Schroder British Opportunities Trust PLC (SBO) Earnings Call Transcript & Summary

Good morning, and welcome to our webinar for the Schroder British Opportunities Trust Annual Results. My name is [ Sunny Klar ]. I work in the Investment Trust team, and it's great to be joined here today by your 2 Co-Managers, Tim Creed, who joins us in Zurich, and Uzo Ekwue, who joins us in [indiscernible]. Welcome, guys. They're here today to present the annual results of the trust for the year-ended 31st of March 2024. So before they begin, I'll just remind you that you can download a copy of the presentation via the events platform and the full annual report. And also you can use your -- the Q&A button to ask them a question so that they'll have a formal presentation, and then there will be time for me to ask them your questions. So I will let them take it away. And I believe we're starting with Tim.

Perfect. Hello. Good morning, everyone, and welcome to the annual update on the Schroder British Opportunities Trust. And I will start with a brief introduction about the trust in total, about what we've done and what we're doing. I will then go into detail on the private equity part of the portfolio, and I'll then hand it over to Uzo, who will talk all about the public part of the portfolio. So let's start with the big picture. What is it that we're doing and why? This is a pretty unusual and unique trust in that we can invest in both public companies and private companies. The great benefit of this is it allows us the broadest universe of companies to choose from, which we believe allows us to select the best companies out there across the U.K., whether they are public or whether they're private. The trust is run by a very experienced group of individuals, both on the public side as well as the private side. Those individuals are shown on the next slide. But really, what I'd like to highlight is, although there's 4 people shown here, we're actually part of much larger teams. On the private side, there are over 60 investment professionals looking for companies that are attractive evaluating those companies, making the investments and managing those companies, whilst the public side of [ Schroders ] business is, of course, very well known and has got a very long history. The next slide goes back to the why public, private? And it's a bit of a repeat of the first slide, but we really think this is an important topic. This gives us the full universe of companies to choose from. There are far more private companies out there than there are public companies, but at the same time, it's not always possible to access those private companies when you want to. And therefore, having a trust that allows us to invest in both public and private means we've been able to invest at a very good level throughout what has been quite some challenging times over the last couple of years in some highly attractive companies, and we'll go into those in a moment. The next slide #5 talks about the overview of what's been happening this last 12 months. On the left-hand side, you can see the financial performance. You see that the net asset value of the trust increased by 2.5% over the course of the year from GBP 79 million to GBP 81 million. And you can also see the main drivers of that performance. There are 3 of the unquoted companies, the private companies that were significant drivers whilst at the time we want to always be transparent about companies that are not going so well, we had a couple of companies that didn't perform quite as well as we'd like or had lower valuations and their list at the bottom. In the middle of the page, we show our portfolio summary. We've had a very busy period. It's not just a matter of making investments and then sitting and watching them. We've also, in these last 12 months, we've made a number of follow-on investments, particularly on the private side into CFC and Learning Curve to help facilitate and drive their further growth. We've also sold 3 of the public companies, Keywords, City Pub Group and Velocys. And Uzo will talk about those in a lot more detail because there have been some very good exits during this year. The next part of this slide is the outlook. There's a lot of media speculation talking about how the economy is going. There's been obviously general election, and there's also a lot of commentary about the private equity market overall. But where we sit today, we see that there is a high number of very attractive investments to make on the public side and the private side. Indeed, we've actually made one new private investment just after the end of the period, and we'll talk about that later. What we also see is the portfolio themselves -- itself is doing very well and the underlying companies have been progressing well, and we think that there's going to be further new investment opportunities looking forward over the course of the next 12 months. The next slide shows a picture of the net asset value and also the share price. Now this has -- this slide, the green line is the net asset value. So that is the value of the companies within the trust, both the private and the public companies combined, whilst the blue line is the share price. And you see they were trending quite similar to each other during calendar year 2021. But then at the beginning of 2022, when Russia invaded Ukraine, and when the interest rates significantly increased, we saw a significant drop in the share price. This is despite the fact that the NAV actually stayed pretty stable. In fact, actually, what you've seen over the last 2 years is the NAV has gradually ticked upwards, whilst the share price had the initial drop and then has further now subsequently started to tick upwards as well. There's still