Navigating the $14tr private market

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Brian Kelly (BK): 
Thank you all for coming. The topic today is navigating the $14tn private market opportunity. We'll start with some introductions. To my right, we have Peter Singlehurst. He's the head of the private company business and firm partner. And we have Rob Natzler as well. He is a co-manager on our private company funds and together helped found the private company business with Peter. I'm Brian Kelly. I'm an investment specialist in the private company business. Before I joined Baillie Gifford, I was in your seats as an allocator for 11 years. The plan today is quite simple. We will start with a background of some big picture thinking on private markets and why we allocate capital the way we do in different asset classes. Then Peter will give a bit on why we're excited about the private growth asset class in particular. And then Rob will give some history of Baillie Gifford's involvement in private growth and bring it to life with a few case studies. With that, I thought it'd be helpful to start with first principles of private markets. And I think the best way to set the stage is to look at the growth of private market assets over time. And I think there's one takeaway that I'd like to take from this chart here, which is that if you remove the top yellow bar here, which is the dry powder in the private market ecosystem, what you can see is that the purple and the yellow, the buyout and the venture, are the large majority, the lion's share of assets deployed in private markets. The rest is private growth and then a lot of yielding assets like infrastructure and real estate and private credit.

The question to ask is why does so much capital congregate and anchor in buyout and in venture? We have teams and institutions that are built around buyout and venture. And there's a lot of answers for this, but I think the one answer we want to explore today is this concept of those two asset classes give something very clear and very different than what public markets can generate. In the case of buyout, private markets give you control. And so you can do things with control that you can't do if you're a passive owner. And in the case of venture, it gives you asymmetry and asymmetry gives you that power law type outcome that can be additive to a portfolio. Let's explore both of those before I hand it over to Peter.

We'll start with this funky value creation bridge, which seeks to explain the concept of control, but using the different elements of what generates value for a hypothetical company. Before I get into it, I think just to set the table stakes here, this is a hypothetical scenario. It's based on an individual company and it doesn't really represent the actual results of a fund. A fund includes things like the hit rates of successful investments and so on. But it gives you the idea of the building blocks of return for an individual company. On the left, the way we've developed this scenario is we've said, let's look at the Baillie Gifford averages. And what you see is you see about a 60 per cent revenue growth rate. In history, we've done investment companies slightly faster growing. But what we've done is 60 per cent revenue growth rate with a lot of operating leverage, meaning at investment, it's burning a lot of cash. And over the five-year hold, it pivots to profitability. And that's what generates this chart. There's a whole backup spreadsheet you can go through if you're interested. On the right we have buyout. And buyout is built up from pitch book averages. Without getting into all the details, effectively just remember the rule of 10. We're estimating about 10 per cent revenue growth, 10 points of margin expansion and about 10 times Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). That's more or less how you get a chart like this. The really interesting conclusions here when you think about why is control so important for buyout, is it's really this point here around margin expansion and financial leverage. Margin expansion is quite interesting because if you have control, you can do things like cut costs, cut headcount and if you can increase the margin, the EBITDA margin of a company by 10 points, which we have modelled in here and it's valued at 10 times EBITDA, you've now doubled the value of that company. It's quite powerful. The other reason control is quite effective is that you can then lever a company far more than any public market rational investor would ever allow. And so you can eke out a little bit more returns. And when you build that up and you build in the revenue growth you might get, the margin expansion, the financial leverage, you get to a really attractive total return. That is why we like buyout as an industry.

Now if we compare that to growth, there's two takeaways I'd focus on, ignoring the fact that it's so different. The first is that that value creation, that pink bar on the left, is driven by exceptional management and product-driven growth. This is really special because at Baillie Gifford these are things we can underwrite. They're things we've underwritten going back decades across public markets and private markets. To give an example of this, Rob will talk more on it in a few moments, but the company Anthropic, which is a large language model company focused on coding, they generate about 80 times more growth per sales employee than the average enterprise software company because their product is so good. And that's what can fuel this really exceptional growth. The other thing I'd point out is that we often look at growth rates and we think of them in the percentage of an annualised basis, but I don't think it's as common to map out what does that look like over five years. If you do map that over five years, what you see is you get, if you compound 60 per cent over five years, you get to about 10 times growth. And if you have a base of revenue growth over 10 times, it means you can absorb a lot of things that could possibly go against you. You can absorb multiple compression and dilution and maybe a slightly longer time period to hit the target you expected. But in summary from this chart, what I want everyone to take away is that buyout is very complementary, or sorry, growth is very complementary to buyout. The sources of return are very different, but it can give you something very special that you can't get with buyout.

