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Should more trusts follow Scottish Mortgage into unquoteds?

Investors Chronicle, Investment Trusts, November 12 2020
By Mary McDougall

Private equity investment trusts have existed for decades. And more recently a number of trusts that focus on listed companies have also started allocating more of their assets to unquoted companies…

As increasing numbers of companies stay private for longer, particularly in the technology sector, being able to invest in unquoteds broadens a fund’s opportunity set and enables it to capture growth early, which could provide a boost to its long-term performance. If a trust’s managers back enough of the right companies before they list, the trust’s shareholders could be handsomely rewarded. And large investment companies such as Baillie Gifford have strong buying power so can wield a certain amount of influence when they invest in companies, particularly when they are private.

This could help companies as they approach coming to market. Most private equity investors tend to view an initial public offering (IPO) as a liquidity event that provides an easier means of disposal, says Emma Bird, research analyst at broker Winterflood. This can often lead to companies being loaded up with debt for a quick sale. And even if companies are not coming to market, private equity funds can be forced to return cash to investors after a seven-year period.

But the incentive for trusts like Scottish Mortgage Investment Trust (SMT) is different. Their long-term interests are aligned with those of the companies they invest in, as they will continue to own companies after IPO if they still view them as an attractive investment…

James Carthew, head of investment company research at QuotedData, highlights some of the problems investment trusts incur when they invest a small portion of their assets in unquoted companies. “These trusts are often minority shareholders investing alongside normal private equity investors,” he explains. “When something goes wrong they have no power or way of changing things.”

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