Discount doubles at $1.2bn B Gifford Schiehallion Fund

Peter Singlehurst

Baillie Gifford’s $1.2 billion Schiehallion Fund — which invests in private businesses that may go public — has reported that its ordinary share net asset value (NAV) returned negative 0.9% and share price returned negative 22.3% during the financial year to January 31, 2024.

Schiehallion said the fund’s share price discount to NAV widened from 23% to 40% “as sentiment remained against growth stocks and private company investments.”

The Schiehallion Fund seeks to generate capital growth for investors through long-term investments in later stage private businesses that the fund considers “to have transformational growth potential and to have the potential to become publicly traded.”

Over the period from launch date on March 27, 2019, to January 31, 2024, the fund’s ordinary share NAV returned positive 18.8% and price returned negative 28.5%.

The fund’s biggest investments included SpaceX, TikTok owner ByteDance, money transfer business Wise, digital financial services Affirm, digital consumer applications firm Bending Spoons, Indian news and video aggregator Dailyhunt, fintech Brex, online real estate marketing platform McMakler, autonomous vehicle software firm Wayve Technologies, and bus and train operator Flix.

Schiehallion Fund’s manager Peter Singlehurst wrote: “Although the year ended with a small negative return, this was the result of a weak first half followed by a recovery in the second half of the year.

“Performance for the year was driven by a mix of public market uplift and increased valuations in private holdings.

“Listed holdings, Affirm, Wise, and Oscar Health, saw significant increases in their share prices throughout 2023 of 408%, 272%, and 64%, respectively.

“Private holdings, such as Bending Spoons and SpaceX, also experienced strong increases in their valuations. Bending Spoons’ valuation increased over 150% in Q4 on the back of strong operational performance following successful integrations of their recent acquisitions and a new funding round where the company was valued at $2.55 billion.

“SpaceX conducted another substantial secondary tender offer that values the company at $180 billion, making it the second most valuable start-up in the world behind ByteDance, which is also in your portfolio.

“The largest detractors of NAV performance were private holdings, specifically Convoy, which ceased operations in October 2023, Indigo Agriculture, and Solugen. When considering the broader portfolio, companies are well capitalised, with over 90% by capital weighting having more than 12 months of cash runway.

“In recent months, we have seen an increased focus on capital efficiency as companies seek to strike the right balance between growth and profitability.

“We remain optimistic about the resilience and potential of the companies in your portfolio. Operational performance and efficiency continue to improve, and in several cases, are better than expected following rate hikes and broader economic and political tension …”

Addressing the issue of the fund’s wide discount, Singlehurst wrote: “Historically, the two options for capital deployment within Schiehallion were investing in new companies, or putting additional capital into existing ones.

“Following the merger of the C-Share and ordinary pools, and within the context of the shares trading at a large discount, we announced a share buyback programme. We believe this represents an attractive opportunity to create value for shareholders through the accretive effect on Net Asset Value.

“However, our primary objective continues to be concentrating capital into the existing portfolio to support our companies’ ongoing growth and into new opportunities that have the disruptive and growth potential we seek, and to take advantage of valuations that might be at an attractive discount. As of year-end, we had bought back 2.6 million shares.

“Alongside the buyback programme, we see continued opportunities to put more capital into existing investments. As well as the follow-on investments discussed in the Interim Report, we also made a small additional investment in Databricks and a more substantial investment in ByteDance.

“The latter is a company often in the news, with much of the focus being on TikTok and its fate in the U.S. What the reporting in Western media outlets often fails to mention is the scale and profitability of ByteDance’s domestic Chinese businesses, where their Toutiao and Douyin apps generate substantial cash flows.

“Our investment case for ByteDance rests on the domestic opportunity, with some optionality around the international monetisation of TikTok. We purchased shares in a secondary transaction at a compelling price given the growth and profitability of ByteDance.

“New investments are the third string to our capital deployment bow. As Schiehallion has closed in on full deployment, the pace of new investments has naturally slowed, though we do have some remaining capacity.

“The bar for new investments is high given the opportunity to buy back our own shares at a discount or invest more in existing companies where we have a longer history.

“But where we see new opportunities clearing this bar, we will invest in them until we hit the buffer of reserved capital. The team has recently looked at companies in Australia, Germany, India, Israel, Singapore, South Korea, and of course, the USA.

“These businesses are in a wide range of industries, from precision medicine to immersive entertainment, fintech, and defence. Over half of our current pipeline is generating top-line growth in excess of 50%, and more than a third is profitable.

“In the second half of the year, we took advantage of public liquidity to sell and trim some holdings. We sold our holdings in both Ginkgo Bioworks and Illumina. Both these holdings came about from acquisitions of private companies, Zymergen and Grail, respectively.

“We also trimmed our holding in Affirm. Affirm remains a high conviction holding for us, showing both strong fundamental and share price growth over the course of 2023. Despite trimming the holding, it remains amongst Schiehallion’s five largest positions …”

Over the three months to January 31, 2024, the fund bought back 2.6 million shares at a cost of $1.9 million. Since the financial year end, the company (fund) has bought back an additional 1.1 million shares.

The company will also be seeking authority to renew its buyback authority for ordinary shares at the forthcoming AGM. The directors are also seeking a 10% share issuance authority at the AGM. This authority would expire at the conclusion of the AGM in 2025.