Don’t worry if you missed this week’s virtual event with Schroders UK Public and Private (SUPP), the former Woodford Patient Capital Trust that has just changed its name to Schroders Capital Global Innovation (INOV ).

You can watch fund managers Tim Creed and Harry Raikes explain how they have restructured the £250m portfolio in the past three years, dividing its assets into three buckets of venture, growth and life sciences investments, while improving stock selection.

Quizzed by Citywire’s Gavin Lumsden and viewers, Creed and Raikes highlight the opportunities and challenges for the trust’s key stocks and explain how the fund’s board is looking to narrow the wide discount to net asset value at which the shares trade. 

Never miss an update on INOV. Sign up for future news on the investment trust here.

Can’t watch now? Read the transcript

Gavin Lumsden:

Hello and welcome to ‘Capturing the Global Innovation Opportunity’, a one-hour programme brought to you by Citywire and Schroders. My name is Gavin Lumsden and I’m from Citywire. With me in the studio I’m delighted to say are the two fund managers of Schroders Capital Global Innovation Trust. They are lead portfolio manager, Tim Creed and co-manager, Harry Raikes. Tim, Harry, very good to see you, welcome. The context of today’s discussion is last year’s bear market and the macroeconomic concerns around rising interest rates and stagflation that are discouraging investors from taking a more positive view on the opportunities in public and private stock markets. And it’s the particular story around this investment trust which, as many of you will know, was until recently called Schroder UK Public & Private. That name was adopted when Schroders replaced the previous fund manager, Woodford Investment Management at the end of 2019.

It’s been a busy and challenging three years for Schroders in reorganising the trust’s investments, but Tim and Harry are here today, to explain what they have achieved and how the portfolio is positioned for the future. After their presentation, which I’m going to ask them to start shortly, I will ask Tim and Harry a few questions. After that, it’s over to you for Q&A in the last section of the show. Ok it’s time to start.

Repositioning the trust

Tim Creed:

Hello, it’s good to be here. My name is Tim Creed, I’m here with my colleague, Harry Raikes. I’m the lead portfolio manager for the trust. My role is that I am head of private equity investments at Schroders Capital and I am also one of the four members of our global investment committee. Harry, with me, has been working on this trust for a number of years. He’s been working with the companies directly, making both new investments, as well as managing the existing investments and he is the co-portfolio manager for the trust.

So before starting to talk about exactly what we’re doing today and, also, talking about the future, we thought it would be useful to take a little journey through the past. So, this slide represents the story of the last three and a half years. As you mentioned, we took over the trust at the tail-end of 2019. Since then, we’ve really delivered three things in three years. The first was that we repositioned the trust. We repositioned the direction of many of the existing or the original companies. We moved them from path A to path B, to a path that we felt really comfortable that represented growth for those companies.

The second thing we did is repay the debt. Many of the listeners will be aware that when we took over the trust, there was a large amount of debt on the trust. We did a number of asset sales and were able to fully repay the debt, so the trust is now debt free. The third and most recent thing we’ve done is, we’ve done a number of new investments. These new investments really reflect our strategy as a firm. That culminates in today, where we sit here with a newly named trust, where the trust reflects our entire private equity strategy of global innovation. Hence the name, Schroders Capital Global Innovation Trust.

So, what are the recent announcements? There are five recent announcements, of which the first two are structural in nature and then the next three are about Schroders Capital. So, the first is that we made an announcement that we would have a continuation vote at the AGM in 2025. We think this is going to be an important step for the shareholders of the trust and for the trust itself. The second announcement that was recently made is that we’re going to make a number of share purchases, both in calendar year 2023, as well as also in calendar year 2024. So, they’re the first two announcements we made.

The next three announcements are all about Schroders Capital. That is because this trust is being transferred from Schroders management to Schroders Capital management. That’s because Schroders Capital is the private equity and venture capital business of Schroders. That really reflects the strategy that we have for the trust and the strategy that we’re going to follow in the coming months and years ahead. So, with that, I will now handover the microphone to Harry, who will go into a lot more detail about the portfolio itself.

Harry Raikes:

So, this first slide just shows the portfolio as of 21 December 2022. The investments on the left designated in white are the legacy investments that were inherited at the time that Schroders took on management of the fund. The blue investments are the new investments that we’ve been making and we can talk about some of those. The fund ended this period with Oxford Nanopore still as its largest holding at 22% of the fund. I would note that we had about £16m of cash at the end of the period to fund both the share repurchases and some new investments. On the right-hand side, in terms of exposure, 61% in private equity.

We’ll talk about the splits between the three different sub-strategy buckets that we have in terms of venture growth and life sciences that we show here across both parts of the portfolio. The fund is still concentrated in healthcare. So, 54% in healthcare, which goes back to some of the heritage of the fund and then still very UK-centric currently. Although there was a change to the investment policy last year, so we now have the ability to pursue investments globally.

Oxford Nanopore

First line here just talks about Oxford Nanopore (ONT), which is the largest holding. So nearly 23% of the portfolio value, 22% of the actual asset value of the fund. This is a business that is developing nanopore-based sequences for various markets. It’s an innovator in its sector and is looking to scale up, but still loss making currently. The business completed an IPO [initial public offer or flotation] back in September of 2021. Over the first period since listing performed very, very well. I would note that we were subject, on this fund, to a lock up until March of last year and then the share price has slightly come off since then. Reversing primarily, the gains that were achieved shortly after the IPO.

The second slide here shows some of the financial numbers from the latest annual report. The business grew nicely in terms of its life science research tools, which is the core long-term sustainable part of the business. There are other one-off revenues, but we’re really focused in on what is long-term sustainable revenue. Within this aspect of their business, they actually expanded their gross margins over the period, which was a great performance against the backdrop of difficulties in supply chain, consumer electronics. Components that had been difficult to source. That was a very good result, and we’ll point out that the business is very well funded at the moment.