a big gap between the 2 and the team, both the investment team but also the broader Schroders team are doing a lot of work to try and reduce that gap as we speak now and in the coming months and years ahead. Slide 7 shows the portfolio for the last 12 months. I mentioned that it has increased from GBP 79 million to GBP 81 million. This shows the drivers of that change. There was a small drop in the quoted portfolio of GBP 0.6 million. There was quite a big increase in the unquoted and the private portfolio of GBP 3 million, meaning in aggregate, the portfolio increased over this last 12-month period. Now let's have a little look at the drivers in a bit more detail. Slide 8 shows the 5 biggest positive contributors and the 5 biggest negative contributors. On the left-hand side, you see the positive contributors and you see the percentage contribution gain that these companies have contributed to the portfolio, and these are pretty good sized gains over the course of the year. They also, I should mention, exceed the detracting values on the right-hand side where we list the 5 companies that have had the biggest reduction in value in this period. Slide 9 is a standard regulatory slide that needs to be put forward in every presentation, and rightfully so. It shows the share price performance per year and also the NAV performance per year. And you see in 2021, they both went up, in 2022, they both went down, and in 2023, they have both gone up again. So you can see that we have rebounded from the problem year of 2022, and we are now in a position of confidence for calendar year '24 and '25 ahead. Let's dig into the top 10 companies in a bit more detail. This Slide #11 shows the 10 largest companies. And probably, there's a few things that I'd like us to take away from it. The first is, of course, is that not surprisingly, 9 of the top 10 companies are the private companies. We had said that when we launched the trust, we're going to make slightly larger investments in the private companies, but also a number of those private companies have had significant up valuations since we invested. On the right-hand side, you see the valuation in March 2023 and then the valuation in March 2024. And the table is listed by the valuation as of March 2024, meaning that Mintec is our largest company at GBP 9.5 million in the trust and 13% of the trust and Cera Care, Pirum Systems, Rapyd and EasyPark build out the rest of the top 5. The important thing to mention across these 10 companies is that the 10 companies have progressed well over the course of the last year, and we've got a few comments that show that in a bit more detail later. The next slide talks about the overall portfolio again from a different perspective, and that is the perspective of the public private balance. And you can see that we are now at 73% private, which is what we had said we would be at about a year ago or 2 years ago. We said that we wanted to be around 75% private. And on the right-hand side, you see the industry breakdown. We'd say here that the industry breakdown is very highly diversified. The important thing to mention on software is that the software companies provide their software to a broad range of end industries. So actually, the software industry is quite -- is quite a lot more broadly diversified than it may look from this single pie chart. That was the summary of the big picture of the trust. We'll now jump into private equity for a few slides before I hand over to Uzo, who will go into the public equity in more detail. So starting with the private equity. So here, we look at just the private companies. And hence, we look at the NAV at the beginning of Q1 2023 to Q1 2024, so the calendar year. And we see that the private portfolio started at GBP 47.9 million. We then made about GBP 2 million worth of new investments. That was the top-up investments I mentioned at the beginning. We then had a number of company events. This is where the companies themselves did small add-on acquisitions where we didn't actually need to put further equity into those companies, but they are able to tuck on acquisitions at very attractive valuations. The important part in this table -- in this chart, I think, are the next 2 marks, which is the GBP 5.1 million gain through trading gains. This is revenue growth and earnings growth across the portfolio. So this shows that the 9 private companies, in aggregate, have been trading very well, have been growing significantly over the course of the last 12 months. The next column, the valuation multiple. You see that this is the first mark that actually goes down, and that's because the valuation team, which is fully independent from the investment team, decided to value a number of the companies at a lower revenue multiple or EBITDA multiple compared to the previous year. This is despite the fact that these companies have been growing so well. The reason for that reduction in revenue multiple and EBITDA multiple is because we've seen that across the market, across public market, but also the wider private equity market. And so rightfully, the valuation team have a conservative approach to valuations and so they've reduced the multiple. That does not necessarily mean the companies are struggling. In fact, actually, on the contrary, you can see through the trading gains that the companies are doing very well. And that leads to the point where we sit today at the end of Q1 with a NAV of the -- in the private equity side of nearly GBP 53 million. The next slide emphasizes or explains that the companies -- how and why we believe the companies are doing well. So the slide has 3 sections and it has 2 bars per section. The first bar is the SBO performance. So this is our private companies. The second