Next, I think it's helpful to look at the lens of asymmetry. Because again, this is why we invest in venture capital as an industry. And so venture, we can really look at venture as that tiny purple bar on the left of seed stage investing. What we show in this chart, by the way, is we're looking at the median company size by every potential stage of that company's lifecycle. And what you can see in venture is that that is the most asymmetric point of a company's life cycle. If you invest in a great venture-backed company and it can prove product-market fit, by the time it graduates to our stage, to growth stage, the median step-up in valuation is about 23 times. That's great. If you invested in Google back in 1999, you saw 160 times step-up in valuation when it went public in 2004. That is the dream of venture capital. The thing that I think is less obvious in the industry is that growth can give you a very similar type of asymmetry. The takeaway from this chart is that it's similar asymmetry, it just might take a little bit longer. Maybe it's not the one step up or one stage, maybe it takes a couple more years, but that's really important. The other takeaways, which are not really as relevant or prevalent in the chart, is that growth is less risky and it can absorb more capital. If we were to bring this to light with a company like SpaceX, when we first invested in SpaceX, it was actually around here. It was a $30bn company. It was around the size of a median S&P 500 company. We've since seen that valuation rise 12 times. It's worth about $400bn today. And it's about the 25th largest company in the world. What's really special about that is it's been profitable for much of that journey, meaning it's far less risky than the average venture investment. And a lot more money could be deployed into that company along that journey. That's the summary takeaway here is you get a very similar asymmetry to venture. You get less risk and you can deploy more capital into growth. It just may take a little bit longer.

The last first principle I want to cover is relative valuations. And this can be a helpful starting point when thinking about where to allocate capital where it's needed most. Interestingly, a couple years ago when we'd start with this conversation, it was a very clear message that we were really excited about private growth, because it had seen that massive correction in valuations and I mean effectively we were here. And it was a really nice starting point. Where we're at today is that private growth looks expensive, so it's a helpful starting point to measure. But the reality is that everything is expensive in the private markets. Venture is expensive, buyout's expensive. In fact, you can zoom out even further and look at the Nasdaq. The Nasdaq today is valued around seven times revenue and it hasn't been that expensive since the dot-com era. Everything's expensive. It's not as helpful to start with valuations. What is helpful is to think about the actual companies in the portfolio. And so it's nice sometimes to deconstruct some of these headlines and go back and say, well, what do we actually own? What do we invest in? And what we can see is that it's far from everything is expensive. There's a lot of companies in the private growth domain that are actually downright cheap. I mean, ByteDance we invested in at around eight times earnings a couple years ago and it's still eight times earnings today. The IP marketplace is a new addition to the portfolio. I think it's actually 12 times earnings when you look at the revised financials. But that was as of a couple months ago when we first underwrote it and Revolut at 47 times. What's really important here, though, is that this really is dependent upon sourcing, selectivity and access and it's really about partnering with an underwriter, with a platform that can find great opportunities. In summary, growth is, I should say, buyout and venture are the heavyweights in the private market domain. They're what receive the most capital. But growth can be quite complementary to those two asset classes in the average allocator's portfolio.

And so with that, I'll turn it over to Peter, and he's going to walk through some of the reasons why we're excited about the private growth domain specifically.

Peter Singlehurst (PS): 
I'm going to do two things. I'm going to talk about why we like private growth investing from a bottom-up stock-picking perspective. I'm going to try and dispel a few myths around the private growth equity asset class as well. Maybe just to level set first, what do we actually mean by private growth investing? It can mean lots of different things to lots of different people. But just to give you a sense of the kinds of businesses we're investing on behalf of our clients within our dedicated private portfolios, the average company is doing a couple of $100m in revenue, is still growing about 70 per cent year-over-year. On average, it's slightly loss-making, but some are already very profitable when we first invest. These are big companies. Many have proven product-market fit, but they're still growing really quickly. There are sort of four reasons why we like growth investing. Firstly, we think there are attractive risk-reward dynamics. Secondly, just the underlying business quality. Thirdly, valuations. And then fourthly, we really like the scope for competitive advantage as investors when you're doing private growth investing. Let's start with the risk reward dynamics, which this slide attempts to illustrate.