It’s got over £550m of cash that they hope will take them on to a path to profitability by 2026. I’d obviously talk to the point about the disappointing performance last year. The business, we see is performing very well at underlying level, but the valuation of these types of growth businesses, still loss making, was really out of favour over the course of last year. Hence the value of the holding declined over that period.

Four other top holdings

This next slide talks to the other four largest holdings that we have in the fund. Firstly, Atom Bank, which is a UK mobile first bank. During 2022, they raised additional capital from existing investors. They increased their retail deposits. Deployed that into mortgage lending and business lending and are really on a path of scaling up their balance sheets to prove to public market investors that they can generate the cost-income ratio that they need to generate outsize returns, relative to traditional banks. That’s the journey that they’re on and we think that hopefully in future, business profile of Atom will be a potential IPO candidate from this portfolio.

The next largest holding is a biotechnology company called AMO Pharma. It’s focused on rare and orphan diseases. It has a lead asset, AMO-02 that is in phase two/three clinical trial at the moment. That is expected to read out in the mid-part of this year, around July, which will be a key event for the fund. That is a business that has a degree of risk to it. It’s more clinical in nature, so we’re really looking towards that key clinical readout as being a key point of time for that business and its value inflection point.

The third business is Reaction Engines, in the more industrial tech space. Very deep IP [intellectual property] base and technology. They’ve been developing their technology with various different defence organisations and strategic groups. They had some good data from the core programme that they’re running on their heat exchanger with the US Department of Defence last year. The key thing for this business is really taking that long lead time, deep technology programme in hypersonic travel and applying the technologies into other areas. It was encouraging to see that the technology they developed for the motorsport industry was getting a lot of recognition and as a loss-making business, they raised further capital last year, from a strategic group, which was encouraging to see. That’s a business where that core programme needs to continue to deliver, and the revenue needs to come in from some of the applications of the technology that are nearer-term. So that’s what we’re looking at from that one.

The fourth business is BenevolentAI (AMS: BAI). This is a company that’s applying artificial intelligence in drug development and discovery.

[TEN MINUTES]

So end-to-end through the drug development process. It completed a ‘Spac’ [special purpose acquisition company] listing during the course of last year, raising a significant amount of capital to deploy their business plan. They also extended a collaboration that they have with AstraZeneca, into additional disease areas, which was positive. The disappointing news from this one happened after the financial year-end, where their lead programme in atopic dermatitis, although it was shown to be safe and tolerable, didn’t demonstrate the efficacy that was wanted. This is a business where they have a pipeline of earlier stage preclinical assets.

The next candidate, which is for ulcerative colitis, is going through the clinical application process at the moment. That’s a key programme that we’re looking at as a validation of the technology that they’ve developed because we want to see that process from end-to-end really be proven out. That is a business that is funded through to the end of next year on the current plan.

How we invest

Tim Creed:

So, with this, what I’d like to do is introduce Schroders Capital in a bit more detail. So, Schroders Capital is the private capital business of Schroders and we sit within Schroders Capital private equity which runs the entire private equity and venture capital platform. We can trace our heritage back over 25 years. We were actually founded originally to invest in US venture capital. We now invest in venture capital, growth capital and buy-out in Europe, US, and Asia across fund investments, across secondary investments, co-investments and direct investments. So really, we cover the full private equity spectrum. From this trust itself, I’ll go into a bit more detail about what specifically we invest in but really, that background is important to know because that really allows us to gain access to a number of the deals that we’re looking for.

This slide has a lot of data points, a lot of pieces of information. I think I’d like to pull out just a couple. The first is that we have over £14bn of investments and the next I’d like to highlight is the topic around high ESG [environment, social, governance] competence. For us, we strongly believe that in order to make long-term successful investments, you must follow a very sustainable type of investment process. One of the ways that we do that is using the UN SDGs, the UN Sustainable Development Goals, as that’s a very useful way of applying sustainability to individual investments and to portfolios.

Let’s go into detail about the trust itself and what we do and how we invest. So, we invest into direct companies in the venture and growth space, which is in the middle of the page here. In order to do that, we really need to have two skillsets and those two skillsets are demonstrated by the left and right on this page. The lefthand side shows the importance of one thing and that’s probably the most important thing in venture and that’s access. Do you have access to the best venture capital funds and do you have access to the best venture capital deals?  What the lefthand side of this page shows, is that we do. We have access to the best venture capital firms because we’ve been investing in their funds for the last 25 years.

Some of the names are shown up here, both venture firms, but also the companies that we’ve helped but in business. So that’s about access. Do you have access to the best deals? The next thing you need is on the right-hand side, which is assessment. Can you assess and evaluate individual investments? The world of private investing is very, very different from public investing. What this slide shows is that we made over 200 direct investments in venture and growth and buy-out companies that were private in nature, when we made those investments. There are not that many firms that have made such a large number of private investments. So, we have a very large team who’ve been doing this for a long period of time. When you put those two things together, the access to the best deals and the ability to evaluate and assess those deals, you get the centre of this page, which is our ability to invest directly into fast-growing, attractive venture and growth investments.

What we look for

That’s easy said though. How is it actually done and what is it that we look for? We look for four different things in all the underlying investments that we target. When we talk about the companies later on, hopefully you’ll see that the investments that we made really do have these four characteristics. So, the four things, not wishing to simplify our investment strategy too much, but the four really important criteria are 1) that every company must have a best-in-class product, best-in-class strategy, best-in-class positioning. It must be a really high-quality product offering, product or technology. The second is it must have huge growth potential. For us, the objective investing in venture and growth investments is to get outsized returns. In order to do that, you must invest in companies that can really scale very, very rapidly and very sizeably. So that’s the second area.

