The Schiehallion Fund [LON:MNTN] from the Baillie Gifford stable is an interesting fund that gives investors access to privately-owned, later stage companies that are shaping up to list publicly.
It’s also the second-best performer over the last year in the Association of Investment Companies’ (AIC) total universe of all funds with a share price total return of +68.85%, narrowly surpassed by the Manchester & London Investment Trust [LON:MNL] which The Armchair Trader wrote about earlier this month.
Schiehallion, with a market cap of about GBP1.1bn is in the AIC’s Growth Capital sector, which has seven constituents and is a collection of funds that primarily invest in unquoted companies, taking non-controlling interests in privately-held companies.
The fund is a fairly new investment trust, having been founded in 2019 and it listed in the same year. The fund is managed by Peter Singlehurst and Robert Natzler. Singlehurst is head of Private Companies at Baillie Gifford and joined the Scottish fund manager soon after graduation. He helped establish and lead Baillie’s private companies team in 2017 and suaged into Schiehallion in 2019.
Natzler also joined the firm soon after studying at Oxford and was initially involved with emerging markets before undertaking a private companies research function prior the fund’s IPO. Incidentally, if you were wondering, Schiehallion is named after a mountain in Perthshire, which was the site of a famous experiment in the 1700s to determine the mean density of the Earth.
Schiehallion looks for revenue growth and R&D investment
The fund focuses on unlisted firms that have a sustainable record of revenue growth regardless of market cycle and maintain a high gross profit margin that the company is willing to invest in research and development.
Singlehurst and Natzler pay special attention to R&D, and companies that have a track record of investing in their own products and services, even when the market is in recession and ultimately the companies have to be profitable and generating excess cash.
The fund is predominantly US weighed, with 51% of assets in the country as at the end of June. The next biggest nation by weighting is 8% to China, followed by the UK at 7.7%.
Schiehallion, traded in US dollar, which puts it at odds with the rest of its sector which are traded in sterling, has assets under management of GBP1.1bn and has the lowest discount-to-premium of -11%, the highest in sector, with a sector average of -35.13%, but there are some extreme outliers in sector.
The Schiehallion Fund top five holdings
| Investment | Sector | Weighting |
| Space Exploration Technologies Corporation (SpaceX) | Aerospace & defence | 8.0% |
| Byte Dance | Technology | 5.8% |
| Bending Spoons | Software | 5.6% |
| Wise LON:WISE | Financial Technology | 4.3% |
| Brex | Financial Technology | 3.9% |
Source: Baillie Gifford, 30th June 2024
Although the fund hasn’t been around that long, it has a five-year record, returning -12.34% (to 22nd July), with although in negative territory, it was 30 percentage points above the sector average.
The most innovative companies in the world
Singlehurst said that the list of the unlisted includes some of the most innovative companies in the world: in the US they include SpaceX, the advanced rockets and spacecraft firm founded by Elon Musk and Epic Games, the firm behind the hit video game Fortnite. In China they include ByteDance, owners of TikTok the most downloaded app in 2021. The fact that so many start-ups are staying private for longer gives the fund a large universe.
He added: “They can maintain a small, concentrated, aligned group of shareholders, focus on their operations and the long-term vision [and] …everything else being equal, they can build better businesses by staying private for longer, with higher probabilities of success.”
The principles of the fund are that private market companies are where you can find high growth, and Baillie has history of playing the private market, being an early investor in Alibaba NYSE:BABA through the Scottish Mortgage Investment Trust [LON:SMT] in 2012.
The fund is not a VC fund or an early-stage investor or the type of private equity investor that seeks to take a controlling stake in a private company and supercharge its growth. Instead, Schiehallion comes in at a later stage with a minority stake in firms that already have substantial revenues and are close to IPO and after listing (as in the case of Wise LON:WISE) will hold onto them as appropriate. Singlehurst said: “At the stage we invest, the companies are normally generating substantial revenues. Many of the companies are profitable, fast-growing and have proven product-market fit.”
This is an interesting fund that is somewhat different to other growth-orientated investment trusts, and will allow investors to buy into some of the most exciting private companies at a significant discount. While its relatively short track record means caution is warranted, the fund’s strong performance and experienced management team suggest it could be a compelling option for those seeking exposure to the private markets and willing to accept the inherent risks.