bar in light blue is public companies. Now we decided to be very transparent and trying to make this a fair comparison. So we've chosen public companies that are quite comparable to our private companies. Our private companies are fast-growing. They're generally in the tech space. We have nothing in oil and gas. We have no big banks, et cetera. And so in order to make it a fair comparison, we removed big banks, oil and gas companies, coal companies, exactly commodity companies from the public peer group in order to really make sure we are comparing like-for-like. And what you see here is, on a like-for-like basis, our private companies in the SBO portfolio are outperforming them in sales growth because they [ grew ] 24% in aggregate, which is really substantial growth, whilst also the EBITDA margin, we are -- we have a number of very, very profitable companies because you can see the EBITDA margin in aggregate as a weighted average is 46%. So these are fast-growing and highly profitable companies. Whilst at the same time, I mentioned the valuation team have been reducing our multiples or the valuation multiples. And here, you see on the right-hand side, the average -- the weighted average multiple on an EBITDA basis is 24x compared to a similar set of public companies that would be 31x. So the summary here is we have fast-growing companies that are highly profitable at attractive valuations. Now that's easy to say in detail, kind of as a big picture. Let's go into a bit more detail in each of the companies that are -- each of the private companies that are in the portfolio, and that's shown on the next slide. So this slide shows the private companies listed by size. So again, Mintec is at the top. What I'd like to highlight here on the left-hand side is we've invested GBP 34.5 million into these companies, and the value of these companies sits at GBP 55 million. So the aggregate value of these companies has significantly increased since we've invested and you see the aggregates or the private equity terminology is called TVPI, total value to paid-in and that means that we sit at a 1.6x multiple across all these private companies. That has been a good performance over the last couple of years. On the right -- far right-hand side, you see that 7 of the companies have got a clear green light. That's because they are really growing very, very well, whilst we've had 2 companies that we've been quite transparent about for the last 2 years, 3 years that have been underperformers through our holding period, and that's Graphcore and Learning Curve. Fortunately, they are, of course, the 2 smallest companies, and therefore, they have the least impact on the overall portfolio. We actually have a slide on Graphcore because we've now managed to sell a Graphcore, and we'll talk about that in a moment. The message behind here and you can read the text in the commentary is that the 7 companies at the top, [ 2 quarters, 3 quarters ] page really are growing well, and you can see the commentary about what's happening in each case. I'm sure you've all been able to download this presentation and you can look at this in more detail should you wish to afterwards. The next slide is a recap of our strategy. We had said when we launched the trust that we wanted to invest in growth, we wanted to invest in growth buyout, and we wanted to invest in the small mid buyout part of the U.K. We wanted growth, and we had always mentioned this would be higher risk, higher return kind of investments. And so you've seen that with Graphcore being a underperformer, but Rapyd being an outperformer, hence the commentary about high risk. The growth buyout, these are true star companies. They're very fast-growing whilst we manage to do them as a buyout transaction. The small mid buyout, this is the bulk of the portfolio. This is the engine of the U.K. private equity market, and you can see the investments we've made here on the right-hand side as well as our latest investment HeadFirst. What we'd like to do now is introduce a slide which we haven't shown before, but which tries to explain our strategy and action. What is it that we're trying to do with each of these companies. And really, we'd like to summarize it as 3 distinct activities that we're doing with each of our companies that we invest in. Sometimes we manage to do all 3, sometimes only 2 and sometimes 1, but really, our goal is to try and do as much of each of these 3 as possible. And the 3 things we try and do is we try and drive strong organic growth. We like to see high-quality companies with high-quality management teams growing very fast year-on-year. And you see the bulk of the portfolio gets a yes there. They get a tick for high, strong, robust organic growth. The second thing we try and do is small add-on acquisitions. These are normally small tuck-in add-ons or bolt-ons, where a company needs to add an extra capability, could be a new small product, it could be a new geography, it can be kind of a small expansion. These are generally done at much lower entry prices, and so they're very accretive and very beneficial to the strategy. The final thing though that we like to do, and this is perhaps more unusual or somewhat unusual is we like to drive significant acquisitions. We like to make significantly bigger and better companies through our holding period. And one of the best way is for a company to be able to buy a major competitor in order to grow significantly. Mintec, for example, acquired a company called Agribusiness last year, which was a major U.S. business, and that allowed us to take a U.K. leader to become a European leader and now a true global leader at what it does. Likewise, Waterlogic. This is one of the first companies that had a large transformational