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

I'm Pav Sriharan. I'm 1 of the portfolio managers of Schroder's British Opportunities Trust, and I'm pleased to take you through the half year results. So if we start by looking at the financial performance, the net asset value of the trust decreased by about 60 basis points, and that's largely driven by the private equity positions. So if we look at the positive performance, we had EasyPark, Acturis and CFC. And the upside movement was really driven by the underlying operational performance in the businesses. CFC Underwriting underwent a recapitalization, which led to some capital back, although a modest amount. If we look at then the negative performance, we had HeadFirst, Cera Care and Expana and the negative performance was principally driven by market movements. So these are movements in the valuation multiples that our valuation teams apply to the underlying valuations of these companies. So the operational performance in the main of those businesses is also trending to be positive. If we then talk about the activity over the last 6 months, we said 6 months ago that we would be shifting the intention of the trust to invest into private equity in the main. And so we have started shifting the portfolio via sales of public investments to reinvest those into private equity positions. And we're pleased to say that we have announced 2 new investments, the first in the period and just after, the first being JMG, which is our insurance business focused on commercial line insurance and is a U.K. leader and the second is CSL, which I'll come on to later in the presentation. If we just talk about outlook for a second, we feel that within the Schroder's British Opportunities Trust, we now have a very established private equity portfolio with these companies going through their value creation journeys and we've just added or just announced 2 new investments. And the intention would be to reshift the existing investments that we have in public positions into private equity positions, where we have a very good pipeline ahead of us in the U.K. market. If we look at the long-term performance, this is a story that shareholders will be familiar with. Effectively, the green line shows the NAV of the trust, which has been very resilient in a very challenging market. And the blue line shows the share price. And so us -- much like many other investment trusts that invest in private investment landscape are still trading at a discount to our comparators and to the NAV, I should say. If you look at the portfolio performance in the last 6 months to the 30th of September, I said earlier, the movement is pretty flat, but pretty much driven by the private equity position revaluations. I won't spend too long on the key negative and positive performers. It's as mentioned, principally EasyPark, Acturis and CFC leading the way with a couple of positive movements in some of our public names that remain and on the more negative HeadFirst, Cera and Expana, and again, some negative movements in the public book that we hold. Now if we talk to the portfolio positioning, the top 10 positions as at 30 September just reflect the private equity positions as 1 might expect with Expana being the top company by size, just under 14%. If we look at how the split looks from a public to private perspective, we're currently 84% versus 16% weighted towards private much in line with our intentions. And then if we look at the split from an industry or sector perspective, we feel we have a very diversified portfolio that is over-indexed to technology. As we've said in the past, technology remains a very interesting area for us in the businesses that we invest in. There's very high levels of recurring revenue. There's a big digitization theme that pans out. And of course, with AI, which causes threats, but also in a lot of software businesses, there's upside in how you can have customer support with your clients, but also on the product development side, reducing costs. So we still think technology is a very interesting area to be over-indexed too. If now I double-click on our private equity strategy. This is a reminder slide that our shareholders will be very familiar with. Our focus is on growth capital as well as small and mid buyout capital. We don't focus on the market, or the parts of the market that tend to be overheated, such as late-stage venture and large-cap private equity. If we look at the private equity allocation attribution, so what has been driving the movement in the NAV of the trust over the last 6 months, you will see that the underlying performance of these companies, which is the blue bar that has 2.6 in the middle has been positive. But that's largely been offset by valuation moderations in the multiples that our valuation team have applied, where we're seeing softness in some of the trading multiples in some of the comparators that we're using to value these businesses. You'll see a negative 1.2 net capital activity and that is capital that was distributed back from CFC Underwriting, as I mentioned earlier. So that's a detractor to NAV, but really comes back in cash. And so in the main, it's been a pretty broad movement or pretty flat movement rather in terms of the NAV, but in quite challenging circumstances. If I use this slide to just talk about our private equity portfolio and really what it stands for. If we look at the growth across our portfolio, it's been in double digits and just under 14% in top line or sales over the last 12 months. If we look at the margin, the EBITDA or profit margin on an aggregated basis for the portfolio, it's just under 35%. And that really talks to the pricing power that our companies have and the resilience that these businesses have and their ability to pass on this price to their consumer, while keeping a lean organization in the main, and 35% is a very healthy margin across the book. Now those earnings and margin and profits have also been growing at double-digit figures, just under 13% in the last 12 months. So not only is the margin profile of our portfolio strong in the main, but it's an underlying earnings profile that continues to grow. It should also be said that coming to the last point, we -- our portfolio has performed 11 transformational add-on since inception. So these add-ons provide strategic breadth to these companies. It allows them to go into different regions and it also enables them to have better margins once the integration process happened and all the efficiencies can be fully baked through. The other thing that we should mention is some of our businesses are still investing for growth. And so whilst 12.4% is still a good bottom line growth figure to have in the last 12 months, a lot of our businesses are still underinvested. And so reinvesting cash flows into go-to-market and product development. So we are excited about the portfolio in the main, and we expect that these -- the distributions in these and the exits and realizations in the portfolio will start to happen in the following years as the portfolio matures. In this slide, we just have outlined all of the positions that we have to date. And as I mentioned, there's 2 new deals that have done. The high-level takeaway here is that we've invested just under GBP 43 million of capital and that sits at a value of around GBP 64 million, including distributions back. So that is a money multiple of 1.5x. So 1.5x invested capital is the value that we have back, which is a very strong performance in light of what