top 10 holding at 9.7% of total assets, the portfolio received £2.4m in cash. The company was valued at £5.1m in March this year.

New investments, commodity price data provider Mintec and tech-driven insurance business CFC were among the top contributors to performance, gaining 2.9% and 1.9% respectively.

Graphcore which has developed a next generation processor for machine learning and AI applications, is currently facing a challenging market environment given the long sales cycles that surround such revolutionary technologies. It fell 1.8%.

The trust’s small and medium-sized UK listed equities fell 5.9% over the period, underperforming large caps as a result of rising interest rates, as Russia’s invasion of Ukraine looked set to prolong the inflation problem facing developed economies.

The team added Bytes Technology (BYIT), one of the UK’s leading resellers of software, security and cloud-based products, in 2023 after exiting Euromoney, EMIS and Ideagen, which had received bids.

The trust has £7.5m in cash, which it intends to invest in the near future, with ‘very strong pipelines’ on both the public and private side.  

The board repurchased 1.1m shares over the period as their deficit to NAV widened. The trust also has a fixed ten-year life, which could be extended at the windup vote in 2028.

Performance since launch 

Source: Morningstar