As investors, what we all want is lots of upside, lots of reward with as little risk as possible. We think that those dynamics are really compelling within growth equity investing. On the left-hand side here, we've tried to illustrate just the magnitude of growth, the magnitude of upside you can still get at the growth equity investing stage. These were all series C plus companies when we first invested. And what you can see here is the growth in these businesses that we've seen over the period that we've been shareholders. Lots of upside. At the same time, the downside risk that you face in growth equity investing is much less than you would see in venture investing. Growth equity loss ratios are lower than venture. And fortunately, Baillie Gifford's growth equity loss ratios are lower than the average growth equity loss ratios as well. Hopefully we're doing something right in avoiding the duds in our industry as well. Now when you think about it, there's an underlying logic as to why this is the case. When you're investing in growth equity companies, you're investing at a point where they are young enough for there to still be a lot of upside but where they are de-risked enough and where they are proven enough that you are avoiding those very high failure rates that you see at the venture stage. Compelling upside and much lower downside risk that you might associate with say venture investing. The second reason we like this asset class is just the quality of the businesses. Now what I mean here very specifically is competitive advantage for every company that we invest in competitive advantage is one of the main areas that we really focus on because competitive advantage is what drives a business's ability to continue to grow and compound over long periods of time. But it's also what defines whether or not that business can earn high margins by having pricing power and can earn high returns on equity, which is ultimately what this is all about, trying to find businesses that can grow for a really long time, earn high margins, then a lot of profit relative to the amount of capital that has gone into their businesses. Competitive advantage is what enables that. This is just a couple of examples we've tried to illustrate here, and these are examples which you'll hear about a lot over the coming few days.

The first company on the left is one of the core advantages of a business that we're shareholders in called Bending Spoons. Bending Spoons is an acquisitive software business, but core to their competitive advantage is talent. They are absolutely maniacal on talent density within their organisation. This slide is now actually slightly out of date because they're on track to have 800,000 applicants this year for just 200 jobs. They are able to recruit the best engineers in the world. They are able to outcompete the likes of Google or Alphabet and Meta to bring in the best engineers to be able to take these digital consumer applications that they acquire and turbocharge growth and profitability within those. It's been around for 12 years and they've built that advantage over 12 years.

SpaceX is a company you'll hear about a lot over the coming few days. I would argue SpaceX has one of the most entrenched competitive advantages of any business in our private portfolios. And just to give you a sense of how far ahead they are of everybody else, last year they did 138 orbital launches. The United Launch Alliance did three. Blue Origin did zero. And China, the whole country, only did 66. It's that advantage of launching rockets, getting stuff into space cheaply, which underpins their ability to grow and underpins their ability to be really profitable. When you're doing growth equity investing, you can invest in companies that have these really robust competitive advantages. Again, very, very different from what you would find at an earlier stage of investing, where companies are just getting going and any potential advantage is very nascent and very theoretical. We like the depth of competitive advantage that you can find doing growth equity investing. And then we really like the prices that we're able to invest in companies at as well. What we're trying to show here is just the relative valuations of some private and public businesses to give you a sense of the levels of growth and the price of that growth measured on a multiples basis. What we're trying to show on the left here is the relative prices and growth rates of Stripe, a private business, which we own within our private portfolios, and Adyen, which is a public business, which is a great business. But what you see here, illustrated by the purple bars, is that the multiple on Stripe is lower than the multiple on Adyen, but it's growing much faster.

Same again for Bending Spoons and Constellation Software. Bending Spoons is growing much faster than Constellation Software, and we've just priced around in that business at less than half the multiple of Constellation Software. Now, why is this the case? Well, this is the case because private markets are just way more inefficient. They don't have the constant flow, constant pricing that you have and you don't have these big hedge funds, quants, arbitraging away any price differences. And this is what we're just trying to show here with Citadel, Jane Street, Renaissance Capital. These are the entities that basically arbitrage away price anomalies in public markets. You can't do that in private markets. We think it's just better scope for mispricing of business quality and business growth within the private market. That's the third reason that we think companies are cheap in private markets relative to the growth rate of them. And then if we move on to the next slide, we think there's substantial scope for competitive advantage doing growth equity investing. There are really two core elements to this. The first is the advantage that you can have in analysis. You need to be able to separate the wheat from the chaff. Growth equity investing is something that's been core to us as an organisation for over a hundred years. But in your analysis, what you need to be able to do is identify not what is good about a business today, but what is going to be good about a business in five- or ten-years’ time. What we're trying to show here is just how different companies become over the period that you own them as a growth investor. And that in turn informs how you should go about analysing those companies.