The third thing is the management and the teams behind all of this. After all, it’s management that generally builds companies. So here, we look for high quality entrepreneurs, high quality management teams and high-quality boards, in order to help ensure that the companies are driven in the right direction. That brings me to the fourth really vital and important topic for private capital investing. That is, are you investing with and alongside the best venture capital funds? Now, a few moments ago I mentioned that we’ve invested in many of those best venture capital funds. So that’s how we get to see where the best companies are. We also get to see who the best venture capital funds are. Over the last 25 years of investing in this space, we have seen a very strong alignment between investing with the best venture capital funds, and that allows you to get access to the best venture capital deals.

With that, we also follow a number of specific and very clear targeted themes within the venture space. These themes, there are eight that we follow, as shown up on this page. What we do is we follow a top-down analysis of what the themes are and what we should look for and we follow a bottom-up approach of looking for the very best companies within each of these themes and these segments and subsegments. This slide shows those eight themes in detail and we may be able to go into some of these segments in a lot more detail later on. It also shows a number of logos. Those logos are companies that are in our portfolio across our global platform. Now, to be transparent, they’re not in this trust in all cases, but they do demonstrate the kinds of companies that we have access to in our portfolio today, on behalf of our institutional investors. With that I’ll pass the microphone back to Harry to really go in more detail about our strategy.

Venture, growth and life sciences

Harry Raikes:

Our strategy is divided into three principal components. Typically, if you’re looking to assess the risk and return profile of businesses at different stages and life sciences being one with a particular profile. So, on the left-hand side of this page, we focus at the earlier stages on what we call venture stage businesses. These are companies that typically have initial customers. They are looking to iterate in terms of their go to market strategy, their product. It’s really all coming together and there are risks associated with those types of changes that we’re looking to assess. We’re looking to come into these businesses at much lower valuations and try and generate returns of three to five times on those types of businesses. We’ll be looking to make small initial investments in these companies, of about four million and reserve the same amount for potential follow-ons because these are companies that typically raise a series of rounds over time.

This most high-risk element of the portfolio, we’re targeting at about 20% over the longer-term. The next bucket is the growth stage companies. These are more mature. They’ll have a scaled level of revenue. They’ll have long-term customers. We’ll be able to do more analysis of the cohorts of customers that they have and the dynamics that they attribute to them and the capital that we’re typically invest in these businesses, then to accelerate growth over the coming years, rather than iterate in the product. Whether that be through pure marketing. It may be entering new geographies on the profile of previous regions. That’s the type of business that we’re looking at. These companies don’t have that product technology risk typically. So, we’ll be looking more at competition and valuation, which are far more corelated with the return profile of those companies.

We’ll be looking for lower returns because there’s lower risk. So, targeting two to three times money on those companies and we’ll also be looking to make larger investments. So, £10m initial investments and £5m, typically, reserved for the follow-on.

Then specific to life sciences, which really goes back to the heritage of this fund. We’re looking at businesses in the therapeutics space. These will be companies that are either in the clinic or within six months of being in the clinic. We don’t look to take very early-stage pre-clinical risk. These companies are obviously, highly dependent on the quality of their technology. So, we have a specific team of biotech experts that look across all of our global innovation funds and are looking for opportunities for this fund.

These businesses will be targeting larger returns of potentially more than five times money, but we’ll also be looking for a more diversified portfolio. So, we’ll be doing much more investments, a higher allocation to follow-on because they companies may raise over series of rounds to fund further clinical progression of assets. That’s generally the profile that we’re looking for.

On the next slide, as Tim really talked to, we’re looking to come in alongside other very high-quality venture investors.

[TWENTY MINUTES]

They are active with their companies. They are experienced in terms of how they help those companies grow and become the big businesses of the future. We’re looking to align ourselves with those investors that are there supporting their companies. They help with recruitment, going to market strategy, pricing, all areas of the business. We come in with the areas where we also support those companies. We’re not the sole source of funds for these companies. We come in as part of a syndicate. We make sure that we’re aligned with all investors and the management team over the longer-term and we think that’s key to success in this area.

One of the key parts in relation to this fund is the journey that we’ve been going on in terms of the percentage of the fund that is represented in new investments. We started making investments back in the second quarter of 2021 with the investment in Tessian and the percentage of new investments has scaled up now, to a stage where it’s at about 20% after factoring in the new investment in AgroStar that we announced back in April. The increase in the number of investments, is both because we are deploying into that part of the portfolio, but also, some of the valuations from the legacy holdings have also come down.

Avoid frothy valuations

It’s important to say that over the period of the last couple of years, where venture markets have been relatively frothy, with valuations becoming really detached from fundamentals, leading on our experience as a firm having been investing in venture for over 25 years, we did steer clear of deploying more into new investments. So, while 20% might seem a low number, we really focused on doing what we believe were the most high-quality businesses.

Tim Creed:

I couldn’t agree more with Harry’s last comment there. The key topic over the last couple of years has not been the number of investments that we’ve been making, but the number of good quality investments that we’ve been making. It would have been very easy to invest sizeable amounts of capital, but the market has been challenging over this last 18 months. We sit here today and when we look at where we are now and what we’re doing and we look at the future, we now wish to leave you with four of the key messages.

The first is that we really have transformed the portfolio. We feel that it’s really moving in the right direction and this really brings us to the second point, that it’s moving in the direction that Schroders Capital wants. We have been running this strategy on behalf of institutional investors now, for the last 25 years. So, this trust gets to benefit from that same strategy that we know inside out. The third is that we really do welcome the changes that the board made. Particularly around the share buyback. The current market, particularly for investment trusts, does warrant and justify proactive activity like this, in order to help reduce discounts that we see across the market.

