A veritable smorgasbord of comments today about wildly different investment trusts. The first is some good news which is that Merian looks like they’ve managed to get away their Chrysalis fund. According to a Numis report this morning,  they’ve raised £100m for the new Guernsey-domiciled investment company, listed in London. The new shares will start trading the Main Market of the London Stock Exchange on 6 November under the ticker “MERI”. This issue had targeted £200m which I had always thought was a tad overambitious given volatile markets and where we are in the stockmarket and M&A cycle. Clearly, Merian itself has taken a position in the funds – it had intended to take a stake of 15-25% via its own funds, plus an investment of around £3m by the management team. The fund is looking to invest in fast growth pre-IPO private businesses and I think this could be a great opportunity for private investors to co-invest alongside some of the largest VC firms. Up till now most retail money invested in VCs has tended to go into earlier stage businesses via venture capital trusts  – access to the larger, more mature private businesses has only been possible by investing in the VCs or spin out businesses themselves. The Chrysalis fund offers a real alternative although I still worry about its timing.

Talking of private businesses, it is worth quoting some numbers from Scottish Mortgage’s results today. This has been a long-term investment of mine and although I harbour some real doubts about the big bets taken by the fund on the likes of Tesla, I still respect the management’s track record – and singular investment vision. Nevertheless, one of my main concerns has been the stampede into private business investing by large asset management groups, who are traditionally focused on listed securities. I can see how VCs can navigate their way through this space, but I worry that big asset managers lack the right cultural framework to invest in risky private businesses. The one possible exception to this general anxiety has been Baillie Gifford (managers of the Scottish Mortgage fund) which, so far at least, does seem to be building an excellent reputation. Obviously, those big bets on great entrepreneurs such as Musk allow the BG team access to deals others can only dream of. The numbers from Scottish Mortgage are very revealing when it comes to these PE/VC deals.

According to Numis “ from June 2010, when the fund made its first unquoted investment, to the end of September 2018, unquoteds made an absolute contribution to portfolio returns of c.17%. However, this increases to c.30% including the returns from holdings that have subsequently listed. Over the period, Scottish Mortgage’s entire portfolio generated a total return of 344%, but the total return from holdings that started out as unlisted investments over the same period was 419% (versus 163% for the FTSE All-World Index).”

Last but by no means least we have Ranger Direct Lending. It looks like I was a tad too cautious about the wind-up process at this US-focused direct lender. I had assumed that investors might be looking at a 10% hit as the loan book was slowly wound up. That, in turn, led me to assume a target price of between 720 and 740p. Earlier this week though we discovered that RDL has entered into an agreement to sell its book of current receivables. According to the Cantors note from that day, the deal was “ at a blended rate equal to 96.5% of par for all Receivables held which are either current or up to 30 days delinquent, for an aggregate purchase price of $18.2m, paid on October 23, 2018. In addition to the sale of performing loans, the Company is working with the same Consumer Receivables Platform to sell a small portfolio of charged-off loans for an amount equal to $191k, after the deduction of applicable fees.”

As a result of this, the directors of the fund approved a distribution of the sale proceeds by way of a special dividend of 85p per share (c. $1.10), with xd date 1 November. Next day the shares came down sharply in price reflecting this distribution.

This is obviously good news although I would simply observe that

  1. This was a book of easy to access short-term assets that had much less duration risk. Thus, we might expect a bigger haircut on the remaining longer duration books and
  2. This also removes a source of steady, robust income which might impact the regular dividend.

My sense is that what remains of the loan book will now deserve a much higher discount, if only because of the longer duration risk, and the obvious challenges facing the Princeton legal dispute.