Baillie Gifford UK Growth trust is seeking approval to allow it to invest up to 10% of its portfolio in unlisted companies, with the management team hoping to capitalise on "a trend for growth private businesses in the UK" of staying private for longer.
The trust, which is managed by Iain McCombie and Milena Mileva, informed investors this morning (9 June) that it is seeking approval at its 5 August AGM to leverage Baillie Gifford's expertise in the unlisted space.
Baillie Gifford has assessed approximately 180 private UK businesses in the past two years, according to the trust's board, and invested in eight of them, two of which have subsequently listed and one has been subject to a takeover.
"The assessment of private companies alongside listed counterparts is a natural fit with and extension of both the managers' investment philosophy as well as process, and increases the opportunity set for generating positive returns for shareholders," the board told investors.
Under the proposals, Baillie Gifford UK Growth would be able to invest up to 10% of total assets in private companies, as measured at the time of initial investment, while any private investment would need a market valuation of about £500m.
Any unlisted investment would also "need to offer something that cannot be accessed in the listed space at that time", the board said.
Explaining their position, the management team said: "There is a trend for growth private businesses in the UK, and more globally, to stay private for longer than in the past.
"With the permanent capital structure of an investment trust, we are the ideal vehicle to own such businesses.
"The board and portfolio managers have been assessing this area for some time and in doing so have been able to tap into the expertise and experience in Baillie Gifford, not least the private companies team."
However, the managers cautioned that this proposal is about "simply widening the universe" and they would be "under no obligation, nor do we have a strong desire, to use these powers unless a compelling individual opportunity presents itself".
"We also have no intention to alter the type of business we currently seek to invest in if shareholders approve this proposal i.e. we would not be investing in small, early stage venture capital style businesses," they added.
Baillie Gifford UK Growth delivered a NAV and share price total return of 37.7% and 53.7% respectively in the 12 months to 30 April, compared to a 25.9% return for the FTSE All-Share index.
Performance was driven by a number of names, including online luxury fashion retailer Farfetch, construction equipment rental business Ashtead, and ventilation product supplier Volution Group.
With an annual turnover rate of 3%, two new positions were initiated over the company's financial year; insurer Lancashire Holdings and Experian. Meanwhile, the trust exited positions in Rolls-Royce and Mitchells & Butlers.
Net revenue return for the year was 2.88p per share, down from 3.75p in the previous year, with a final dividend of 2.42p per share recommended via a single payment.
Commenting on the outlook for the portfolio, the management team said most UK companies "appear to have reacted well to the immediate challenges created as a result of Covid-19, the long-term ramifications of which are unknown", adding that Brexit as "had little discernible economic impact albeit the matter is clouded by the impact of the pandemic".
"However, companies face the ongoing challenge of adapting to what is a very difficult and different trading landscape compared to that faced in early 2020," it added.
"Despite this, the board and managers continue to believe that exceptional UK growth companies are able to exploit their competitive strengths over the long term and take advantage of the opportunities that follow severe economic dislocation.
"As selective stock pickers, the managers are likely well placed to invest in growth companies that will reward the patient long-term investor in due course."