When we first invested in Amazon in the public markets in 2004, they'd only just launched their marketplace business. AWS wouldn't exist for another two years. Amazon is a totally different business to the business that we first invested in in 2004. And we've been able to make money for our clients because we were able to imagine how it might become different. Spotify was a long-standing private investment for us. We still own it in the public markets. When we first invested in Spotify in 2015, it had 15m paying subscribers. Today, it has about 285m paying subscribers. Again, a totally different business. SpaceX, just to ram home the point on this business, again, a totally different company. When we first invested in the business, they were great at getting stuff into space. They were great at launches. And we thought maybe there might be this opportunity for them in Starlink. Today, Starlink is a major part of their revenue base. To do proper growth equity analysis, you have to be able to look out over the long term. You have to be able to deal with uncertainty. That's where our heritage has lain within the public market investing sphere, and we transpose that over into our private investing capability. You need to be great at analysis in private markets and that's one scope for competitive advantage and we try to harness that by having public and private growth equity investing joined up. But there's another much more structural way in which you can have a competitive advantage doing growth equity investing and that's in analysing businesses. It's all very well to be able to point to businesses and say, well, this one looks great and that one looks great. In private markets, if you can't get access to those companies, it doesn't matter. It's irrelevant. And what we've built out over the 13 years that we've been doing private growth equity investing is a pipeline, a reputation, a sourcing muscle that gives us access to the best businesses in the world.

As a team, we meet about 1,000 companies a year in the growth equity space. We make, on average, about 10 investments. We need to have a process that has a wide funnel at the top and then says no to 99 out of every 100 companies that we look at. We think that there are two kinds of businesses that you need to have access to, to do growth equity investing well. You need to be able to access the growth champions, which are sort of represented by the companies on the left here. These are the biggest, the most high profile, in many ways the best private growth equity companies out there. But you also need to be able to access and find those companies which are going to become that next generation of companies on the left. We refer to these respectively as the growth champions and the hidden gems. What we try to illustrate on the right here are some of the lesser-known companies that we've been able to source and access over the years, but which are truly exceptional growth businesses and where in some cases we're the first institutional capital into these companies. Our edge in access comes from the structural integration between public and private investing. It comes from the fact that when we invest in a company privately, it's the touchpoint between that company or the first touchpoint between that company and an institution that can potentially go on to become those companies' largest shareholders in the public market should our public market teams see fit. And for example, in the case of Spotify today, we're the largest shareholder after Daniel Ek.

That's the case for a business like Wise, which again started off as a relatively small private investment, and where our public teams have leaned into those businesses because they see massive upside when those companies come to the public markets. This is ultimately the structural reason why you can have a compelling competitive advantage doing private growth equity investing, which gives you the ability or the right to access the best companies to then drive returns within portfolios. In summary, we like growth equity investing because of the risk-reward dynamics, the business quality, the valuations and the scope for competitive advantage. That's all very well, but I'm sure you will have some reservations still. I want to touch on three of the pushbacks that we often get about private growth equity investing as an asset class. And one which we've touched on a number of times already is valuations. People say, well, yes, that's all very good. But don't you pay through the nose for investing in private growth equity companies?

What we tried to plot here is the growth rates and the multiples of growth stage companies with the pink companies being public businesses and the yellow companies being private growth businesses that we're shareholders in. And then we sought to plot a line of best fit for the public companies. Now, really, if you want to take the simplest interpretation of this graph, you want to be as far as possible towards the bottom right-hand corner of this graph, because you want to have lots of growth at a low multiple and you want to be as far away from possible to the top left, because there you get not very much growth and you pay through the nose for those businesses. And what you can see is that our private companies are all on the side of that line that you would want to be.

