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Let’s start with a striking fact: ByteDance, the Chinese company that owns TikTok, is worth more than Shell, the 116-year-old oil giant.
Here’s another: ByteDance, which is barely a decade old, is a private company – its shares are not listed on any stock market. Shell is, of course, publicly quoted.
British savers can still invest, indirectly, in ByteDance, and we’ll come to how in a moment. But first it’s worth pondering a little on the significance of the company’s private status for all investors.
Private companies account for ever more of the economy, and especially the part that promises growth: technology in all its forms. Part of the reason is that tech businesses often don’t need much capital to get going – to write an app you don’t need to build a factory – and for the capital they do need there is a growing army of investment institutions willing and able to provide it.
Now some of these private tech companies do in the end go public but the delay in listing their shares, relative to earlier generations of growing companies, means that less of their growth is available to investors who stick to quoted companies – in other words almost all of us.
In Questor’s view, this should prompt readers to at least consider allocating some of their money to private companies, via, of course, investment trusts that own unlisted businesses.
We have tipped several that invest exclusively in private companies, including Pantheon International, HarbourVest Global Private Equity, Hg Capital and Oakley Capital Investments. But there is another, more famous trust that has billions invested in unquoted concerns: Scottish Mortgage.
The £9.1bn trust can invest up to 30pc of its money in private companies and is near that limit at 28pc, although its 52 private holdings outnumber its 47 listed ones.
Trust managers Tom Slater and Lawrence Burns, of Baillie Gifford, seek out exceptional growth companies and are agnostic as to whether they are private or public.
However, the fund is not a “venture capital” investor. It backs companies that are already well established. They typically already have a global footprint and may even be household names; Elon Musk’s SpaceX and Northvolt, the battery maker, are examples, along with ByteDance.
Despite the appeal of private companies, many investors have expressed misgivings about their valuations: specifically that they are too high, because they are arrived at by flawed methodologies or because they have become very out of date against a backdrop of rapid changes in the public markets brought about by the rise in the returns available on cash and bonds.
In the case of Scottish Mortgage, however, two developments give us cause to believe that the valuations of its private holdings are realistic.
The first is a report this week in the Financial Times that Northvolt is preparing for a flotation that could value it at about $20bn (£16bn). That figure compares with the $12bn at which the company is valued in the accounts of Scottish Mortgage, which owns 3.3pc of Northvolt.
The second is the trust’s publication last week of additional information about its 10 largest private holdings. Among the details it provided were impressive revenue growth and margin figures: in the three years to June sales grew by an average of 164pc (58pc if we exclude one exceptional company) and gross margins averaged 38pc.
This, in the words of Numis, the broker, “gives them the ability to invest in R&D to fuel future growth”.
Numis also praised the trust’s “unique and active approach to valuation”. It values a third of its private holdings every month and uses a range of methods including comparisons with similar quoted stocks and with what investors paid when private companies issued new shares.
Scottish Mortgage is managed by investors who are deeply committed to finding businesses that offer the chance of truly exceptional growth. They have also built up over the years the networks of contacts that help them identify these businesses and, importantly, will offer them the opportunity to invest.
Private companies are a key part of the trust and these recent disclosures suggest that they are both growing strongly and appropriately valued. At a discount of 18pc, now looks like a good time to buy.
Questor says: buy
Ticker: SMT
Share price at close: 651p
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