The fourth and final topic is that we are strongly committed to this. This is a strategy that we run on behalf of our institutional clients and we have done for 25 years. This trust sits very neatly alongside those vehicles, which ensures that this trust benefits from the same team, doing the same thing that we’ve been doing for many years.

Kymab story

Gavin Lumsden:

Tim, thanks very much. Looking back over the history that you’ve just been talking about, the sale of Kymab back in April 2021 looks like it was pretty significant. Got sold to Sanofi, big pharma company obviously, for over a billion dollars. That generated £65m for the trust and that helped pay off debts and provide funds for new investments, so that’s all good. Thinking about the share price and the wide discount that the trust is on, do you need another big transaction like that to provide a catalyst, to provide some positive news to rerate the stock?

Tim Creed:                       

That’s an interesting question. We certainly think that there’s a lot of good news going on across a variety of different companies that help the trust overall. If I really say a few words about that transaction, in particular. So, we feel the Kymab story really reflects a lot of the way that we work. When we took over the trust, Kymab was not universally popular. A lot of people felt it should move towards an IPO and to do so, it would have likely needed a number of financing rounds, likely at decreasing valuations. We felt very strongly that the team was really strong. The product was really strong, but it really needed to move in a different direction and that was, it needed to work with big pharma.

So, we helped the management team and we helped the other shareholders move the company to build partnerships with big pharma. That wasn’t a universally popular path and actually, we scooped up a small investment. So, we added an extra million or we invested a further million into the company-.

Gavin Lumsden:

So that’s another investor pulling out and you took their share?

Tim Creed:                       

We did, yes, absolutely. A few months later or six months later or so when that was sold to Sanofi, we actually made ten times our money on that small investment. What really that demonstrated is that the move or the change in strategy of moving for an IPO and moving instead, for working with big pharma was the right decision.

Gavin Lumsden:

So, were you instrumental in setting a deal up or were you more about thinking, you should collaborate with a big pharmaceutical company?  You weren’t necessarily thinking they were going to get bid for, were you?

Tim Creed:                       

Different companies require different approaches and that’s something that we’ve learnt over many years. We are a very, very large team who run this portfolio and run these companies. Some companies, an IPO is the right path, but for other companies it is not the right path. We felt in this case it definitely wasn’t. We felt in this case, it really should work with big pharma. So, we worked with the board and with management and with some of the other shareholders to really help reposition the company. We think if you look back with the benefit of hindsight, that was definitely the right decision.

If I also go back to your actual question, which was go we need to have a number of big hits like this? Of course, we’d like to have a number of big hits like this. If you look at the underwriting that we do, the types of investments we make, we’re looking for good size hits within the venture space. In the growth space we actually don’t need quite such large hits because we’re also not taking quite as much risk. They are solid, fast-growing companies. The segment of the portfolio that could have these large hits would be the biotech life science part.

We deliberately make these very small investments because they’re also very high risk. So, what we’d like to do is, we’d like to see the portfolio grow over time across venture growth and the existing portfolio. Then, have a few potential big hits on top. What we don’t want, is we don’t want a portfolio that’s dependent on a very small number of big hits because there are not that many big hits across the venture portfolio. What we want to see is a large number of good quality companies growing over time and that’s what we think we’re building in this portfolio at this time.

Gavin Lumsden:

I think Harry referred to the possible flotation, Atom Bank. Would that be positive for Atom Bank, but would it have a wider uplift for the portfolio if people could see the price at which it’s commanding?

Tim Creed:                       

Definitely. We’ve had a couple of IPOs. Particularly with Immunocore and with Oxford Nanopore. So, an IPO is definitely a good path for a number of companies and that would definitely be a good reflection for Atom Bank. So, we’re working with the management. We speak very regularly. It’s a very high-quality management team who are building that business.

Gavin Lumsden:

You’ve made 11 new private equity investments in the three years you’ve been in charge and they make up just over 20% of the portfolio, as you said. How many of the legacy investments that you inherited do you like? Is the restructuring, reorganisation, is that pretty much finished?  So, there’s a legacy investment there. It means that you’ve got conviction in it.

Tim Creed:                       

Definitely. One of the big topics over the last three and a half years has been moving the companies in the right direction. We’ve done a number of individual sales. We’ve also done portfolio sales. Which now means that the portfolio that is in the trust are portfolio companies that we really feel have a good future from this point on.

Writedowns and valuations

Gavin Lumsden:

A number of the trust’s holdings were written down in value last year. Atom Bank was one. BenevolentAI and Revolut. One reason for the wide discount on the shares, may be investors’ concern there could be more write downs like this to come in private equity. How up-to-date is the valuation? Does it reflect all of the fall in stock markets last year?

Harry Raikes:                  

So, the portfolio’s reviewed quarterly in terms of full. We release a daily NAV, which factors in the valuation of the public holdings and the changes in foreign exchange rates.

Gavin Lumsden:

NAV is the net asset value of the investments.

Harry Raikes:                  

So, the whole portfolio, as it were. Then reflecting the changes in the public holdings day-by-day and, also, the foreign exchange rates that we apply on investments denominated in other currencies. So that’s fluctuating daily. The fund’s largest holding is Oxford Nanopore, a listed company, that is reflected in that daily price. The private equity holdings are reviewed on a quarterly basis. So, there’s a full review of all of the private equity holdings, all the holdings actually, in terms of some of the listed holdings that may be less liquid. So, the whole portfolio is reviewed in full on a June period end a December period end.

Then in the intervening quarters of March and September, the valuation process is based on what we call a triggering event. So, if there’s a material change in the outlook of that business, the valuation team will take a look at it and then that will be considered for revaluation within that quarter.