If you're curious, the very top left-hand business there is Palantir. What we've been able to do for our private clients, or those clients with whom we're allocating towards private businesses, is find these companies that have growth rates which are actually a lot faster than you'll typically see in the public markets. Companies of these growth rates will typically try to avoid going public because often public markets won't properly value those levels of growth. And we've been able to invest in those companies because of the advantage in access that we have to create these portfolios. We actually think that the levels of growth that we're able to give our clients capital exposure to is very compelling at the prices we're able to invest at. We don't believe that private growth equity investing is expensive.

The second misconception is people say, well, yes, what about control? And Brian was talking earlier about the importance of control in private equity buyout investing. And our pushback on this is, well, actually control investing is inappropriate for these companies. What these companies need is not control but governance. They need to have independent boards as they get ready for becoming public companies. And that's something that we help our portfolio companies with. We held a forum for founders and board members at the tail end of last year on the very topic of how you build out exceptional independent boards to become ready for being a public company. We don't think this market is about control. We think it's about something a little more nuanced, which is governance. Not to mention the fact that you just couldn't do control investing. You couldn't wander up to the Collison brothers and say, hey, I want to take a control position in Stripe. It's just an inappropriate fit for this marketplace. And we think that there's real positive selection bias when you're backing founders who themselves want to remain driving businesses. If you are investing in companies where founders are saying, well, you know, I'm out, I'm going to go and sit on a beach, the chances are they know more about that business than you do. And we argue there's a negative selection bias there. By backing founders who want to stay operationally involved and driving companies, you have a positive selection bias. And then of course we get to partner with many of the world's finest business leaders in the private markets, whether that's Daniel Ek, Elon Musk and Gwynne Shotwell, or indeed the Collison brothers at Stripe.

We think that this market really is all about governance rather than control, and we think that actually that's a very compelling way for businesses to be managed at this stage in their growth. People will say, well, yeah, but what about liquidity? How do I get my money out? And of course, that's very important. We know that everybody has pensions to pay and liquidity really matters. Aren't IPO windows shut? Well, IPO windows are more open or less open at various given times, but throughout our journey doing private company investing, we've actually been pretty consistent in seeing companies go public from our portfolios. In 2023, we saw Oddity go public from Fund One and Fund Two. That was a period where everybody was saying, well, hey, aren't the IPO windows shut? Well, no. If you're a good business that's growing, you're profitable, and you are accommodating on price, you can go public at any time. Same for Tempest last year.

And this year, we've seen a number of IPOs as well. Some of these from our portfolios, others are not. But the point is, we're seeing companies enter the public markets. But it's not just IPOs that are sources of liquidity within this market. Many of our portfolio companies are today incredibly profitable, and in some instances, they're buying back shares. If we wanted, we could sell our shares in ByteDance, back to ByteDance. I don't want to. I think those shares are massively underpriced, but there's liquidity there if we want it. SpaceX is a large position in our private funds, but we've taken the opportunity of tender offers that the companies have facilitated to take some of the winnings off the table. We are actually seeing a growing number of tools for liquidity within the private markets. And we're always conscious of being able to make sure that we're investing in companies that over the long run will be able to get liquidity for our clients in. But we're trying to optimise for those companies that can become many, many times their current size, and we're not looking for near-term liquidity in these businesses. I'm going to pass over to Rob now, who's going to talk a little bit more about what it is that we do and talk through a few case studies.

Robert Natzler (RN): 
Awesome, thanks. Brian's highlighted, I think, why growth equity makes sense inside a broad allocation. And I think Peter's done a really good job of overviewing some of the reasons we think Baillie Gifford is a very well positioned platform to go out and get access and exposure to the very best companies in the space. What I want to do in the next 10 minutes is talk a little bit around the practicalities of how we've gone about doing that as an investment house over the last decade or so, and then dive into a couple of case studies which should illuminate, again, the practicalities of everything that Brian and Peter have already alluded to.

Just to start with, we've got a bit of a potted history of our approach. We made our first private investment for Baillie Gifford clients back in 2012. Indeed, the period between 2012 and 2019 was one where we found ourselves managing a number of different custom mandates for some of our largest institutional shareholders, institutional clients. The typical conversation would go along the lines of, we would like you to run a direct mandate for us, making direct investments into private companies and into public companies within the same portfolio.