acquisition. Waterlogic is a company that actually makes water coolers in offices. It sounds rather basic, but it is the true global leader of what it does. When we invested, it already become the U.K. leader and was well on its path to becoming the European leader. It did a huge acquisition, a huge merger with a company called Culligan, and it became the global leader in what it does. So it did a big acquisition with the U.S. business, and it now dominates U.S. and Europe as the global leader of water coolers. So what we find here across the portfolio is if we can do strong organic growth, if we can do multiple small add-ons and if we can do a large transformational merger, we can turn small U.K. leaders into true global leaders in their field, and we think that means that we're building out a very strong portfolio. So the next slide is very, very detailed. I don't propose that we go through this at the moment. I do suggest that people who are interested should download the presentation and should read all the text because we want to make sure we gave you text so you could see what's happening in each of these companies. You can understand exactly what the company does. You can understand the thesis of why did we invest and also some recent developments. What I would like to do now though is move on to 2 recent developments. The first is a new investment and the second is our first exit. So our most recent investment is into a company called HeadFirst. It was actually done after the Q1 period, so after the reporting period of this annual report. But we obviously have made the announcements to the market that we've made this investment, and so you'll see it appearing in the portfolio in future quarters. The company is called HeadFirst. It is a tech-enabled recruitment company. Now in the old days, recruitment was generally a networking-based business, where people would network to make sure they could help companies recruit the right candidates. Now it is highly tech-enabled. This company, HeadFirst is actually a Dutch business. We've known about it for a very, very long period of time. It has grown very, very strongly. And the capital that we invested allowed HeadFirst to buy Impellam, which was a U.K. AIM-listed business. And so we took Impellam private, we've merged the 2, and we now have a true European leader at HR recruitment. And when I say HR recruitment, I should be quite precise because HR recruitment is a very broad category. This company specializes in recruitment in the STEM segment. So science, technology, engineering and mathematics. These are, of course, highly sought after highly skilled people, and it requires a great business to be able to identify the right people to put them -- to help them get jobs in the right companies. And HeadFirst, Impellam is now the -- certainly the European leader, and our goal is to make it the world leader of what it does. We're very excited about this investment. We're investing alongside our partner, IceLake, who we've invested with before and have had very significant returns with them in the past. The next slide is our first exit. Now this is an exit that -- it brings both happiness, but also maybe a bit of sadness in the fact that Graphcore had -- has the -- or had the potential to be a great company. We invest in it, and this is a company -- this is one of the few companies that you'll see in many investment trusts. Many of you will know this company. Of the 9 and now 10 companies with HeadFirst, of the 10 companies, we think 9 of them are pretty much unique to this trust. The one exception is Graphcore, where many of you will know about Graphcore. Now Graphcore has had quite a high profile journey over the last year -- over the last 2 years, and it's now been acquired by SoftBank. The acquisition was at a lower valuation than the last financing round. However, we managed to still make 1x our money. Now 1x our money is not a return that we'd like to make on investments, but we had mentioned for a long period of time, this is our most underperforming investments. What's perhaps just as important is that it was at an uplift to our last valuation, and this demonstrates the conservative nature of our valuation team. And so our exit was at a 22% uplift to the last valuation. The reason we were able to still make a return on this investment when most of the other investors were wiped out and most -- many other investors received nothing is because we invested in the Series E and therefore, we had preference shares compared to the previous and earlier investors. So this is -- we're pleased to have sold this company. We think that SoftBank will be a good home for it and will drive the company for further growth. But it's journey with us has now ended and hence, we've sold the company. My final slide before moving -- passing the microphone over to Uzo, it's just a recap or a reminder of the big picture of where we fit in the landscape. As an industry, private equity and venture capital can be shown as these 7 boxes. Venture has 2 boxes. Growth and buyout has 3 boxes and then large mega buyout has 1 and then turnaround. This trust targets the 3 middle boxes. It targets growth, small buyouts and mid buyout. And the reason for that is because over the long run, over the course of the last 30 years, this segment has been a segment that's been the true engine of performance across private equity in the U.K. and in fact, actually globally. So growth, small buyout and mid buyout have been the dominating part of the industry. And therefore, this trust really focuses on that segment in particular. With that, I'll pass the microphone over to Uzo, who will go into detail about the public part of the portfolio and explain what we've done there.