Gavin Lumsden:

You mentioned the valuation team. So that’s separate from you. You’re not marking your own homework?

Harry Raikes:                  

Exactly. Completely separate team. Investors may remember that the board took steps during the course of last year to change the AIFM [alternative investment fund manger] of the fund.

[THIRTY MINUTES]

So now that role that intels the valuations has passed from LINK to Schroder Unit Trusts. That is a separate team within Schroders that’s specifically focused on valuations and they’ve now got oversight of the valuations in the fund.

What happened at Revolut?

Gavin Lumsden:

Could you take a more conservative view on your valuations? I’m thinking about Revolut, neo-online bank, it’s a big part of the portfolio. They were right down in its valuation last year, no great surprise, lots of companies were. There were reports of different investors writing it down by different amounts. Could you clarify what was going on with Revolut?

Harry Raikes:                  

The valuation team would have their own comments in terms of how conservative they see their own process. They look at the portfolio in full. The value different companies in different ways. Depending on what the profile of that business is. So, look at a company like Revolut, where it has scaled revenues, is growing. We have access to information, both through our investment, but also through exposures that we have through our fund’s portfolio. We can take a very detailed view of how the market is viewing that and our valuation team can make a call as to how they do that.

Those companies are typically valued because they have those scaled revenues, on a mark to market basis. So, they’ll be looking at how the business is performing, how they peer set is performing. Also, on a relative basis and therefore, the valuations can reflect both of those dynamics.

Tim Creed:       

                

I think I’ll say a few more words about Revolut because that’s a relatively high-profile company within the trust. We have been investors through our venture funds in each of the financing rounds that Revolut has been through. So, series A, series, B, series C, series D and now, directly in this trust through series E. So, we’ve seen the journey that the company has taken. What we’ve liked about the company is it ticks those four boxes that we mentioned earlier in full. It really has great product technology. It has great growth potential. It’s got a great management team and it’s also got great investors.

So, it really is a prime example of a high-quality business. What we’ve also see is the growth that it achieves through all cycles have been amazing. If you think about what the company was known for originally, it was originally known very much for currency exchange and then Covid came along and people couldn’t travel. Yet despite losing or having a big part of their business being less popular, the company was still able to grow. So Revolut has proven its long-term growth through a variety of different challenges. So, what we see is, if you look at Revolut and you compare it to many other companies, some companies are very good in one country or they might be very good with one product.

There are not many companies out there that are multiproduct multi-country and Revolut is. Revolut really can do a lot of things in a lot of geographies, which means the ceiling for Revolut is very, very high. In fact, we would argue that it’s one of Europe’s best venture capital backed companies.

Gavin Lumsden:

So, the 46% write down there was last year, isn’t a reflection that the business is going wrong. The underlying business is a good one?

Tim Creed:                       

We think it’s a very high-quality business. We should definitely say that was a valuation that was done by the valuation team, which is separate from the investment team, but it was also due to market coms rather than the company itself having any form of struggles.

Gavin Lumsden:

It’s comparisons with listed banks and fintech firms.

Tim Creed:

Correct.

Gavin Lumsden:

It’s being incorporated into the sector wide valuations as well as business specific one.

Harry Raikes:                  

I’d make the point there, in terms of how we underwrite these types of investments because they are such high growth, we may be paying relatively high multiples for that growth. We have, within our base case, typically an assumption that the valuation of the business will decline over time. What’s happened really is that the valuation of some of these businesses on a mark to market basis has fallen quite so quickly because of the change in markets over that period. It’s just happened so quickly, that we haven’t had sufficient time for the company to grow, from an underlying financial perspective, to hold the valuation the same. So, it’s justified that it’s marked down, but the business is doing everything it should be at an underlying level.

We turned down many investments

Gavin Lumsden:

Picking up on the valuation point. Clearly, last year was a difficult year for valuations, what’s going on, what’s being revised. Was that a reason for-, does that make it difficult? Does that slow up the pace of investment for you? You’re wanting to transition the portfolio, find new things. You’ve made 11 investments, could you have made more? Was it a difficult or are we in a buyers’ market? What’s going on?

Tim Creed:                       

It’s a very interesting question and it’s not just for this trust. This trust is part of the overall book of private equity and venture capital that we manage. So, we have announced a significant amount of capital to make investments. I would say there’s rarely been a period like the 18 months from middle of 2021 to the end of 2022, where we declined so many investment opportunities. For us, we decided that we have a-, well, we’ve always had a very high bar. There were some companies that looked very attractive on initial review. As we dug into them, we felt that there was either something wrong with the valuation or with the market.

There were certain risk elements that meant that we were not comfortable to make those investments. So, we actually declined a very large number of investments through that 18-month period. We feel with the benefit of hindsight and looking back in time, that was definitely the right decision to make. We feel the investments that we did make into companies like Ada Health and Revolut and Back Market were really game-changing companies that are truly differentiated and truly good at what they do. We would have been able to invest in many other companies, but we chose not to.

Where we sit today, is the market and the pipeline has got interesting again. There are quite a number of quite exciting companies out there. We have an investment committee every week and if we look at the companies that are coming through to the investment committee and the companies that we’ve been working on for three, six, 12, 24 months, we’re seeing a large number of quite exciting opportunities at the moment.

Portfolio split

Gavin Lumsden:

The trust is becoming more global. It’s changed its name to reflect that, but it’s currently quite UK focused. 80% or so. What will that UK allocation go down to?

Harry Raikes:                  

The long-term ambition of this fund is to diversify risk and that will involve a change in the regional allocations of the fund. So that will obviously, be a gradual process because we’ll need to transition some of the companies. It won’t be linear, but if we look across what we’re doing within our global innovation programme overall, looking for the best opportunities globally wherever they are. I would say we’ll probably come in close to 40% Europe, including UK, 40% in the US and maybe, 20% from our Asia programme. That would be the broad outline, but as I say, the portfolio is bound to differ from that outline because there is that transitional element to it.