That might be with a 30 per cent – 70 per cent ratio, a 20 per cent – 80 per cent ratio, but the underlying pattern was the same. During that period, we were discovering that this space was much larger than we'd initially understood it to be, that there were a huge number, and indeed a growing number, of high-growth private companies that had outgrown venture capitalists as their natural backers, were still wanting to IPO in the future, were still driven by founders who had no intention of selling out to buy out, but who valued being able to build an institutional relationship over a five- to six-year period with someone who would be able to help them as and when the IPO time came about. We then came to 2019, which is when we launched our first pooled vehicle, offering the capability we'd built during the 2010s to new clients. Now that pooled vehicle was an evergreen fund. We call it Fund One. It was very much built in a structure that was suited to some of our British and Australian clients very well, but it was not a General Partner/Limited Partner (GP/LP) fund. And we got feedback from American clients saying if you want to give exposure to the space to Americans, we really want it in a GP/LP vehicle. That was then Fund 2, which we launched in 2021. Now Fund 2 was very much launched, influenced by the heritage of these very long-term mandates we'd run for institutions through the 2010s, and then also the evergreen structure that we'd launched with 2019's Fund 1.

Fund 2 was a GP/LP fund that had some elements such as a 15-year term that meant it was very far from being an easy off-the-shelf product, but it allowed us to learn as an organisation how to do GP/LP funds and it also helped us advance conversations with a number of key clients and potential clients about what they would want to see inside a vehicle. This year, we've then been out raising our first dedicated off-the-shelf pooled GP/LP fund. This has been going out to both existing clients and to new clients. It's a 10-year limited life GP/LP fund with some, we think, extremely limited partner (LP)-friendly terms. Charging, for example, a 1 in 10 fee with the carry ratcheting up as we achieve more upside to make sure there's alignment there, but with fundamentally a cheap underlying approach to delivering value. That just reflects the fact that if we were doing this outside of Baillie Gifford and the institutional infrastructure Baillie Gifford gives us, we would face higher costs. As stands, we're able not only to have the advantage of Baillie Gifford's brand among growth founders for being the shareholder of choice, but also we have some of the regulatory and institutional infrastructure in place and we wanted to pass some of those benefits of scale on to our client base as well. And that was an 800m targeted raise, and we've achieved more than half of that in the first close last week, and so we're now pushing towards final close next year.

