00:08:23 · Guillaume Moubeche
[00:08:23] S1: And one thing, you know, like, I'm curious to hear, like, your take on it. So whenever you invest in public markets, let's say, like, typically, I have, like, millions of dollars, like, that that are, like, invested in in public markets. Personally, I can leverage this to get debts and use this as a line on credit on many thing. However, in a private company, I probably have like hundreds of millions invested. However, if I want to put, you know, like my asset of private companies to get like leverage anywhere else, it's almost impossible or at least like very hard. So from the investor like you work with, what's like your view on this and do you think it's gonna evolve because you were also talking about the fact that actually right now if you look at private markets, back in the days, they were almost zero liquidity. Now if you take like and drill, and tropic, SpaceX or whatever, it's trading almost in a similar way that you can see in in public markets. So curious to, like, hear from your perspective as an investor, how do you see private market evolving so it benefits a lot more, like, the the investors and and potentially the people, you know, like your LPs in your funds. Yeah.
00:09:41 · Peter Singlehurst
[00:09:41] S0: Yeah. So I guess couple of questions in there. I'll I'll sort of take the leverage one first, and then maybe kind of how sort of secondary markets are evolving and some of those dynamics within private markets. So I think leverage can have an important but very specific place in portfolio construction and in finance. Where you have regular and predictable cash flows, I think that leverage can be amazing for bolstering returns, on equity. You know? And I'm I'm sort of talking here more probably from within businesses than at that kind of portfolio level and borrowing against portfolios. But, you know, if we are shareholders in a company that's very profitable, leverage can be an amazing tool. So take Bending Spoons for instance. It's a very profitable business. And they can use leverage very effectively to acquire new companies and delever very quickly as they start to get cash flows from those acquired businesses. However, if companies are not yet profitable or only at that early part of their journey in in in generating cash flow, I think leverage can be a very bad thing. So if... So most of our portfolio companies are not levered. Actually, even most of those that are profitable are not levered. But if a company is not yet cash flow positive, unless there's a very specific reason, they should really not have debt within them. They should be a little bit more patient. They should be using equity to fund themselves because, a little bit more dilution never killed a business, but debt kills businesses. And we've seen businesses be killed by debt. Companies that, if they had not taken on debt, could well have gone on, survived, and thrived. But for a variety of reasons, they geared up, took on debt, and that debt came to kill those companies. So where we see companies that are cash flow positive, we're fairly relaxed about debt, provided there's good reason for it. However, where companies are either not yet profitable or that kind of more nascent stage of their journey in profitability, we really counsel companies to avoid using debt.
00:11:45 · Guillaume Moubeche
[00:11:45] S1: Okay. Makes sense.
00:11:46 · Peter Singlehurst
[00:11:46] S0: On on the sec... On the sort of broader kind of private market dynamics, I think you need to separate primary and secondary, capital within private growth equity markets, because I think they're seeing two quite distinct pictures. On on the primary side, so companies raising capital, going to investors, you know, giving them full information and and selecting a small number of partners that they want to work with as shareholders in their companies. I actually think this part of the market has become much more institutionalized, much more professional over the last ten years. I would say, actually, specifically, really since 2020 and 2021. There was a lot of hot money in those years. There were a lot of hedge funds. And what happened in 2022 is a lot of those market participants got really badly burnt, and they left the market. And I think that's a really good thing. You want to see a rational, professional, institutionalized market in the growth stages of the private markets as you see in many parts of the public markets. And you can see this in the financing rounds of some of the most prestigious companies. So if you, you know, talk about Anduril, for instance, which we're shareholders in, if you look at some of their more recent rounds, they have skewed towards bringing in partners who are actually traditionally public market investors that are large asset allocators, that have been doing this for a really long time and have that level of sophistication. And because they get to choose who their investors are, they bring in those institutional investors, and they sort of say no to the, sort of slightly hotter money, should we say. So I actually feel pretty good about the standards, the level of underwriting, and the level of professionalization that you see within the primary parts of the private markets. Secondary markets are a little bit different. There, you do see, sort of slight FOMO dynamics. You will see people wanting to get access to companies where they actually don't even have information. So they'll they'll know about a business by what they read in the press, but I have no idea what the financials are of the company, which... Plus it's crazy. Like, have no idea how you could decide that you want to invest in x y z company. You've never seen a set of accounts of the business, let alone spend time with the management team.
00:13:59 · Peter Singlehurst
So you do see some of that in the secondary markets. There is more liquidity in the secondary markets, and some of that's good. Like, it it can be useful for investors to be able to add to or reduce positions in secondary markets. But what's not good is where you see investors coming into the secondary markets, trying to get access to brand name companies where they don't know the management team, they've not spent time with them, they don't have access to financials, they're and just kinda waiting to pay whatever valuation that that, yeah, that... That's out there. That is worrying. But, like, what sits behind that? Well, what sits behind that is there's a cohort of amazing companies that only a very small number of institutions and investors can get access to. Like, we're fortunate enough to be one of those. We're fortunate enough to be one of those because we've been doing this for as long as this part of the market has existed. But I do believe it's right that ordinary savers should be able to get access to these companies. Like, it's... Tesla creates a lot of wealth for ordinary investors. SpaceX, it's been much more difficult for those ordinary investors to get access to these kind of companies. And so part of what we've tried to do is give ordinary investors access to those kind of companies, and we do this from within these investment trust structures that I mentioned. So the fund that we started doing that for was a fund in The UK called the Scottish Mortgage Portfolio. It's a 15 or so billion dollar fund, but quite quite quite on that number. It might be a little bit off. And north of 30% of that fund is invested in private companies. In 2019, we launched a dedicated fund called the Schiehallion Fund, which today, it's just shy of $2,000,000,000 in net asset value. Anybody can go and buy shares in that company, and they can get access to SpaceX, ByteDance, Bending Spoons, Databricks, Stripe, Anduril. Like, I could go on. You can get access to those companies, you know, for as little as $2 if they wanna buy a share. Very low management fees on that vehicle. Free freely tradable on the London Stock Exchange.
00:15:59 · Peter Singlehurst
And so, yeah, we found ways actually to sort of democratize access to some of these companies, but still do it in such a way where there is, you know, a high level of due diligence that goes into these companies where we are underwriting these companies with full information rights, full access into management. And so individual investors don't have to make spurious decisions about, hey. Well, I'm just gonna buy something in an SPV, and I've got no idea what it is. They know that what's going into the Schiehallion Fund or or Scottish Mortgage has been underwritten to the highest level of sort of, you know, professionalism and and experience from doing growth equity investing for over