Results analysis: Schroder British Opportunities

• Schroder British Opportunities (SBO) has released its annual financial results for the year ending 31/03/2024. Over the year, the trust saw its NAV per share increase by 2.5% on a total return basis. This has contributed to a NAV total return of 12.3% since inception in 2020.
• NAV growth in the past year has been primarily driven by performance in the nine-company private equity, or unquoted, portion of the portfolio. The focus on growth capital and buyout, over early stage or pre-IPO companies has led to upwards fair value adjustments in valuations, leading to a gain of 6.3% for the unquoted holdings over the year.
• The public equity (quoted) portfolio benefitted from the takeover of City Pub Group in the year. This was one of the largest quoted holdings in the portfolio and the sixth to be bid for since inception. Whilst beneficial to performance, this was not enough to offset the negative performance seen elsewhere in the public equities, which detracted a total of 2.3% from NAV. SBO now owns positions in 21 quoted companies, following the sale of one other holding in the year.
• The managers made commitments of £1.7m to two unquoted holdings in the year, which meant NAV consisted of 65% quoted and 23.9% unquoted holdings at year-end. In the period post results, the trust announced an investment in HeadFirst, an unquoted HR service provider for an undisclosed amount.
• Cash and cash equivalents totaled £11.6m (c. 14% of NAV) at year end, of which £3.2m is uncalled capital commitments for follow on investments in existing holdings, subject to restrictions.
• The discount narrowed in the year, from 36.2% to 27.8% as a result of share price appreciation. The board has not undertaken any share buybacks in the year.
• Chairman Neil England stated: “The UK stock market represents one of the cheapest equity markets in the world and the UK mid-cap sector looks particularly attractive,” adding, “inflation numbers are better which suggests a more positive medium-term outlook for growth companies.”

Kepler View

Schroder British Opportunities (SBO), managed by a four-strong team, owns a portfolio of both public and private equity investments consisting predominantly of UK companies. This portfolio will contain between 30 and 50 holdings, with a tilt towards mid-sized companies that are able to deliver significant capital growth over the long-term. The ability to invest across both public and private equities should give the managers the flexibility to identify the best growth opportunities regardless of what stage of their journey they are at.

SBO has delivered a year of solid performance, having returned 2.5% in NAV terms. This has predominantly come from the uplift in value of the private equities, which increased by an aggregate of 6.3% and includes the three largest contributors to performance. EasyPark was the largest of these, having added 2% to NAV, partly as a result of an acquisition that will expand the company’s global reach leading to an increase in value. We believe the performance contribution of the unquoted holdings is a good demonstration of the benefits of the Schroders Capital expertise.

Despite some bright spots, particularly with the takeover of City Pub Group which contributed 1.2% to NAV, the public equities were a drag on performance. The managers’ focus on mid-cap companies, as well as the bias towards the consumer discretionary, technology and industrials sectors has meant their portfolio has had greater sensitivity to macro factors such as higher interest rates. They believe that valuations are very attractive though, and have the potential to recover with a more stable political outlook, and the prospect for rate cuts in the near term.

The share price return was a positive in the year, climbing 16.1% to reverse some previously challenging periods. The managers argue the share price improvement could be a sign that investors are recognising the growing momentum in the portfolio. This has contributed to the discount narrowing to 27.8% at year end, though has since slightly widened to 29% as at the publication of the results. We believe this discount could be attractive for long-term investors, especially in the context of the portfolio composition, as nearly a quarter of the portfolio is public equities, and therefore their weakness is already priced into the NAV, inferring an even wider discount on the private equities, despite their positive ongoing performance.

The managers made two additions to existing private holdings in the period and sold three public equities, two of which were the subject of takeovers. This has resulted in a portfolio of nine unquoted holdings totaling 65% of NAV, and 21 quoted holdings totaling 24%. Since the period end, the managers added one new unquoted holding in HeadFirst. The managers believe this demonstrates the opportunity set in private markets, despite the negative sentiment towards the sector. They believe their holdings enjoy market leading positions which can support long-term growth going forward.

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