Great. Thank you very much, Tim, and good morning to everybody. So let's take a step back. I want to be able to explain the way in which we look at things on the public equity side of things. So as a reminder, we're looking for growth companies in the U.K. within the small and midcap space. And we're looking at things with a market cap range of between GBP 50 million and GBP 2 billion. We look for things where there's a market mispricing. And by that, I mean where our expectations of earnings growth is very different from where the market is currently pricing the shares and also where consensus estimates are. So we like to have a positive growth gap. That's the way in which we describe it. Now if we can get things right, we think that over time that consensus will then revise the earnings expectations upwards and then therefore, that will lead to rising share prices. So just like everybody else, most investors, we're also looking for robust business models. We're looking for strong valuation support. We're looking for good governance. But we're also looking for an inflection point or a catalyst that will lead to a re-rating of shares. So how does that then translate into the way in which we construct the public equity sleeve. So you might remember this slide, but I'll just go through it again. We are very much focused on 3 particular sectors. Consumer discretionary is 45% of our portfolio, technology is 23.5% of our portfolio and industrial is about 21%. Now the one thing that a lot of these sectors have in common is that they are very, very, very sensitive to changes in interest rates. And those changes can basically manifest itself either in terms of the earnings or in terms of where the valuation multiples trade at. When it comes to earnings, it could be because higher interest rates can often translate into higher financial costs for both consumers as well as also for corporates. And then the opposite is true, obviously, for lower interest rates. And then when it comes to high-growth businesses, such as which you typically find in the technology sector, these valuation multiples tend to be very, very sensitive because these are long duration growth stocks. So I just wanted to put that into context. So let's talk about something that has happened positively in the portfolio during the period. We had a takeout of a company called City Pub Group. Some of you may be familiar with it. We bought it in March 2021 during COVID. If you remember back to then, COVID had just started to really get into the swing of things from a lockdown perspective, and we felt that this was one of the best companies within the restaurant and the pub space that actually would be able to navigate COVID very, very well. And the reason for that was because it had a very strong balance sheet. Its loan-to-value ratio was very, very low. It had very, very high liquidity buffers. And in general, we thought that it was a well-run company. So let's move on to this slide. And you can see that in March 2021, as I said, that's when we bought it, the share price just declined. Inflation started to rise, interest rates started to rise, and there was a lot of negative sentiment around this business, but then also just around the overall consumer discretionary sector, as I mentioned earlier, the sensitivity to changes in interest rates. And at one point, this business was trading at a 60% discount to its net asset value. And we just thought that, that just didn't make any sense. So we continued to add to our position as you can see, those red dots there. And then with the Liz Truss, Kwasi Kwarteng exit, the share started to bounce and then eventually, they will take -- the company was taken out by a competitor last year -- at the end of the last year. So we made 14.5% total return on this investment. And we think that's very, very good. It's very attractive, particularly when you compare it to the FTSE AIM Index over the period, which declined by 38%. The FTSE 250 Index declined by around 8%, and also the FTSE Small and Mid-Cap Index declined by about 2.5%. So this is not the first takeout that we've had in the portfolio. For those that have been watching us closely, this is now the sixth. We're very happy about that. And aside from Blue Prism, which you can see in the middle of the top there, every single exit has been very, very strong. So we've had EMIS Group, which we made a total return of about [ 83.5% ], Ideagen was 53% and so on and so forth. So what's -- how did the portfolio move over the period? So you would see in the financial results that actually the public equity sleeve was a small detractor to the overall performance of the trust. And I just want to spend some time to explain the puts and takes towards that. So in terms of the positives, I have talked about City Pub Group, we locked in our gains there. And then we also have some really strong financial results from our technology holdings. So there was Bytes Technology, Trustpilot and Trainline, which you see at the top of the page. Trustpilot, for example, actually reached profitability at the EBITDA level a lot faster than we and the market had expected, and it's also recently started to do a very, very small share buyback. Now in terms of what held the portfolio back during the period, let me start off with our holding in Sosandar. So for those of you that know Sosandar, it has traditionally been an online women's retailer. But what happened during the period was that they decided to change their strategy into a multichannel concept. So they're now moving into retail physical stores. And in doing that, the best way for them to reposition themselves was to decrease the level of discounting and promotional activity that they were doing. So that led to a revenue warning. Now we think that actually, going forward, a focus on higher-margin full-price customers makes sense, and we continue to hold our position there. Now I'll just go on to a holding in Watches of Switzerland. So Watches of Switzerland during the period was actually our largest position in the public equity sleeve. Now a few things happened here. In the summer of last year, Rolex, which accounts for about 50% to 55% of its revenues, announced that it had acquired one of Watches of Switzerland's competitors, Bucherer. Now this was a long tail risk. Nobody was expecting it. The market was very, very nervous and the shares declined quite materially. But we spent a lot of time speaking to the company. We read the statements that Rolex put out. And it was clear to us that we felt that at least over the medium term that Watches of Switzerland will continue to be supported by Rolex in terms of its allocation of Rolex watches. We wanted to wait until the Strategy Day, which was in September, October of 2023 because we felt again that, that would prove what we believed. And we were right. The shares rallied materially from there. And the shares actually continued to rally in calendar Q4 of 2023 because of the prospects also of lower interest rates and expectation of interest rates cuts, which helped move the consumer discretionary sector. Now fast forward into Q1 of this year, Watches of Switzerland, unfortunately, had a profit warning at the beginning of this year, and that was because of lower average selling price for its Rolex watches. And the movement in Watches of Switzerland this year actually led the entire portfolio for the entire year to have that small detraction that you can see in the annual results. So what do we think of the investment opportunity from here. We continue to have our holding in Watches of Switzerland Group. And the reason for that is because we think that fundamentally, it's trading on around 9x price-to-earnings ratio for mid-teens earnings growth. And there's a real opportunity now for the business to increase its proposition in jewelry to be much higher value and also for it to continue to take share in the U.S. So if we think about the performance over the longer term of the public equity sleeve. So if this was a stand-alone fund, if you compare that to the U.K. smaller companies peer group that the investment association runs, this portfolio over 3 years and over 2 years would be a very strong first quartile portfolio. So whilst short-term performance can sometimes be disappointing, we are long-term investors, and that's what we're focused on. And then if I just round off my section with the portfolio activity during the period. As Tim mentioned earlier, we exited our position in Velocys during the period, and that was just because of concerns over the company's balance sheet and then also, as I mentioned, we exited our position in City Pub Group.

