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Fair Process, Fair Valuations.

Stewart Heggie, Investment Specialist

Investment specialist Stewart Heggie explains how valuations are carried out for private holdings in the Scottish Mortgage Investment Trust portfolio.

All investment strategies have the potential for profit and loss. The Trust has a significant investment in private companies. The Trust’s risk could be increased as these assets may be more difficult to sell, so changes in their prices may be greater.

 

Why now?

Quite understandably, shareholders want to be confident that the stated Net Asset Value (NAV) is a fair reflection of the assets held within the portfolio. Moments of stress in public markets often prompt shareholders to ask for clarification on the approach we take to valuing private companies in the portfolio in order to ensure that they are priced appropriately.

How?

Most investment structures that include private companies adhere to the same guidelines* for valuing these assets. However, these guidelines are followed in different ways, often dictated by the liquidity profile of the vehicle in which the assets are held. Scottish Mortgage is a widely held daily dealing investment trust that also holds publicly listed companies. We therefore take a proactive approach and regularly update valuations with the aim of holding private companies at 'fair value' i.e. the price that would be paid for them in an open market transaction.

The valuation process is carried out by a valuations committee at Baillie Gifford who take advice from an independent third party, IHS Markit. To ensure this process is entirely independent of the managers, they only receive notification once changes have been applied to the valuations of any private companies in the portfolio. 

As part of our valuation process, we revalue the private companies on a rolling three-month cycle.  That does not mean the entire portfolio is revalued once a quarter, as is the case for some other trusts (not managed by Baillie Gifford). Instead, we value a third of the private component of the portfolio each month. As an investment trust, and a public company, the prices of these assets are also reviewed twice a year by the Board. They are also subject to the scrutiny of the auditor, PricewaterhouseCoopers, as part of the annual audit process.

Beyond the regular cycle, the pricing of private companies is monitored daily by Baillie Gifford’s private companies valuations team who are alert to ‘trigger events’ that might prompt a revaluation.  Such events could be influenced by several factors including: a change in company fundamentals; a follow-on funding round; a takeover approach; an intention to carry out an Initial Public Offering (IPO); or changes to valuations of publicly listed companies that are used as comparators as part of the valuation process.

Any ad hoc change to the fair valuation of any holding is be implemented swiftly and reflected in the next published NAV. There is no delay. 

This valuation process ensures the private companies are valued in both a fair and timely manner. As a result, shareholders can be confident that the NAV of the Trust as a whole is a fair reflection of the assets held at any given time.

What else to consider?

In recent years, the level of exposure to private companies has been increasing within the Scottish Mortgage portfolio and shareholders are notified of that exposure as a percentage on a monthly basis. 

Whilst the valuation process will influence that percentage exposure. There are several other factors to consider that may also impact the percentage value. 

Most notably these are:

  1. The quantum of additional investments in private companies, whether they are in new companies or follow-on investments in existing holdings.

  2. The number of companies that make the transition to the public markets – which can be heavily influenced by the wider market environment. For example, only three private companies in the portfolio made the transition to the public markets during 2020 as the world was gripped by the Covid-19 pandemic. Whereas in 2021, we saw 13 companies go public, some of which had been delayed from the previous year.   

  3. The overall performance of the private companies relative to the public holdings in the portfolio. Many of the private names held are disruptive businesses at the cutting edge of huge new markets that could develop into multi-decade opportunities. As a result, they have no obvious comparators in public markets and the valuation adjustments applied to them will not always be in-step with the overall direction of public markets.

* Baillie Gifford applies valuation techniques consistent with The International Private Equity and Venture Capital Valuation Guidelines 2018 (‘IPEV’) which are intended to represent current best practice on the valuation of private securities.


Important information and risk factors

This communication was produced and approved in March 2022 and has not been updated subsequently. It represents views held at the time of presentation and may not reflect current thinking.

A Key Information Document for the Scottish Mortgage Investment Trust PLC is available here.

This communication should not be considered as advice or a recommendation to buy, sell or hold a particular investment. This communication contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions.

Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority. Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. The Scottish Mortgage Investment Trust is a listed UK company, and is not authorised or regulated by the Financial Conduct Authority. The value of its shares can fall as well as rise and investors may not get back the amount invested. A Key Information Document for the Trust is available by contacting us.

The specific risks associated with the trust include:

The Trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.

 

Ref: 15616 10007627

Author

Stewart Heggie

Investment Specialist

Stewart joined Baillie Gifford in December 2019 and is an Investment Specialist for Scottish Mortgage Investment Trust PLC. Before joining, he was a Portfolio Director at Cazenove Capital where he worked for over 14 years. Stewart graduated MA in Political Economy and Management Studies from the University of Aberdeen in 2001.

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