Gavin Lumsden:

In terms of the sectors, it’s very healthcare dominated at the moment for historical reasons. 54% in healthcare. Is that going to come down a lot too? I see the life sciences is one of the three buckets you mentioned and the target there is 10%, but life sciences maybe isn’t the same as healthcare. Will healthcare come down or are you happy with that 50% or so?

Harry Raikes:                  

That 10% is very specific to the therapeutics type of portfolio that we’re developing. There will also be healthcare businesses within venture and growth. We’ve got Ada Health, for example, in the growth bucket. That’s a digital health business. So that would fall within the theme. I think when we broadly talk about the different sectors that we invest across, typically, our portfolios have roughly 60% in healthcare and technology. So those would be broadly, the outline of what we’ve been doing. As I said, very specific in terms of therapeutic risk because that’s a specific profile of companies.

Why do you hold companies after flotation?

Gavin Lumsden:

Touching on a topic I was thinking of asking you anyway. ‘Why do you hold companies post-IPO?’ I think you’ve got 25%, broadly, is what you’re prepared to hold on to companies after they’ve floated. IPO being Initial Public Offer in case anybody is wondering what that is. Oxford Nanopore, one of the difficulties for you last year was the fall in that share price. So, is it a problem to be holding on to companies for so long after they’ve floated? In that case you were restricted from selling, I understand.

Tim Creed:                       

If you look at our overall history for the last 25 years, we’ve been investing in venture and growth for that whole time. If you look at the success stories of venture capital, firstly, a lot of that success has been when those companies have been private. Also, a lot of that success as a world, as an industry, has been when those companies went public. So, in some of those cases, you see a lot of the value creation when they’re private. In some you see more when they’re public. In some you see both. Google for example, was a magnificent venture story, but it’s also been an even more magnificent public story.

So, what we do believe is, when you find really high-quality businesses, we would like to hold them through the private journey because that’s how we get to know them, that’s how we get to benefit from a lot of the early growth.

[FORTY MINUTES]

Then when they’re successful, we’d also like to hold them post-IPO. What makes this trust relatively unusual compared to most vehicles that invest in the venture space, is that we are actually able to hold those companies post-IPO. So, we are actually seen as a differentiated, long-term investor for the companies when we invest at the venture stage and that is useful in order to distinguish ourselves from the other vehicles that are out there.

So, we believe that it’s good to hold companies both when they’re private and when they’re public. The challenge of course, is that journey through that IPO and beyond. There is a lockup period, which in most cases lasts for six months. In some cases, you see companies’ share price increase during that time, sometimes decrease during that time. I wouldn’t say there’s one fixed rule. For us, we look at the companies on an individual basis to see what we should do with each of those underlying companies.

How have new investments performed?

Gavin Lumsden:

Another question from a viewer is, ‘Can you please comment on the aggregate performance of the new investments that Schroders has made?’

Tim Creed:        

So, we feel that the last 18 months has been a very challenging year. The key has been to access to access and invest into really high-quality businesses. The underlying performance of those companies has been very, very strong. Clearly, the overall valuation is slightly decreased, as we’ve seen a huge decrease in the wider venture growth and post-IPO market. We feel that where we sit today is, we’ve still got access to some very high-quality businesses. Companies like Back Market, for example, are growing really, really strongly and we are, therefore, very pleased with the aggregate portion of those private investments and we’ve not even touched upon the life science deals, where there’s really some nice little gems in there.

Circular Back Market

Gavin Lumsden:

Do you want to say a bit more about Back Market? You got six new investments last year and five of them were on the life sciences side. Back Market isn’t part of that. What is it?

Tim Creed:                       

Back Market is part of what’s called the circular economy. The idea being that things shouldn’t be wasted. I think many of the viewers and listeners will be very conscious of how the world sits today, there’s a lot of resources that are wasted. There’re not enough resources in the world. What Back Market does is it ensures that resources used, for example, electronics, etcetera, can be repurposed and resold and used again. Now that sound relatively simple, but it’s actually a very complex business in order to make sure that your access and the company itself can gain access to the legacy technology equipment like iPhones or various other phones, various devices.

Back Market is the leader in Europe at that recycling, repurpose position. It’s been growing very fast in the UK since our investment and that was part of the rationale of our investment and if any of your viewers or any of the viewers and listeners are actually based in London, I’ve sure people have seen the adverts on the tube. It’s also been nicely profiled in a number of the broader media about the growth of the company. So that was a private investment. It’s almost impossible for most investors to get access to it because it’s a private company and we’re very pleased to have that in the trust.

Managing the discount

Gavin Lumsden:

Question here from Tom. ‘What is being done to narrow the discount?’ You referred to buybacks, but do you want to elaborate what is being done to what is a pretty wide discount of 46% currently?

Tim Creed:                       

Certainly, the discount for almost all investment trusts, particularly those with private content is very wide. That is a very unfortunate dynamic. It’s been like this for the last six, 12, 18, 24 months for many trusts. This trust is no different. Arguably, this is at the more extreme end because as you say, it’s a pretty sizeable discount. We feel there’s a few things that we, as the investment manager, but also as people running the trust have been able to do and can continue to do. The first was around investment strategy. It’s been really important to access the best companies globally.

