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that they are too high, because they are arrived at by flawed methodologies or because they have become very out of date against a backdrop of rapid changes in the public markets brought about by the rise in the returns available on cash and bonds.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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