A flagship product of Baillie Gifford, Scottish Mortgage has faced criticism from its own non-executive board member Amar Bhidé, who spoke out against the firm with his concerns.
In an interview with Financial Times, Bhidé said he questioned the management team’s “capabilities and governance clout” to fully monitor its PE exposure, given the lack of publicly available information, culminating in a row with chair Fiona McBain.
Scottish Mortgage board clashes over governance and unlisted issues
James Carthew, head of investment companies QuotedData, said Bhidé had raised “serious questions” about the depth and expertise of Baillie Gifford’s unlisted investment team “that the firm will have to respond to”.
In an RNS notice, McBain responded: “As chair of Scottish Mortgage, I have complete confidence that Scottish Mortgage’s board provides robust governance and oversight. Current topics such as short-term volatility and the company’s exposure to private companies have been debated at length and will continue to be scrutinised by the board.”
She said the board was “convinced” the managers were taking “the right long-term investment approach and building a portfolio of exceptional growth companies that can deliver for shareholders over five years or more”.
James Budden, director of marketing and distribution at Baillie Gifford, told Investment Week: “Scottish Mortgage has been investing in private companies for over a decade,” adding “these are not start-ups”.
He said: “At the stage we invest, founders are no longer looking for the operational support traditional venture capital firms offer. We make no attempt to be Venture Capitalists, instead we provide long-term patient capital to fund further expansion, often holding businesses after they have listed on public markets, to capture their full growth potential.”
The RNS notice, released at 3.54pm also stated that Bhidé had neither resigned nor been removed as a director of the company.
Back in September, at a client presentation in London entitled ‘Private Investor Forum Investing in Positive Change’, Claire Shaw, an investment specialist on Scottish Mortgage, addressed concerns over the trust’s private equity and team management at the time.
She told shareholders that Scottish Mortgage’s dedicated private company team was separate to the analysts and managers, and it had people independently review new valuations before they were checked by the board, which was repeated frequently to keep up with the daily stock price changes.
About 95% of the private companies in the trust would have been revalued at least twice, Shaw said, and just under 50% would have been revalued more than five times.
Emma Bird, head of investment companies research at Winterflood, said she was reassured by the management team’s approach, saying the trust “has been clear on its approach to investment in unquoted equities”, with the managers aiming to identify the best long-term growth opportunities across all global companies, whether they are listed or not.
She said the board works to manage the risks of its PE holdings by using external and internal valuation experts and benefited from the experience of Baillie Gifford’s private companies team, and its access to private deals.
With over 1,700 staff based in Edinburgh, Carthew said it was not practical for the asset manager to be “rolling up its sleeves and getting involved in the day-to-day business of the companies that it invests in – we would say, not at all”.
“It is far more important that Baillie Gifford ensures that these underlying businesses are properly staffed,” he added.
Bhidé’s other concern was over the trust’s exposure to PE teetering on the edge of its 30% limit, and what that meant in regards to its share price and discount.
According to data from the Association of Investment Companies, the trust currently sits on a 17.9% discount and, according to its latest factsheet, had 29.9% invested in PE.
Back in February, it surpassed its 30% limit for the second time in nine months, due to a drop in value of its listed equity portfolio.
While exceeding the limit was not an official breach of policy and did not occur this time around, Bird said: “The increase of the unquoted allocation to more than 30% as a result of listed equity market falls will have caused investor concern”.
She said that getting “as much clarity as possible” from the board and managers “should help to restore investor confidence”.
Scottish Mortgage ‘under pressure’ due to stretched private assets exposure
According to her, the ability to invest in private equity is a “key differentiator” from its peers.
This characteristic is something current managers Tom Slater and Lawrence Burns, and former figurehead James Anderson have long championed, and has proved successful for them in the past.
The group were some of the earliest investors in now mega-stocks Tesla, Amazon and Alibaba, as well as current high-profile names including Elon Musk’s Space X, Stripe and ByteDance, the parent company of TikTok.
Investec analysts Alan Brierley and Ben Newell made a ‘Sell’ call on Scottish Mortgage for the first time due to its PE exposure surpassing 30%, and said that rating has still not changed.
At the time, the pair suggested the trust’s board come back to shareholders to seek approval to increase the limit to relieve some of the pressure, just as they had done in 2016 to take it from 25% to 30%.
Carthew seconded this, suggesting the trust it lifts the limit to 50%, “but with a stated ambition to keep the exposure to around 30% over the long term”.
He added: “This would get around any potential problem with SMT being unable to provide extra finance to these companies over coming months. Without this, Scottish Mortgage could find itself diluted”.