Thank you. Thank you very much, Uzo and Tim, for the presentation. Just a reminder, please submit your questions if you do have anything you would like to ask. Let's start with you, Tim. We've had a really good question. AI appears to be the theme attracting a lot of investment and profile at the moment. Should we expect to see more investments here? Or are there many opportunities or valuations are really quite stretched in this area?

That's a great question. And AI is a topic that we've been looking at actually now for about 12 years as a global organization, a global investor in venture capital, private equity -- and private equity. We made our first investment in AI about 12 years ago. So it's a segment we do know well. And the way that we look at it for this trust is that really there's 2 areas to think about. The first is a specific AI company, and these are quite common in the news, quite high profile, and we've got investments from other vehicles in many of those, and they are really venture investments. Now when they work, they work very, very well, but there's quite a high risk around those companies. And at the moment, it's still not certain as to which those AI companies are going to be the proven winners and which ones are not, although we and many people have quite a strong view. But that segment of venture capital is not in the scope of SBO. It's a slightly different risk profile. In order to do venture capital investments, you actually have to make a much larger number of investments than we have in this trust because we only have the [ 9 stroke 10 ] private companies. So then we look at it from a second area, and that is what are our corporates, what are our businesses doing in response or with AI. And I can give Mintec for -- as an example. Mintec is a company that is the global leader in pricing of food commodities. Now that sounds a bit basic, but they actually have pricing on over 10,000 different food commodities. And when we say food commodities, we don't just mean wheat. We mean a wide variety of different kind of wheat. We mean wheat from different geographies, et cetera, et cetera. And they price these 10,000 commodities based on the frequency of requirements. Some of them are daily pricing, some in fact are hourly pricing, daily pricing, weekly pricing, monthly pricing. And now what Mintec have done, in addition to that big acquisition in the U.S. where it's becoming the global leader is they've used a lot of AI in their ability to do pricing. So they can now actually do a lot of forecasting on pricing. And so they can see using AI, if there is a weather event in a certain part of South America, what does that mean for cocoa prices and how does that ripple through the supply chain? And so Mintec are very active users of AI across their business. I could say the same for Cera Care and for Pirum and for Rapyd and for a number of our other businesses. So in order to answer your question really for this trust, we look at not making an investment in a tech business, in a venture business, instead, we look at how these businesses use AI to become more powerful and strengthen their organic revenue growth.

