Results analysis: Schroders Capital Global Innovation

• Schroders Capital Global Innovation (INOV) has released its financial results for the year ending 31/12/2023. Over the year, the trust saw its NAV per share decrease by 11.2% on a total return basis, which compares to an average total return of -4.8% for the AIC Growth Capital sector.
• Whilst the overall period saw negative returns, the final quarter of 2023 saw a recovery in NAV of 7.9%. This was primarily driven by Autolus Therapeutics which saw a share price return of 239.5% over the year following positive developments. Detractors primarily came from the public equity holdings, including largest holding Oxford Nanopore.
• The managers have continued to reprofile the trust towards the new strategy. This includes maximising proceeds from the disposal of the legacy holdings, adding new companies that align with the new strategy and encouraging existing holdings to progress towards profitability.
• There were six new investments in the portfolio, all in private companies from across the globe. These were evenly split across the life sciences, venture and growth strategies the managers are now focussed on.
• The managers made four exits from the portfolio, all listed holdings, as well as notable reductions in two more, including the portfolio’s largest holding Oxford Nanopore, to reduce concentration risk and focus more on private equity. This activity raised c. £32.8m of which £22.8m was allocated to six new holdings and c. £7m to share buybacks.
• The board have committed to significant share buy backs with the goal of narrowing the discount. The goal is to buy back at least 5% of the shares in each calendar year, a goal that was achieved in the period. The discount narrowed by nearly four percentage points to 42.1% at year end.
• Chair Tim Edwards believes the final quarter represents the beginning of recovery, stating “The increase in net asset value in the last quarter of the year and the positive news flow … both indicate that momentum is beginning to turn in favour of growth in the new investments in the portfolio”.

Kepler View

Tim Creed and Harry Raikes, co-managers of Schroders Capital Global Innovation (INOV), have continued the journey of transitioning the portfolio to a primarily private equity vehicle. The updated portfolio will consist of companies predominantly in the technology and healthcare industries which will be split across three strategies: venture, growth and life-sciences.

The managers have three main goals to complete the reprofiling of the trust: reducing legacy holdings that no longer fit the trust’s goals, encouraging existing holdings to progress towards profitability, and making new investments in companies that meet the new strategy. The first of these has resulted in four disposals, and two partial sell downs in the year, raising c. £32.8m. There have been six new positions in the period, split equally across the venture, growth and life-sciences strategies, all of which were unquoted companies. This activity has tilted the portfolio towards the goal of being predominantly a private equity vehicle, with a level of 71% at the year end.

The development of the existing portfolio has seen a focus on profitability and cash runway. Nearly 30% of  companies in the portfolio were profitable at year end, with another c. 32% having enough cash on hand to cover over two years of operations. The managers also point to 11 of 12 life sciences companies now having reached clinical stages as a further encouraging development. The managers’ focus on supporting existing holdings has arguably gone some way to de-risking the portfolio. The higher interest rate environment has made financing more challenging, therefore this focus on profitability and cash runway has helped to mitigate these risks in our opinion.

Over the course of the year, the NAV delivered a negative return, though the managers believe the positive return in the last quarter reflects an important turning point. This was largely driven by Autolus Therapeutics, the shares of which increased nearly threefold in the final quarter following promising results from clinical trials. Furthermore, since the period end, Roche completed the acquisition of portfolio holding Carmot Therapeutics. This position was only initiated in May 2023, though added 2.6% to NAV as a result of the takeover. We believe these holdings demonstrate the upside potential of a portfolio containing growing, innovative companies.

Whilst the trust has seen some challenging periods in its lifetime, the managers argue that the new strategy is beginning to deliver on its potential. Despite this, the discount remains especially wide at 42.1%. This is despite the significant share buy backs of a minimum of 5% of the shares per annum. We think that this discount looks interesting, especially considering the commitment to buybacks, whilst the NAV could offer upside potential from further growth and corporate activity.

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