When the trust was focused purely on the UK, it was focused on a relatively small pool of companies that we can invest in. Now, we can invest globally. We think that allows us to get access to a much larger, much better quality of company. We’ll of course, continue to invest in the UK, but being able to invest everywhere, we think is really useful. Secondly, we want to grow the companies that are in the trust. Companies like Back Market, Ada Health, Revolut, as well as the companies that Harry talked about. Oxford Nanopore, etcetera, Atom Bank. They are growing nicely and as long as the revenues and earnings of these companies are growing, then the overall NAV should follow in time.

That leads us back to the circular argument around discounts. Here, we strongly welcome the two major initiatives that the board have put forward. The first is the continuation vote. We do feel that a continuation vote in 2025 will help reduce the discount. Also, the statement that we’ll make a sizeable amount of share repurchases, the buyback programme both in calendar year 2023, as well as in calendar year 2024, which we’ve already announced that we will do this year and next year, we think will really help reduce the discount.

Gavin Lumsden:

The board is committing to buy a minimum of 5% of the shares per year.

Tim Creed:                       

Correct.

Gavin Lumsden:

Also, 25% of any realisations.

Tim Creed:                       

Correct. Any realisations of the older holdings, yes.

Gavin Lumsden:

If you sell a legacy position, a quarter of that money will go towards buying back shares. 5% is clear as a minimum, but any idea what that 25% might involve?

Tim Creed:                       

We’ve done an awful lot of modelling, as you can imagine. At the same time, one of the challenges of the private companies is you must sell them at the right time, at the right valuation. It’s not like public markets, where you can sell shares at any time. With a private transaction, unless it’s an IPO, which then means it’ll be lockup period and then there will be a sale and then you’ll be able to sell the company once it’s public. Unless it’s that, the other part is for it to be a private sale. Those private sales do not happen every day. So, we want to make sure we negotiate the right private sales at the right prices. That’s something that we’re not going to be rushed on. It’s more important to get the right price as I say.

Two years to continuation vote

Gavin Lumsden:

Anonymous question here, but you referred to the board’s other announcement around the continuation vote in 2025. So, two years. ‘Effectively, have you got two years to convince investors that what you’re doing is right and is working?’

Tim Creed:

We all hope that we’ve demonstrated a significant amount of that over the last three years with the transition that we made of fixing the old portfolio, of repaying the debt, which I must admit, was a very big challenge to do such a large number of sales and repay the debt and then renew investments. At the same time, yes, it’s very clear the next 24 months are very important for this trust. We have a large team working on this trust to make sure that the next 24 months are as successful as possible.

Gavin Lumsden:

You mentioned debt, you’re debt free at the moment. Did I read you’ve paid off your credit facility, effectively your overdraft last year?

Harry Raikes:

Exactly. £60m at the end of last year. We haven’t announced the results for the first quarter, but we’ve made the investment in AgroStar. So that was just under £7m. We’ve got a good cash balance. We’ve got a portfolio with public investments that we can look to realise. We mentioned that Nanopore is 22% of the asset value. I think naturally, over time, we’ll look to-.

Gavin Lumsden:

That could be a source of funds as you reduce that stake when the times right.

Harry Raikes:                  

Exactly, when the timing is right, looking at the portfolio overall, be we’ve got that public equity portfolio to access.

When will the downturn stop?

Gavin Lumsden:

Michael Kynan asks, ‘I’ve been invested since 2015. It’s been down, down, down. I’ve viewed every Schroders presentation, all positive stuff, but still down, down, down. When on earth might it start to pick up if all the companies in the portfolio are good?’

Tim Creed:                       

That’s a very fair question. The period before we took over the trust, it’s very hard for us to comment on, as you can imagine. The share price was around 30p plus or minus when we took over and when we became portfolio manager. It has decreased since then, for that we do apologise to the shareholders, that’s not what we expected when we took over the trust. We felt that we would be able to move the portfolio very quickly. It’s been a lot of work, there’s been a lot of people focused on moving the portfolio in the right direction. It’s been three and a half years to get us to this point.

The world’s been a challenging time during that journey, but at the same time, I certainly don’t want to suggest that Covid or anything else has been a bigger play than it should be. We are now at the position where we strongly believe that the new investments, as well as the fact that we’ve moved the old investments in to the right direction, mean that we have a very good chance for a nice positive journey from this point forward.

Gavin Lumsden:

‘Did the trust incur a lot of cost when Schroders took over in December 2019?’

Tim Creed:                       

We could get back to the full details, but it was very limited. That process we should say, was run by the board. The board of the trust ran a full process to select a new investment manager to run the trust. Schroders were just one of the many firms that bid. There were other private equity firms.

[FIFTY MINUTES]

There were other investment firms who bid to become the new manager of the trust. We’ve spoken to the board about the process. They and their broker and their intermediary ran a very, very competitive process. Full RFP, presentations, etcetera, etcetera.

They selected us. We’re told that one of the many reasons they selected us was because of the public and private capability, as well as our experience at really moving healthcare investments in a positive direction, which was at the time, something that was strongly needed. We don’t believe there was a significant cost to that process.

The advantage of co-investing

Gavin Lumsden:

In terms of private equity experience. Can you clarify because you’ve shown a number of private equity fund managers that you invest through. Are you operating a fund of funds approach? Are you investing in the funds of companies like Excel, Lightspeed, Sequoia Capital, the well-known global private equity firms or are you investing alongside them?

Tim Creed:                       

That’s a great question, I’m glad it’s been asked because we definitely want to be very, very clear on this topic. So as a firm, Schroders Capital has been investing in venture capital funds for the last 25 years and therefore, Schroders Capital has invested in many of the venture funds that you mentioned, as well as other ones out there, in the US, across the UK, across continental Europe, as well as across Asia. From those relationships, we get access to the best deals. So, this trust invests solely in the companies themselves. This trust does not invest in those venture capital funds. Those venture capital funds generally have ten, 20, 30, 50 companies. This trust will invest purely in the individual companies themselves. Like Back Market, like Ada Health, like Revolut, like AgroStar, etcetera.

