Investec has kept its ‘sell’ rating on Schroder UK Public Private, arguing proposals to broaden the trust’s investment universe will take years to have an impact and that it remains “wary of the siren’s call that the discount is attractive”.
Last week the board of the £364.9m late stage UK companies trust floated plans to allow it to invest globally in a bid to tackle its “frustrating” discount.
Chair Tim Edwards said the move would allow Schroders, the trust’s manager, to leverage its “unparalleled access to a global universe of top-quality opportunities” and give investors exposure to the “best venture and growth companies in the world”.
However, this did little to persuade Investec, which said even if changes were implemented, the trust’s immature portfolio and legacy issues would continue to be a drag on returns over the medium-term.
“The harsh reality is that it is likely to be several years before the company reaches its intended destination,” director of investment company research Alan Brierley said.
“When the appointment of Schroders was announced back in October 2019, we said that while it is always tempting to look across the valley, the company faced some serious challenges.
“While balance sheet risks have since been addressed, the valley is proving a lot deeper and wider than expected, and sadly for investors, we struggle to identify grounds for optimism.”
See also: Schroders trust rises week after sell rating due to deal on Woodford holding
New holdings have done little to inspire confidence
Though SUPP has found some success with the holdings it inherited from former manager Neil Woodford, such as Oxford Nanopore, others like Rutherford Health, which is 6.6% of NAV, remain a major concern, Brierley said.
“Ominously, SUPP advises that should efforts to secure long-term funding prove unsuccessful, there is a material risk that it will have to file for administration.”
Though managers Tim Creed (pictured) and Roger Doig have invested £65m in six private investments and three public companies (Johnson Matthey, Petershill Partners and Spirent Communications), Brierley said the performance of the latter “has done little to inspire confidence”.
“We are acutely aware of the record levels of dry powder and activity last year, and generally concerned about the impact of high valuations and accelerated due diligence processes on long-term returns of the more recent vintages,” he said.
‘Wary of the siren’s call the discount is attractive’
Brierley was also dubious SUPP’s discount looks attractive. Applying a 50% discount to Rutherford Health, he notes SUPP is trading on an estimated 31% discount. This is not dissimilar to Harbourvest Global Private Equity (HVPE) and Pantheon International, which are trading on discounts of 29% and 30%.
“We continue to be wary of the siren’s call that the discount is attractive,” he said.
“While SUPP continues to struggle with legacy issues and an ongoing portfolio rebalancing that will take some time, we believe these companies [HVPE and Pantheon International] offer much stronger fundamentals, including high quality and mature portfolios, generating superior revenue/earnings growth, and significant levels of realisations at material uplifts to what are proving conservative valuations.”
