Baillie Gifford, one of the world’s top tech investors, has warned fast-growing private companies could settle next summer.
And the £228bn Edinburgh-based wealth manager says it is “not ready to give up on China”.
Peter Singlehurst, its head of private companies, told a conference on Wednesday that previous market cycles had shown that there was typically around 18 months between the highest euphoria in the market and the highest frequency of down-rounds.
“That would lead you to estimate that the peak frequency of down rounds will be in the middle of next year,” he said.
The tech-heavy Nasdaq index is down more than a third this year as investors brace for a regime change of rising interest rates. That decline has yet to be largely reflected in private markets, and Singlehurst said it wouldn’t happen until companies run out of cash and have to borrow again at a lower valuation.
“It will come,” he added, describing it as “a gravitational force [that] even the best private companies will not be able to escape”.
Speaking at the Financial Times Future of Asset Management event in London, Singlehurst said Baillie Gifford’s portfolios “have already done this calculation because we mark all our private holdings at market price.” This is because they are held in daily rated funds such as the FTSE 100-listed Scottish Mortgage Investment Trust and the £642m Schiehallion Fund managed by Singlehurst.
Scottish Mortgage shares have fallen more than 40 per cent this year and shares in the Schiehallion Fund have fallen by two-thirds.
Baillie Gifford made his first investment in an unlisted company, Chinese e-commerce group Alibaba, in 2012 and has since expanded his investments in private companies.
Foreign investors are weighing their exposure to China amid President Xi Jinping’s efforts to consolidate power, the release of disappointing economic data and hopes for a quick relaxation of Covid-19 rules. In the past, critics of Baillie Gifford have questioned whether she underestimated the political risk of investing in the country.
Singlehurst said, “We don’t invest in China, we invest in a small number of companies in China.”
The Schiehallion Fund holds three private Chinese companies: TikTok owner ByteDance and two beverage makers, Jiangxiaobai and Genki Forest. All three represent “structural growth stories” where moves in macroeconomic growth “marginally help or hinder,” Singlehurst said.
He added, “The more pressing question for us in China is will the best Chinese companies continue to raise capital from foreign investors?”
In the past, the Chinese companies that were darlings of foreign investors – like Alibaba, Meituan and ByteDance – raised capital in US dollars, which meant foreign investors could invest. “If the next generation of companies started raising capital in renminbi, it would make it very difficult for foreign investors to access the best companies,” Singlehurst said.
Baillie Gifford was “not at all ready to leave China,” he added. “We want to continue to see if we can continue to find great companies because it will be those handful of exceptional companies that will matter to us and our customers, not China at large.”
The largest position in the Schiehallion fund is Elon Musk’s SpaceX rocket business. Investors are debating whether the billionaire’s recent acquisition of social network Twitter will be a distraction from its other companies, such as SpaceX and electric carmaker Tesla.
“If there’s one thing Elon Musk has always been pretty good at, it’s juggling a lot of plates,” Singlehurst said. “He was probably always distracted by whatever he was doing, and yet, despite those distractions, he was able to generate returns for shareholders over long periods of time.”
The “important thing,” he added, is the people around Musk: “There is an excellent management team at SpaceX that has been incredible from an executive perspective.”
https://www.ft.com/content/d8628545-ce35-43fa-9458-04c6d8080821 Tech investor Baillie Gifford warns 2023 will be billed for private companies