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Disclosure – Independent Investment Research

This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.

Overview
SBO seeks to capitalise on the recovery of confidence in British equities…
Overview

Schroder British Opportunities (SBO) was launched in 2020 in response to a perceived ‘once-in-a-lifetime’ opportunity to invest in high-quality and high-growth UK companies at attractive valuations. It was moreover launched with the explicit expectation that the COVID-19 pandemic and policy responses would require significant fresh issuance of equity by companies, especially once government support measures were withdrawn.

Managed by Rory Bateman and Tim Creed, SBO targets investment in a mixture of high growth opportunities (where management teams are looking to maximise the growth opportunity available to them), and mispriced growth opportunities (where the managers believe that equity raises can help high quality businesses return to their former growth trajectory).

SBO will invest in 30-50 (with a minimum of 30 holdings once fully invested) public and private companies in the UK market, intending to target companies with a market valuation of between c. £50m to £2bn. Private companies are valued under a variety of methods, but we understand that typically deemed public market comparable company multiples will be assigned to the reported operational returns from the business.

Since launch, we understand that SBO has built positions in 28 public companies and six private companies (as at 01/06/2021). Some of the public positions have been built in the secondary market where the managers anticipate further raises in the future, whilst others have been undertaken in the primary market. Private market deployment is necessarily a bit slower, but the managers have stated that they aim to have this proportion of the portfolio fully deployed within 24 months of launch.

The managers look to ensure the portfolio is diversified across a broad range of ideas, with a maximum weighting of 10% of NAV to any one company. To furthermore help manage liquidity, SBO will hold a maximum of 60% of its portfolio in private investments and cannot hold any more than 20% of a private company’s shares (with a 10% maximum position for public companies).

We would comment that the trust thus stands out as differentiated amongst the AIC UK All Companies peer group as offering a structural mixture of private and public companies with a strong focus on newly issued equity.

SBO is regarded by its board as a ‘fixed life’ trust, as the directors are presently obliged to present the shareholders with a wind-up resolution no later than 31/05/2028. Under the current rules, this will only require a single vote in favour for it to be passed. SBO furthermore has a formal ‘discount control mechanism’, with the board seeking to ensure that the trust does not trade at a discount wider than 5% during periods of normal market conditions. The present discount of c. 3.6% (as at 27/06/2021) is within these parameters, and we note that the trust has only very briefly exceeded the 5% level thus far in its life since listing in 2020.

Gearing is limited to a maximum of 10% of NAV at the point of drawdown; the managers have yet to report the utilisation of any gearing facilities.

In addition to growth, SBO’s managers are looking to ensure that the companies held display strong ESG characteristics including an emphasis on identifying ‘positive impact’. ESG input involves active quantitative screens excluding companies deemed to be causing significant environmental or social harm, and companies with weak supply chain and/or labour practises. The team further assess prospective holdings against the UN ‘Social Development Goals’ (SDGs), and seek to engage with and support companies integrating SDGs into their business planning.

A management fee of 0.6% p.a. of NAV, calculated quarterly, is payable. There is also a performance fee attached to the private equity segment of the portfolio (including any holdings which were private investments when initiated). This equates to 15% of the outperformance of these holdings over a #performance hurdle.

Please note this is a summary note. If you would like to see more detailed research on Schroder British Opportunities please click here.

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