That's a little bit about the structures that we've used to go after this market. In terms of what that's looked like in deployment, we've deployed roughly US$10bn of client capital into a little over 150 private companies in that period. Of those 150 private companies, more than 50 of them have already IPO'd. Between 10 and 20 of them have also had exits through other means. I think that skew is really unusual. If you're used to this space, you're used to seeing more than 80 per cent of high growth private companies from the venture capital world exit through mergers and acquisitions (M&A). I think it speaks to the selection we're doing, trying to find truly N of 1 exceptional private businesses that want to list, that gives us that higher than normal IPO exit route. That's a little bit on what we've done. I want to give you a little bit more of a window on how we've been doing it. Do you mind jumping to the next slide, Brian? There you go, brilliant. What this slide tries to do, and it's the first time I've seen it in this funky colouring, is wonderful. What this slide tries to do is make Baillie Gifford's capabilities as an investment house come to life. I'm going to start you with the circles down one side, and we're going to slowly work our way up to the top of the slide. Baillie Gifford as an investment house has roughly 130 growth investors. All they do is try and find the best growth companies globally. Most of them obviously do that in public markets, and within that group we have people who have decades and decades of experience covering individual geographies or individual sectors. Now, these 130 investors produce an enormous amount of work. They meet in the average year 5,000 companies and they produce huge quantities of research material, all of which is available to us through both keyword search but also large language model summarisation in Baillie Gifford's research library, architecture. That sounds great, but I think you'll all understand, in terms of practicality, neither Peter nor myself nor our team really has the time to read that many research notes, or even 0.5 per cent that many research notes in the course of a year. The way that we in practice go about accessing the enormous amount of expertise represented here is through human relationships, what we like to think of as human architecture. These faces in purple down below are all senior members of our main public teams. The vast majority of them additionally have on their CVs experience leading direct private investments, whether that's from previous private equity and venture capital (VC) careers or through stints on our team. That's really important because it means they understand our world even as they sit inside the Baillie Gifford public markets world. We get together with this group once a quarter. We sit down, we try and make that meeting engaging and useful for everyone. And the concept is that everybody in that group shares what their public team has been looking at, seeing, thinking and worrying about over the course of the last quarter. It's the new buys and the new sales, but it's also the research notes that are getting drafted, the topics that they're debating in their portfolio construction groups. I like to think that we help our public teams through that human architecture because we're very happy sharing some of our insights and thoughts too. But for us, it's completely invaluable. That acts as a radar for us. It helps us understand what's going on in the global landscape and that's how we end up with a focused team of 10 private company growth investors able to act with the insights and the perspectives of 130 growth investors covering the world from the broader platform. On to the core team up there in yellow of private company investors. We quite like the team size. It means that everyone's really focused and bought in. And there are a couple of ways we run that team that we believe are a little bit different from industry standard. There's two challenges really in running a private company team. One of them is trying to get the balance between genuine teamwork and collaboration on the one hand and keeping people being aggressive and ambitious on the other side. Now, the way we see a lot of our peers in the space go after that is by remunerating individuals only on their deals, the ideas that they have brought. That certainly gets people very focused on trying to find deals that they believe in. However, we think it leads to a lot of negative side effects. You see situations where people leave private teams, leaving orphan holdings behind. You see situations where people join private teams and are not willing to pitch in on understanding and reviewing existing holdings. You get dynamics, and this is for us the most corrosive thing of all, where people trade favours with each other about what goes into the portfolio. If I'm ultimately going to be remunerated on my deals, and Peter's going to be remunerated on his deals, then we can end up in a situation where I support him to get a certain number in, if he supports me to get a certain number in, and we don't really give each other the challenge and the support that we need to make the right decisions for the portfolio. For our team, they are all remunerated by what our clients eat, which is the total portfolio return. And we do that, including a portion of carry in that remuneration structure too, to make sure they're adequately risk-taking. The danger, of course, of taking that collaborative view is you risk stifling people's appetite to really go out and find the best deals in the world. The way that we try and make sure that that's still in the room is we say to the team. You're all responsible for going out and sourcing your own deals. There's no world in which you get to sit on the mothership and free-ride on all the work other people are doing to build human relationships and find things. And if you find Baillie Gifford access to a really interesting company, you get first dibs on whether you want to work on that or not. And I think you'll understand, having seen our portfolio in the earlier slides, because we're working on some of the most interesting companies in the world, people do have a deep level of intrinsic motivation to go out and get to be the analyst who's working on, whether it's Stripe or SpaceX or Epic Games or Databricks, the list goes on. At the same time, we don't want to end up in situations where people on the team are sitting there feeling underutilised or bringing ideas for the sake of it. And so when someone finds an idea that they don't have the bandwidth to work on, that gets shared with the investment committee. That's those four faces up at the top. And if we believe that that is something that's worth working on, we can reallocate that within the team. The result of that is you have a team of analysts who are going out into the world and sourcing stuff. We're achieving a pretty high level of analyst utilisation inside that group, because if you're running dry for a few months, we can pass ideas to you. And at the same time, everyone has the motivation to go out and be the first person sourcing something, because if they do, they get to work on it. That's a little bit about how we run the team and the underlying capability we bring to bear.

What I'm going to do, if it's all right, is jump from talking about how we do it at a high level to just bringing that to life with a couple of examples. Fantastic. They're chosen examples because one of them is a company you will have heard of and the other one is a company you probably haven't heard of and we're starting with the one you probably haven't heard of. Do you want me to go the other way? No, no, no. I think this is more fun. So, Tekever. How many people in this room have heard about Tekever?

How many people in this room have heard about Anduril? Okay, pretty much everyone. Tekever, you can think of as a bit of like the Anduril of Europe. Now, inside our portfolio, we have Anduril, and that's been a great investment for our Fund 2 clients already. But we also have Tekever. Tekever builds autonomous battlefield drones for Nato-aligned militaries. It comes out of Portugal. Now, when we first got to know this business, it was doing just fine. It was putting out more than $20m in net income. It had a top line that was growing north of 70 per cent and most importantly it had a reputation among special forces operators who were taking long holidays in Ukraine as being one of the only systems that the Russians were not actually able of hacking.

