Big institutional investor moves more into private markets – and here are the ones it’s backing

Baillie Gifford’s Scottish Mortgage, the UK’s leading backer of tech-driven growth stocks worth £11.4 billion is about to lift its maximum weighting in unlisted stocks from 25% to 30%.

The change reflects the way growth companies are less inclined to seek stock market listings due to the availability of cheap capital.  Investors in listed small caps have switched their attention to venture capital. 

By investing at an earlier stage, Scottish Mortgage, a listed investment trust, increases its chances of benefiting from the rapid growth of growth companies. It enjoys discussions with them which are richer than with listed companies.

By investing more broadly, Scottish Mortgage also increases its chances of finding diamonds in the rough. This harks back to a 2017 survey by Hendrik Bessembinder of Arizona State University who found that US equity outperformance over 80 years has relied on 4% of listed companies.

According to Baillie Gifford, the MSCI growth index is up 128% over ten years, against 51% from its value equivalent. The top twenty growth stocks accounted for no less than half the excess value of the growth index.

Baillie Gifford moves more into unlisted securities

Source: Baillie Gifford

James Anderson, co-manager of Scottish Mortgage, has been influenced by Geoffrey West of the Santa Fe Institute who believes constant innovation is essential for companies to grow and achieve scale.  This is hard for listed companies to sustain, partly due to shareholder pressure.

Success, or otherwise, in corporate innovation is regularly assessed by Baillie Gifford. This factor helps explain recent reductions in stakes in Alphabet and Facebook by Scottish Mortgage and its sale of Chinese search engine Baidu.

Because Scottish Mortgage does not time markets, it finds more time for research to back up its conclusions like these, and hence a greater chance of getting it right.

Catharine Flood, Scottish Mortgage strategy director, says private companies have: “simply been where the best new opportunities were found.” 

They have contributed to Scottish Mortgage’s increase in value of 510% over the ten years to May, against 179% from the FTSE World index. Elon Musk’s Tesla is its largest investment, 11.1% of its portfolio, just ahead of Amazon.

Baillie Gifford bought Alibaba of China, its first private investment, in 2012.  When Alibaba spun off Ant Financial this became the biggest stake in Baillie Gifford’s private portfolio.

The full list of Baillie Gifford’s private investments is listed below and found here. The list will be familiar to family offices who regularly scour the market for opportunities. 

Scottish Mortgage’s biggest private bets are Chinese. The greatest by number are based in the US. Europe is poorly represented. 

Zipline, linked to Rwanda, is an innovator in drone deliveries for medical supplies. Its early backers in 2016 included the late Paul Allen and Yahoo founder Jerry Yang, with Baillie Gifford and other institutions investing later.

Source: Baillie Gifford