Great. Thank you. And I think good to hear about Mintec as a case study there. Really useful. Let's stay with you, Tim. You mentioned follow-on investments in CFC and Learning Curve. Maybe let's go into that a little bit. Why did you feel it was the right thing to do to add to your positions in these holdings?

Yes. That's a very fair question. And actually, I should highlight that now that we've sold Graphcore, all the companies are highly profitable. None of the companies have any financing need. None of them are loss-making where you have to put more money in to drive the growth. Instead, they're highly profitable, fast-growing businesses. We added a bit more money in order to help them grow faster and also allow them to do some of the small add-on acquisitions. So we put a bit more money into a couple of companies there. We will -- there's a chance that we will put more money into a couple of these companies if they need it for a large add-on. But as things stand, all the businesses are very well funded, highly profitable and don't need further capital.

Great. And it's really interested to hear your new investment in HeadFirst. And I saw in the slide, you mentioned that you've got a long-standing partnership with IceLake. Maybe let's talk about how do you actually work with different investors and partners and actually finding the best opportunities out there for potentially people that are new to the trust and not aware of kind of the process.

Yes, certainly. So there's over 100 institutional quality private equity firms that invest in the U.K. We've been investing in the U.K. for over 30 years or nearly 30 years. So we know them very well. There's a number of the private equity groups out there that we work with in order to source companies and that in this trust, we then co-invest with those private equity managers. So in the case of HeadFirst, we and they knew -- they already owned -- sorry, in the case of HeadFirst, IceLake already owned HeadFirst, and they came to us and spoke with us about providing the capital to help them buy Impellam, because Impellam is a nice U.K. business, and they want to have more money going into that. So the way we work with our private equity partners is we help put a bit more money into really attractive deals in order to do some significant change. And so in the case of HeadFirst, we've worked with IceLake since their first fund. We've invested from our other pools into their fund, and we've got a number of co-investments with them in the past and direct investments with them. And this is the first one that was within the U.K. because they bought Impellam. And so this one really was a textbook deal for this trust.

Great. Thank you. Uzo, let's turn to you now. Maybe you can talk to us about from a valuation perspective and why you believe the U.K. equity market is still attractive.

Sure. Just show some slides. Okay. Okay. So when we look at things on a free cash flow yield basis, we see that the U.K. market, so that's the FTSE All-Share, that is trading at just under 7% free cash flow yield, and that compares to around 5% for the MSCI World Index. Now the reason for that is because the FTSE All-Share definitely does have a higher concentration towards things such as oil and gas as well as the financial sector. So the prospect for share buybacks and dividend yield is actually quite strong. And if I maybe move to this slide to look at the valuation opportunity in a different way. So what this slide shows is that if you take an average of various valuation multiples over the last sort of 50 years or so, so your price to earnings, your price to book, and also your dividend yield, what we see is that the U.K. market is now at a 45% discount relative to the global equities. And that's significant. And you can really see that it was exacerbated since the Brexit referendum in sort of mid-2016. That's not the only reason, I think. I think a lot of political instability as well has added to that too. And then also pension funds just continue to sell. If you look here, now pension fund allocation, so U.K. pension funds basically allocate about 2.8% of their assets to U.K. equities. Now that has been coming down quite materially. So they're underweight the U.K. in comparison to the MSCI benchmark weighting. That's very different from a lot of developed market countries where you see that their pension funds are actually overweight their domestic capital markets. So if we look at the U.K. at 2.8%, we don't think that it can go any further or really doesn't have that much more room to go further and to contribute in terms of the widening of the discount of the U.K. market relative to global markets. So there are some rooms of optimism there. And I just want to remind the viewers and the listeners, particularly those that have maybe seen us for the first time, the reason why we have a small and mid-cap bias portfolio. So despite the fact that, yes, there has been some underperformance on the right-hand chart over the last 3 years relative to large cap stocks, but actually, over the very, very, very long-term, what we do see is that small and mid-cap stocks do outperform.

You talked a little bit about City Pub Group and the activity there.

Yes.

What are you seeing in terms of M&A kind of more widely?

