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01 December 2021

The Schiehallion Fund – Are We at the Foot of the Mountain?

The formations of modern private equity (PE) began in 1978 when Kohlberg, Kravis and Roberts raised US$30m from a secret circle of well-connected, high-net-worth individuals to fund KKR & Co’s first buyout. For decades, the PE sector had a notoriously exclusive reputation for serving only the uber-rich, knowledgeable investor. In recent years, the industry has become readily accessible to any investor as big players such as Blackstone have gone public and investment vehicles targeting the sector have been listed on major stock exchanges. One vehicle, recently launched by Baillie Gifford and named after the 1,000m high Scottish mountain, offers an exciting entry to some of the world’s most promising areas of the private market: the Schiehallion Fund.

A common misconception of private equity investing is that it exclusively targets only high-risk, very small companies. Companies are increasingly deciding to stay private for longer, providing new opportunities to invest in ever larger and more profitable private companies. The fund has a strong management team known for the success of Baillie Gifford’s flagship Scottish Mortgage Investment Trust; lead manager Peter Singlehurst is head of the Private Companies Team and was the first from Baillie Gifford to work exclusively on private company research. He has worked to develop the company’s well-respected internal infrastructure to focus on long-term alignment with company management teams and promotes a low-cost approach to private investing.Uniquely for the private equity space, the team look for investment opportunities where management can be trusted to act in the interests of growth for the company without investors interfering to influence change.The fund has been amongst the strongest performers in the private equity space since its launch at US$1 in 2019, with investors more than doubling their money and far outperforming the FTSE All Share Index. In addition to the ordinary shares, the fund issued an additional C share offering in April to raise a further US$700m for new investments, to be merged with the ordinary shares on a NAV-for-NAV (Net Asset Value) basis once substantially deployed. Net assets for the ordinary shares stood at US$810.7m at the last reported date of 31st July, with net assets for the C shares at US$698.3m.

The fund focuses predominantly on companies that are at the cutting edge of technology and innovation, driving the long-term growth opportunities desired by private equity investors. In terms of holdings, the fund’s largest holding at 10.2% of the portfolio is Affirm, a financial technology company which went public on the NASDAQ exchange in January earlier this year. Affirm was founded in 2012 by Max Levchin, co-founder of PayPal, and offers instalment loans for consumers to use at the point of sale to finance a purchase. Since its launch, the company has partnered with the likes of Walmart, Spotify, Peleton and countless others, and has share price growth of around 29% since its floatation.

Another of the largest holdings is Chinese tech giant ByteDance, owner of TikTok, the social media company taking the world by storm. The company remains privately-owned despite numerous rumours of a public listing and is estimated to be worth upwards of US$250bn after doubling its year-on-year revenue to a staggering US$34bn during 2020. Furthermore, the company appears to be separating itself from the turbulent waters of government regulation by keeping on good terms with the Chinese Communist Party (CCP). ByteDance has been working in accordance with the CCP and its wishes to avoid mistakes made by the likes of ride-hailing app Didi Chuxing and technology giant Tencent holdings, which have been on the receiving end of fines and bans for various violations.

Furthermore, standing at 5% of the portfolio is Elon Musk’s SpaceX, the space exploration company founded with a primary goal of reducing space transportation costs to enable the colonisation of Mars. After soaring into the new era space race, the company has become the first commercial spacecraft to deliver cargo to and from the international space station, and in 2020 was the first to take humans there as well. Based on the most recent US$850m funding round in March, the company was valued at US$74bn.

On the whole, the Schiehallion fund offers investors a unique proposition to access some of the most exciting pre-IPO companies in the world, at a cost of 0.9% of Net Asset Value, lower than any comparable fund in the space. The team at Baillie Gifford are extremely well placed to operate effectively with in the private company space; the asset manager has proved through its long-term positions in Jack Ma’s Alibaba leading to a referral for private investment in Ant Group, and likewise with Elon Musk and Tesla leading to a private investment into Space X. One of the most sought-after investment vehicles in the space, press coverage surrounding the fund has been kept to a minimum, a tell-tale sign of more than enough demand for shares without requiring much advertisement. The fund has performed extremely well over the last year, returning 91%, and is well placed to capture much of the future growth opportunities often unavailable to most investors. While previous performance is no indicator of future growth, many aspects of this fund point to a very attractive growth opportunity, and it is likely that we are nowhere near the share price summit.

This article was taken from the Autumn 2021 issue of 1875. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
The Schiehallion Fund – Are We at the Foot of the Mountain?
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