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Investors back private equity as Scottish Mortgage defends its position

17 May 2023

European and UK investors have been looking away from listed companies over the past year, according to a report released on the same day as Scottish Mortgage’s final results.

By Jonathan Jones,

Editor, Trustnet

Everyday investors have around 8% invested in private equity, although they have a lower weighting to private businesses than their institutional peers, who have an average allocation of 9.2%, according to a study by Research in Finance.

The study of 892 European fund selectors found that Germans have the largest allocation to unlisted companies (12% of the average portfolio), closely followed by Benelux at 11%, with France and Switzerland next at 9%. UK investors lag behind their rivals on the continent, with just 4% invested in the asset class on average.

José Cosio, managing director at Neuberger Berman, said: “Private market strategies have long been used by institutional investors to help reduce volatility and deliver consistent, long-term performance. However, for decades, individual investors have had limited access to similar private market opportunities.

“Fortunately, the democratisation of the asset class continues to accelerate, with retail investors increasingly able to access private strategies.”

Private equity has become more popular among retail investors, with a net 11% of retail allocators upping their exposure last year, in comparison with a net 7% of their institutional counterparts.

A net 12% of European retail allocators are poised to continue increasing client exposure, while just 4% are set to do so from the institutional segment.

Investors are turning to private equity for a number of reasons, with diversification chief among them. Equities and bonds have moved in tandem for a long time, with some analysts suggesting the end of the traditional 60/40 portfolio as a result.

One company unafraid of buying unlisted companies is Scottish Mortgage, which released its full-year results today highlighting that its managers have now been investing in unquoted stocks for more than a decade.

Fiona McBain, outgoing chair of Scottish Mortgage, said: “Increasingly often, high-growth companies are found in private markets. Investing in private companies has formed part of the company's investment strategy since 2012 but this trust does not invest in start-ups, and as such, we are not venture capitalists. We invest in large, late-stage companies with an average size of $10bn and a global footprint.”

Co-manager Lawrence Burns added: “We began this journey in 2012 when Yahoo! was looking to offload its stake in the Chinese e-commerce behemoth Alibaba. It was a fortuitous start to private company investing.

“The trust’s £30m holding became worth more than £150m just two years later when Alibaba launched what, at the time, was the world's largest-ever stock market flotation.”

Since then, the managers have gone on to buy businesses including Elon Musk’s SpaceX, healthcare specialist Tempus Labs and Chinese tech company ByteDance.

Burns highlighted four main reasons the trust remained interested in private equity: companies staying private for longer, access before the mainstream gives them an advantage, insights to future market leaders, and lower-cost access.

“Over the past decade, our private exposure has grown to become an integral part of Scottish Mortgage. It has expanded our opportunity set from which to identify outliers. It has provided insights that would have otherwise been out of reach and we believe it offers our shareholders exposure to exceptional hard-to-access growth companies at a low-fee level,” said Burns.

“The role of Scottish Mortgage will continue to be to support that growth in entrepreneurship in good times and bad, whether public or private, and through doing so generate long-term returns for our shareholders.”

Private companies have also been popular among high-net worth investors, according to the latest report from HMRC, which announced record investment into Enterprise Investment Schemes (EIS), up 39% in 2021/22 to £2.3bn, while money added to the start-up version of the same initiative, Seed Enterprise Investment Schemes (SEIS), rose 16% to an all-time high of £205m.

Investors in EIS vehicles get 30% income tax relief, are charged no capital gains tax on profits made and can apply for inheritance tax relief. Those in SEIS investments get income tax relief of 50%.

Alex Davies, CEO and founder of Wealth Club, said: “2021/22 was a record year for EIS and SEIS investment and shows that investing in early-stage businesses is becoming increasingly mainstream for wealthier and more sophisticated investors, attracted by generous tax incentives and the potential to invest in the next big thing.”

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