We knew that it was one of the rising stars in European defence, but we weren't the only people who knew that. Warburg Pincus, a private equity outfit who I think are very good at buyout, also knew about it. And so Warburg approached the company and offered them a $1bn US dollar term sheet to be bought out. Normally that doesn't happen in the rounds we're involved in, because we're normally investing in companies before they inflect profitability, but in Tekever's case, $1bn was on the table. We knew, however, that one of the founders still had a lot of ambition and appetite and that his vision for the company was to keep it independent and one day take it to IPO. We sat down and we counter-offered with a 500m US dollar term sheet, saying we can bring in institutional shareholders and be part of your journey into going public. I wish I could sit here and tell you that they shook hands on 500m. They didn't. There was some haggling. In the end, we invested in that business for 640m. Still a fantastic price, roughly 15 times price earnings at the time. Because the business was independent, we were able to bring in as our co-lead Nato, the North Atlantic Treaty Organisation, which is pretty much the perfect investor to be bringing into a company like this. Nato was happy with our financial diligence but wanted to do an even deeper technical diligence. The person they had led that technical diligence had run the Reaper drone program for the US for 19 years, so absolutely knew what he was talking about. Not only did he give the investment the all-clear, he now actually works at Tekever. He voted with his feet that this is the future of a significant part of Nato's battlefield drone budget. Since then, Nato's done a great job of introducing Tekever to all of their client base who are all of the militaries and governments you can possibly imagine. And Tekever's growth has accelerated. When we invested, it was growing in the high double digits. Now it's growing in the low triple digits. Recent valuation of 1.2bn still reflects 15 times price earnings. That's one kind of business that we're able to gain access to for our clients. I think it reflects the position we have in the space as being the people you partner with if you're wanting to go on the road to IPO. And I also love it as a case study because it demonstrates it's not just about price. It's about that product market fit. The second company I want to talk to, you might have heard of. How many people here have heard of Anthropic? We've recently invested in Anthropic at an eye-watering enterprise value of $180bn, which represents about 20 times annual recurring revenue, which suddenly puts the electric vehicle (EV) a little bit into perspective. For the longest time, we engaged with the leading large language model labs without biting at the cherry. If you had conversations with us last year or the year before. We were talking about our relationships with the AI labs, we were thinking about the space, but we were really feeling uneasy about making an investment. There were a couple of reasons for that. First off, we think of ourselves, as Peter outlined, as growth investors who specialise in analysing actual businesses. Now, in the old world, a company that's doing a billion or more in revenues is absolutely a growth stage risk. That organisation has built the muscle to go out and understand customers, build product teams, find product market fit, iterate on the feedback they get from customers. There's a certain degree of solidity. It's a totally different world if a company goes from zero to a billion in the course of 12 months, because everyone's throwing their research and development (R&D) spend at one of the only players in the field. You face a fundamentally different underlying corporate risk there. And we just weren't sure if these companies were genuine growth stage companies, or at that point, early stage companies with growth stage numbers and valuations. That was one thing that caused us to sit back. Another thing that gave us pause was questions about competitive edge. There's been a ton of progress in the open source end of large language models and so we had a genuine question as to whether a closed source, internally owned large language model company could hope to have edge, or whether it was ultimately a bit like the modern version of whether 1990s telecoms or 1890s railroads, ultimately laying infrastructure that would become commoditised. What we were able to see over the three or so years of conversation that we had with Anthropic was a team really grow in maturity, build out product and financial forecasting functions, build actual relationships with real customers who are willing to go on the record and give feedback to us about what they found valuable. We found a company that had found a core application for large language models that wasn't predicated on dreams of software agents or some kind of super intelligence, but on a very practical task of coding. In America today, we spend almost $500bn a year on the salaries of coders.

That's data from the US government. If you can address even 10 per cent of that market with machinery, let alone more than that, you've got an absolutely enormous revenue pool to go fishing in. And we found that whilst ChatGPT has managed to gain a place onto almost everyone's phones and has user dwell times more akin to social media platforms like Snapchat than actual utility tools. When it comes to use case by people automating coding and building product, Anthropic again and again was coming up as the company that people really trusted in those engagements. We still have some major questions here around how competitive advantage unfolds. But I think enough of our questions were answered that we felt comfortable making that initial investment into Anthropic this year. And the company was delighted because from their point of view, they'd been having conversations with us for years, everyone else had been knocking on their door and we just kept on saying, we want another six months to understand things better. I think it was a very happy partnership. Hopefully that gives you a flavour of how we approach the changes going on in the world, both from the point of view of organisationally with our products and our people, but also when it comes to some of the applied examples within our portfolios of companies both famous and less well-known.

BK: Thank you all for coming.

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The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in November 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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