Schroders Capital Global Innovation 01 November 2022

SUPP was launched to invest into early-stage private UK companies which had the potential for explosive growth. Following well-publicised problems with the previous fund manager, the board awarded the management contract to Schroders in December 2019. Aside from their well-known public equity investment business, they have a 25-year track record of investing in private companies (see Management section).

Since taking the helm of the trust, the Schroders team have worked in various ways to right the ship within the constraints of having highly-illiquid underlying investments. As discussed in Gearing, a key achievement last financial year was to reduce gearing from 30% in December 2020 to essentially zero in December 2021, with net cash maintained over 2022. The primary benefit of achieving a net cash position has been not just to enable new investments to be made, but also to enable the board to commence buybacks, an activity which is highly accretive to NAV.

Shareholders have agreed to broaden the investment remit from a UK focus to a global mandate. In other ways too, a more institutional approach (see Portfolio section) represents a significant change to the investment process. So far, since their appointment Schroders have made six new private investments, focussed in the key sectors of technology (Tessian), financials (Revolut), business services (Attest), consumer (Back Market) and healthcare (Ada Health & Epsilogen), as well as three new public market investments. Together, we estimate these Schroder sourced investments constitute c. 18% of the portfolio.

SUPP currently trades on a discount to the most recently published NAV of 46%. We observe that other growth capital trusts’ discounts, such as Chrysalis, have widened significantly too this year, reflecting market sentiment towards growth stocks and private valuations. The LPE sector, as a whole, trades on a similar discount to SUPP.

Although Schroders took over the management of the trust in December 2019, given the illiquid nature of the holdings and the gearing employed at the time, it has taken quite a considerable time for the managers to put their stamp on the portfolio. In fact, the process is far from complete and so, judging the performance of the trust since the manager took the reins is unlikely to be meaningful and certainly not indicative of future performance. Over time, the performance of the portfolio is likely to increasingly reflect the skill and work of the current management team, especially now that they have a broader mandate to invest globally rather than focussing on the UK. As time goes on, the team expect that SUPP will start to exhibit a more appropriate risk/return profile than it has done in the past.

In practical terms this can already be seen with the broadening of the mandate, the reduction in gearing, the more institutional approach to investment, requiring other seasoned investors alongside SUPP’s for example, and the rigour of investing in slightly more mature venture companies which have already achieved significant revenues. As such, SUPP offers investors a unique exposure to higher risk and potentially higher rewards, with the added benefit of the managers potentially not having to sell investments, should they IPO. As time goes on, survivorship bias within the increasingly mature legacy portfolio, not to mention new investments made by the Schroders team, support the managers’ expectation that investors can be hopeful of better returns going forward.

SUPP is, in our view, a clear transition story. The portfolio is increasingly reflective of Schroders’ efforts and the current discount looks attractive. With buybacks having started, if performance starts to materially improve there is a very real prospect of the discount narrowing on a sustained basis.