Scottish Mortgage suggests altering the investment policies of private businesses

A change in the growth-focused investment trust's approach to private company holdings will soon be put to a vote by Scottish Mortgage investors

The 15.2 billion investment trust Scottish Mortgage (LON:SMT), which concentrates on high-growth innovation companies, is suggesting a change to its private company investment strategy.

Scottish Mortgage, one of the most well-liked investment trusts among do-it-yourself investors, consistently makes investments in businesses that it believes will be profitable in the long run because of their cutting-edge technology and capacity to increase in value over years or even decades.

Private businesses that haven't yet gone public and whose shares can't be bought and sold on a stock exchange are among the most promising investments in that area. This includes Elon Musk's space exploration company SpaceX, which is the investment trust's largest holding as of February 28.

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Start your trial Scottish Mortgage's shareholders will vote at an upcoming extraordinary general meeting (EGM) on a change to the trusts rules that, if approved, would give its managers more latitude when purchasing private companies.

"Our role is to be patient, long-term partners to exceptional private companies as they continue to scale," stated Scottish Mortgage manager Tom Slater. Occasionally, changes in the market may limit our capacity to invest more in private businesses. The "

What modifications to its investment process is Scottish Mortgage proposing?

Currently, it can invest up to 30% of its assets in private companies under Scottish Mortgages regulations.

However, private businesses can be challenging to value for reasons that are explained in more detail below. In the end, however, a 30 percent cap might limit Scottish Mortgages' capacity to support businesses it has already invested in when they raise additional funds or to pursue promising opportunities in private companies.

This is made worse by the fact that SpaceX currently makes up 15.4% of Scottish Mortgages' portfolio, which is more than half of the current private allowance on its own. ByteDance, the owner of TikTok, is its third-largest holding, accounting for an additional 4.1 percent. Together, these two businesses make up nearly two thirds of Scottish Mortgages' total permitted private company allocation.

The Scottish Mortgages board will suggest that a proposal granting the trust managers the authority to allocate up to 250 million more private investment capacity be put to a vote by shareholders. This would allow them to invest in private companies when they see opportunities, even if doing so increases their exposure to private companies beyond thirty percent.

SpaceExploration Technologies Corp., or SpaceX. headquarters; the Falcon 9 rocket is shown on the left; Scottish Mortgage Investment Trust owns SpaceX, a private American aerospace company.

More than half of Scottish Mortgage's authorized allocation to private companies is currently accounted for by SpaceX.

Slater stated, "This proposal allows us to support our private holdings when it matters most, while remaining selective about new opportunities, giving the board additional flexibility to act in shareholders' long-term interests."

Scottish Mortgage shareholders will vote on the continuation of this extra flexibility every year starting with the company's 2027 annual general meeting.

Why are private businesses difficult to appraise?

Private company shares do not fluctuate in value daily like those of public companies (like Nvidia or Scottish Mortgage) because they are not traded on stock exchanges.

Rather, their valuation fluctuates much less frequently, usually whenever they raise new funds or, on occasion, during a secondary share sale event (in which current shareholders, like company employees, have a window of opportunity to sell some of their shares).

The company's valuation can fluctuate significantly between these events because there is a lot of time between them and a lot can happen during that time.

For instance, SpaceX was valued at about £800 billion during a secondary share sale in December, but it is generally accepted that the company hopes to be valued at almost twice that amount at a possible IPO later this year.

Private companies can only be valued at their most recent valuation on the books of investment trusts and other investors.

Even without purchasing any additional shares, significant increases in valuations between these occurrences may raise the allocation in a trust such as Scottish Mortgage above its maximum allocation. In some ways, this is good news because it indicates that these early investments are paying off, but it may also force fund managers to sell off some of their portfolio holdings in order to purchase new private companies or, in the case of follow-on purchases, additional shares in private companies they have already invested in.

The Scottish Mortgages board hopes that by making these suggestions, it will be able to manage this and continue to support its current private investments as well as seize new opportunities as they arise.