has been quite a challenging market. And then if I look across the logos that we have, we have a very diverse portfolio in a number of different sectors and market leaders in their niche. And as I said earlier, a lot of these companies have undergone transformational acquisitions, which went often in their base case, in our base case underwriting or what we expected to pan out. So they are acquiring competition in other geographies and making these businesses truly global champions. If you look at the status that we've allocated there on the right, just on kind of basic RAG status, all of our companies are performing to plan, and in some cases, exceeding plans and budgets with Learning Curve going through its own idiosyncratic journey, but trending to become positive over the last 6 months, it had a good set of results. This -- just a reminder of our private equity strategy and where we focus our time and the fact that our portfolio and the private side is indexed to buy out position. So these are much more mature companies, cash-generative companies and in the main, a very high cash conversion on profits that could be invested into growth and also very attractive for buyers in the future. And remaining, we only have 2 growth buyout deals that remain and 1 growth capital business in Rapyd where we see some good upside. Strategy in action, what we want our shareholders to really understand from this is the first 2 columns are fairly typical levers in a private equity thesis in terms of having very good organic growth and underlying growth in the business as well as the ability to by multiple smaller platforms, but the larger acquisitions have been as said, transformational. And so changes the size and breadth and scope of these companies, making them much more interesting to strategic acquisitions. And as investors, we like to have optionality in exit and how these companies eventually sold, be it to other private equity sponsors, be it IPO, but also through strategic routes. And we feel, given the large number of transformational acquisitions across the portfolio, many of these will be quite ripe for strategic exits, where strategics tend to buy at slightly higher multiples. I'll skip over the top 5 case studies. I'll spend a minute talking about our latest investment at the -- in the annual results, we announced the intention to invest into JMG, which is a U.K. insurance business. But we're pleased to also announce the 12th private equity investment in the trust, which is CSL. Now CSL is a provider of critical IoT services for -- which tends to be very mission-critical. And to put this in sort of easier terms to understand, if you think about a fire alarm or a health care device, these are pretty mission crucial in terms of needing signals, and you need the ability to be able to transfer signals and transfer messages outside of typical network usage, and that's where CSL comes into play. They have established a very strong niche and a very clear, strong dominant position in the U.K. There's a number of different thesis that the company has, a very good right to win with their clients and market positioning and there's further diversification to be had across various sectors that they currently aren't in today as well as new product innovation where they have been very active in the past few years. So very pleased to have this added to our portfolio. If for a second, I talk about our public equity book. As said, the public investments is something that we'll be reshifting and exiting in the coming months in order to fuel further exciting private positions. But if we look at the last 6 months, we had OSB and Volution that were positive, and both of these had good earnings above where the analysts were sort of predicting them. And then on the more negative side, there was a much more cautious outlook on GBG Group. And then in Mobico, there was some -- there was weaker trading in addition to some governance issues that the market has picked up on, which led to some valuation detraction in those 2 companies. But if we look at the private -- the public equity sleeve rather as a whole, as at 30 September, from an industry split perspective, this is quite complementary to the book that we have on the private equity side with a bigger weighting towards consumer which the investments were made at reasonable valuations and hopefully will rise as fundamentals improve in the U.K. but a lower skew to technology where we have a higher SKU within the private book that kind of dominates the portfolio in the main. I'll touch on the market overview for a second, specifically focused on the private equity side. And I should say that the data that we're showing is the private equity market as a whole, including from small cap to large cap. As a whole, the market has moderated in terms of the deal flow that's been done. However, in the small and mid buyout, there is still a number of transactions that are happening. And we, as a team, are seeing a large number of interesting opportunities and deal selectivity continues to remain very high for us. In terms of exits, I think 2025 has been certainly a slower year, and we can see that actually in the second half of Q2, the numbers have dropped versus -- and very similar to where we sort of were in Q3 of 2024, which is also a slower year in terms of exits. I would say here that the portfolio that we've built is still in its value creation phase, and we should be starting to see some realizations coming through in the near future, but not in -- we're not immediately impacted by the exit environment here, given we have a number of some more value creation levers to pull within our companies. So maybe to conclude, if I talk about our outlook, the portfolio that we have today, I said earlier, we have a portfolio of 10 companies, soon to be 12 companies. These companies are performing well. The underlying performance of these businesses continues to compound. These companies have made strategic acquisitions. In some cases, these acquisitions are still being integrated. Given the environment which has been a challenging 1 for trading, it's easier to take out some competition at lower multiples. And then acquire those businesses and then you have a multiple arbitrage when you're buying for a lower multiple that you get immediately. And so we think the portfolio is well positioned and very well diversified. And as said earlier, valued at 1.5x money multiple as at the end of September. So very strong portfolio that we have today, and we're excited about realizations to come from those portfolio in the coming years. And then if you think about the future, as I said, 2 deals in very interesting sectors, we will be looking to recycle and sell at the right time, the public equity positions that we have remaining and fuel those into very attractive U.K. opportunities. And I should say that the pipeline looks very attractive on the U.K. side. We have seen, as a team, a lot of transactions come through and as ever, selectivity is key. So we have a very robust portfolio that we expect will start delivering realizations in the future. And we have a very good pipeline of new transactions from here, which we can exploit. And have a public equity book that we can sell down and reinvest into private at the right time. So overall, we feel that we are very well positioned. And as the 6-month results show, we have sort of a strong set of results in what has been a challenging trading environment for companies and so excited about the future from here.