Yes. So that's a good question. Let's -- I think I've got a slide for that as well. So -- if we take a look at 2023, there were 40 transactions that were valued more than GBP 100 million that were announced and the pace really just increased throughout the year. And these M&A deals from the chart really shows that they are concentrated more towards the technology sector and then also the consumer discretionary sector. So here, that's been defined by -- or comprised by the leisure as well as retail. If you remember, our portfolio very much is technology and consumer discretionary focus. So we think that our portfolio is well placed. If there's not a natural movement in the shares because of the market recognizes the underlying fundamentals, we think that there could be scope for outside M&A from either private equity or from corporates. So that has then moved into 2024. We can see actually that as of the end of March that there's more activity this year than there was in the entirety of 2023. And there's been companies such as Hargreaves Lansdown, Royal Mail, Crest Nicholson, I could go on. So yes, we think that the U.K. market we think this will continue because of the valuation opportunity that I mentioned earlier.

I don't think we can talk about U.K. equities that talking about the election that we just had. We've got a new government. So from your perspective, what do you think the impact of that is on your day-to-day the economy markets as you see it?

Yes. Okay. So let's go to the slide, Slide 45. So everybody will know that there was a landslide election win in terms of labor. And we think that this really brings an element of political stability now. As I mentioned on the other chart that political instability has been part of the reason that the U.K. trades at a very wide discount. I think that there's been something like 5 or 6 Prime Ministers since Brexit. So that has now been removed at least for the next 5 or so years. There have been a number of capital market reforms that were proposed by the previous chancellor around pension funds and things like the British ISA. And we think that this government is very much pro investment, pro growth. We can't see them overturning. So we haven't seen any evidence of that yet. So they are very much focused on investment. We think that there's going to be some sectors that will win. There'll be sectors such as infrastructure as well. We think that housebuilders will do well as well as planning reform takes the center stage. So yes, lots of opportunities there. But for a government that is very much focused on investments, they're going to have to fund this from somewhere. And we don't know where they're going to fund it from. So could there be higher taxes? I mean, we're just speculating. I don't think that there'd be higher corporate taxes, but there might be higher taxation hidden somewhere else. So yes, that's all in all, we do think that this could be a potential turning point for U.K. equities, and we're very excited.

Great slide, I think. Tim, maybe back to you, and Uzo has really provided there a very compelling argument as to why U.K. equities are potentially the right place to be looking for opportunities. I wondered if you might be able to kind of echo that on with U.K. private companies. Obviously, the mandate of this trust is to invest in predominantly U.K. companies. So why do you think today that there are opportunities in U.K. private companies above potentially elsewhere?

Certainly. Well, if you look at the U.K. small and mid buyout segment, which is the kind of the engine of this trust, that is also the engine of the U.K. private equity market. So some 90% of all investments ever made in U.K. private equity are in growth, small mid-buyout deals. So we're really focusing on the bulk of the U.K. private equity market. Now we've been investing in the U.K. private equity market for more than 25 years. During that time, there's been periods of boom. There's been periods of bust. There's been global financial crisis. There's been Brexit, et cetera. Every year or 2, there's something to be worried about. And yet through that entire time, the U.K. private equity market has performed very, very well, and our own performances -- performance in the companies we've been investing in over the last 25 years has been very, very strong. So we sit here and look at the market and say there's now been change of government. There's going to be some changes that will follow with that, whether they're big changes or small changes, that doesn't actually make a big difference to the underlying quality of the great British businesses that we invest in. Companies like Waterlogic, it does water coolers for offices. Now it went through a period of COVID where everyone stopped going into the office, and yet the company carried on growing. So we try and find great businesses and grow them that -- and grow companies that can grow through all economic conditions, whether it's boom times or bust times. So we sit here in the same way as we did 5 years ago or 10 years ago or 15 years ago with a good degree of confidence about the U.K. small mid private equity market and our ability to find companies in this space.

Great. I think that's probably a really good time to wrap it up. So I wonder if Tim, Uzo, you had any final comments before we wrap this up. Any final statement?

Yes. No, I think we've covered everything. I think I'd like to highlight the great work done by both the private equity team and also the public equity team. This really is a very unusual trust in having 2 areas that we focus on. And some of the great benefits of that is not just that we have the broadest possible universe of companies to choose from, but there's always periods where private is a bit better or public is a bit better, and we're able to go back and forth between the 2 and ensure that we get the best of both worlds. So we sit here with a good degree of excitement for the year ahead.

Yes. And I'd echo those views as well. Very excited for the year ahead.

Great. Thank you, Uzo and Tim. And thank you, listeners, for tuning in today, submitting your questions. If you do want any more detail, you can, of course, read the annual report, which is downloadable on the platform. But other than that, have a great rest of your day, and we'll see you next time. Thank you.