Early access to great start-up businesses is possible but value generation may not always be rapid
Thursday 06 May 2021 Author: Steven Frazer

The problem many investors have with IPOs (initial public offerings) is that much of the big value creation has already been had as a private company. Take THG (THG), for example, a stock investors piled into in their thousands once it hit public markets.

Launched in 2004 by founder Matthew Moulding, the online retail business was backed by US private equity firm KKR 10 years later, reportedly taking a 19.2% stake for less than £100 million. THG listed in London in September 2020 at £4.5 billion, and it is now worth more than £6 billion. That’s a 12-fold increase in value in less than seven years.

Retail investors, understandably, want in on this action, with access to young, emerging and exciting businesses long before they are ready to list on a stock market.

TAKING THE FUND APPROACH

Investment trusts are one option. A number of them already invest in private companies. Scottish Mortgage (SMT), the UK’s biggest, can allocate up to 30% of its assets in unquoted holdings. Its unquoted holdings include Stripe, the digital payments firm set up by the Irish Collison brothers that was valued at $96 billion in March.

The UK is awash with creative entrepreneurs with brilliant ideas, and the UK’s private equity industry is the largest and most dynamic in Europe, turning innovative ideas into successful businesses and driving superior investor returns.

In a recent research note, Stifel’s analysts suggested that many private equity investment trusts have significant exposure to healthcare and technology sectors which have been strong performers.

Chrysalis Investment (CHRY) is one of the higher-rated private equity investment specialists, having almost doubled its NAV (net asset value) since launch in late 2018. It supports tech disruptors with later stage and pre-IPO funding, many in the ‘fintech’ space, such as Starling Bank, Klarna and Wise, the money transfers business that is eying a UK IPO this summer.

Starling was set up in 2014 by the veteran banker Anne Boden with a vision of a digital bank for the 21st Century, giving low-cost basic banking to anyone with a smartphone. It has shown exceptionally strong growth with deposits increasing from around £1 billion in February 2020 to £5.4 billion, while lending has exceeded £2 billion.

Klarna plays in a similar digital world, allowing shoppers to pay for stuff in easy instalments. The company now claims to process 2 million transactions a day from 90 million active users across 250 million merchants.

Atom Bank, backed by Schroder UK Public Private Trust (SUPP), is another digital banking hopeful, alongside Monzo, Revolut and plenty of others. Visma and Iris, for example, provide a different take on the fintech theme, providing payroll, tax and other packages for employers, while CaseWare develops cutting edge audit solutions for organisations, potentially an area ripe for disruption given the controversies surrounding the Big Four audit giants.

TECH & HEALTH

Investing in Visma, Iris and CaseWare is made possible through HgCapital Trust (HGT), a major software investor across Europe. 

HgCapital Trust is also a backer of FE Fundinfo, a company many investors may know first hand from its stock market newswire and fund tools.

The pandemic and lockdowns saw many consumer-facing app type businesses emerge and win private equity backing.

Others have potentially grown stronger, such as online printing company Photobox, a portfolio company for Standard Life Private Equity Trust (SLPE). Turning favourite snaps into albums, mugs or wall art could become more than a short-lived diversion for creative kids and adults, in theory.

Elsewhere, a data-driven platform for scientists to share information and plan work collaboratively may sound like a promising premise. BMO Private Equity Trust (BPET) clearly believes so, as Dotmatics which has developed such a platform and is the trust’s largest single stake worth 9.6% of assets, almost three times the size of the next biggest holding.

The potential IPO of Oxford Nanopore Technologies later in 2021 is a key development for IP Group (IPO).

Though not an investment trust it owns a 14.5% stake in the DNA sequencing process designer, having backed the business since its 2005 Oxford University spin-out. 

Oxford Nanopore is mooted to fetch a near-£4 billion valuation if it gets the London listing away.

There are risks with private equity-style investing given the inherently illiquid nature of the investments and the need to lock up capital for several years. But for those investors who understand these risks, investment trusts can be a good way in which to obtain exposure to unquoted companies.


DISCLAIMER: The author owns shares in Scottish Mortgage

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