I am frequently asked about my intentions towards the unquoted companies held within my portfolios. While these look pretty large in absolute terms, in proportionate terms we are talking about some quite small segments of between 4.5 per cent and 6.5 per cent of the portfolio.
I remain of the view holding unquoted stocks in a long-term investment vehicle is the right thing to do. I also believe the optimal way to unearth unquoted investment opportunities is via the relationships we have established over many years with the “tech transfer” or intellectual property commercialisation companies, including IP Group, Imperial Innovations and Allied Minds.
These companies have relationships with a spread of academic institutions, as well as major pharmaceutical companies and the US federal government and, as such, have given us the opportunity to co-invest in new businesses with them.
We embarked upon a process around two years ago to encourage the move of some of the unquoteds, where appropriate, into the quoted sphere.
One such example was Circassia, a biotech company that came from the Imperial Innovations stable. Circassia is an allergy-platform business, which came to the market in March 2014. It was the first float of a biotech company on the London market since 2006 and the largest for over 15 years. The investments we have made over the past few years are now beginning to show the rewards of our patience. Since Circassia, we have also seen Allied Minds, Xeros, Abzena and Puretech Health float on the stock market.
One of our key strengths in the unquoted space comes from our dominant position as major shareholders in these IPC companies. The largest of these is Imperial Innovations, in which my portfolios combined hold a 42 per cent stake. We have 25.4 per cent in IP Group and 34.4 per cent in Allied Minds. We also now hold large stakes in quoted companies Mercia Technologies (29.5 per cent), Puretech Health (32 per cent) and unquoted businesses Cambridge Innovation (20 per cent), Oxford Sciences Innovation (16 per cent) and Eurovestech (30.3 per cent).
These relationships ensure the portfolios are better placed than anyone to benefit from the commercialisation of intellectual property. No one can replicate this position and we typically have the first option to invest in these companies at a relatively early stage in their life cycles. We will also potentially increase stakes over the life cycle, as milestones are met and as their funding needs for commercial development arise.
Not all our unquoted investments will be successful. It is inevitable some companies in the early stages of their development will fail to deliver as hoped. However, the major pricing improvement on float or trade sales that comes from those that do succeed can provide a significant uplift to portfolio performance. More importantly, their long-term future business value can also enhance performance if they are kept within our portfolios. This can prove particularly significant against a backdrop of the more modest capital returns I now expect from large-cap quoted companies.
Mark Barnett is head of UK equities and portfolio manager at Invesco Perpetual