Gavin Lumsden:

So that’s linking back to the viewer’s question about costs. That is a more cost-efficient way of doing it because private equity is known, when you’re investing through other funds, you’ve potentially got a double layer of fees.

Tim Creed:                       

Correct. If you invest in a fund of funds model, as you described, you normally have the parent fee and carry and then also, the underlying venture capital fee and carry, which varies, but is often described as two and 20. We do not have to pay 2% and 20% on all of our underlying investments to another party.

Gavin Lumsden:

Oxford Nanopore, you refer to its revenues, the core revenues being positive in the results, showing a lot of growth. How does it make its money because it makes these portable DNA sequencers?

Harry Raikes:                  

Exactly, yes.

Gavin Lumsden:

Is there a follow-on revenue, servicing model? What is the business model?

Harry Raikes:                  

Firstly, I’d point at that Nanopore is a leader in long read technology. So, their technology is at the very advanced end of this market. There are applications that are developing. So, looking to get these sorts of tools into more mobile areas like environmental monitoring, forestry monitoring. A whole range of different applications. It’s a mobile approach, relative to a very mainframe approach, which is the short read technologies. That allows you to get far more insights in terms of what you’re analysing and analyse it in a quicker way. So, this business is really a razer and blade type approach, in that you’ve got the actual devices, but then you’ve got all of the associated consumables. So once the user has that device, they then continue to purchase all of the consumables that go with it.

Gavin Lumsden:

Atom Bank, could you say a bit more about the progress it’s making as well?  It’s your second biggest holding around 12%.

Harry Raikes:                  

Atom Bank’s a UK mobile-led bank. So primarily, customers are accessing it through their mobile. So, on the one side you’ve got depositors putting their money with Atom, on the basis of promised interest rates. Atom is a leader in terms of its ability to dynamically price its deposits. Then on the other side, they are lending to small businesses and to homeowners through mortgages. That’s really the end-to-end process of what they’re doing and they’re looking to do it in a very efficient way. So through the process of doing it on your mobile, through the process of applying technology, they want to be able to have much lower cost than traditional banks.

That means that they can generate higher returns on their equity and therefore, achieve a higher valuation from investors. That’s the process they’re going through at the moment in terms of scaling up their balance sheet to show investors that they can really deliver those sorts of returns that they expect.

Gavin Lumsden:

The five life sciences investments last year. That’s the higher risk end of what you’re doing. You’re trying to have a diversified portfolio. You’ve invested in five companies. Which is your favourite, which is the one you’re most excited about?

Harry Raikes:                  

I really think of it as a portfolio to be honest. I think they all have really interesting, exciting areas and this is part of the challenge of investing in this part of the market. Everything can be really exciting when you get down to the nuts and bolts of it. We really feel that the portfolio approach in this space, that’s what we expect to deliver.

Gavin Lumsden:

They’re all doing interesting things, but there’s more of a binary bet going on in terms of whether they’ll be successful with the treatments they’re trialling.

Harry Raikes:                  

Very specific to key inflection points associated with clinical trials. So, we’ll be assessing risk with a viewpoint in mind and what potential value might look like in the future, but it can be more binary in profile. Therefore, that’s the need for that portfolio level diversification.

Tim Creed:                       

We have a few other portfolios that we run for institutional clients, where we have little sub-portfolio of life science biotech and our strong experience of the last 25 years is the best way to succeed in life science biotech is do it in this portfolio approach is how we describe it. That way, you have opportunity to diversify the risk by therapeutic area, by treatment, by stage, by geography, etcetera. We think that’s a much better way, rather than taking single company, I wouldn’t like to say bets, but single company evaluations where you just have one company. We think it’s much better to have this portfolio.

What is AgroStar?

Gavin Lumsden:

The most recent investment in AgroStar, an Asian company. Living up to now, a global name. What is AgroStar?

Harry Raikes:                  

That’s an agricultural technology company out of India. It’s a company that Schroders Capital has been invested in from other funds historically and we’ve looked to participate from this fund as part of the broader financing that we put together from our funds. It’s a leading ag-tech business. It’s combining both a mobile approach and a physical stores approach. What it’s looking to do it to help small Indian farmers with basically, three key issues that they face. Firstly, access to the high-quality inputs to their agricultural approaches that they need.

So, fertilisers, seeds, etcetera. Getting access to high quality inputs is really key for them. Secondly is educating those farmers through the mobile interaction and they’re serving millions of farmers in that region. Helping them optimise their business. So, from both optimising the crops and being able to grow with better efficiency, but also, managing costs. Then thirdly, the last thing is then helping those farmers access more markets to achieve better pricing for their produce. That results in a circular element, where those businesses ultimately perform, helped by AgroStar as the underlying platform.

Do you own the trust’s shares?

Gavin Lumsden:

Last question, do you have skin in the game?  Are you invested?  How many shares do you own in the trust?

Tim Creed:                       

Yes, I invested personally, at the point when we became portfolio manager, so some three, three and a half years ago and I have invested a number of times since as well.

Harry Raikes:                  

Also personally invested. I’ve been invested in the fund for several years. Even prior to Schroders taking on the fund.

Gavin Lumsden:

You were working at Woodford Investment Management and you joined the transition team and then joined Schroders. How useful has that been, Harry?

Harry Raikes:                  

I started as an investment analyst at Woodford, worked there for four and half years. Worked very closely with this portfolio. Gained a lot of experience in that time about these kinds of companies and then I was very fortunate, at the end of the Woodford period to be offered the opportunity to come to Schroders and I’ve been working very specifically on this fund trying to help with the transition period.

Gavin Lumsden:

Harry, Tim, thanks very much.