{ "version": "1.0.0", "segments": [ { "speaker": "Dave Baxter", "startTime": "3.6799998", "endTime": "38.879997", "body": "Private companies are all the rage right now. We've seen plenty of excitement drummed up around the flotation of SpaceX, and we have some other exciting companies on the same path from Anthropic to OpenAI and some lesser known names like Bending Spoons. There's always been this argument that you can tap into greater growth by investing in such companies before they list on the public stock market. However, that entails risks, it entails some complications, and there have been some controversies in the space as well. So that's what we're going to discuss today." }, { "speaker": "Dave Baxter", "startTime": "39.075", "endTime": "54.92", "body": "Welcome back to On The Money, the show discussing the issues affecting your savings and investments. I'm Dave Baxter here at I I and today I'm joined by Matt Masters, the chief executive at the Caledonia Investments Investment Trust. Matt, thank you for joining today." }, { "speaker": "Mat Masters", "startTime": "54.92", "endTime": "57.239998", "body": "Great to be here, Dave. Nice to be with you." }, { "speaker": "Dave Baxter", "startTime": "57.399998", "endTime": "89.600006", "body": "So, Matt, for context, Caledonia invests in all sorts of different things, but you do have a decent focus on private assets, whether it's kind of more direct investments or using funds. So I suppose let's kick off with, you know, if I want to invest and make money, I've been pretty easily able to do that in recent years simply by investing in public assets and listed shares and so on. What is the case for private investments either instead of or alongside shares?" }, { "speaker": "Mat Masters", "startTime": "90.64", "endTime": "135.985", "body": "Well, yeah, at Caledonia, we invest across both, so we have that same question the whole time because we have direct private investing and direct private investing where we own six or seven companies at any given time, and then we also invest in PE funds, so we have exposure to private assets that way. So we're always asking, you know, that that exam question, answering that exam question, and I think, you know, for us, and, you know, we've got the ability to do this with the team and everything, is we're looking at the quality of the business that we're buying into, the underlying companies, what the qualities are of those, and how much risk am I taking in investing in them? I mean, those are the two questions investors have to visit, isn't it? How good is this thing? And, you know, what what what I think it's worth, what are the risks?" }, { "speaker": "Mat Masters", "startTime": "136.83", "endTime": "166.95", "body": "And, you know, so we so we will we will sort of pick and choose depending on what the opportunity set is. And, you know, with with with private with private investing, you know, as an individual, you think you're probably doing it via a fund, via an investment trust possibly, most likely, and so you need to think about the manager as well. So you need to think about those underlying companies, the risk associated with them, and then also the management of of those assets and and and get to know all that." }, { "speaker": "Dave Baxter", "startTime": "167.10999", "endTime": "172.95", "body": "And if someone were trying to, I suppose, understand how private assets kind of fit into their portfolio" }, { "speaker": "Mat Masters", "startTime": "173.18999", "endTime": "173.59", "body": "Yeah." }, { "speaker": "Dave Baxter", "startTime": "173.59", "endTime": "182.285", "body": "How would you say it kind of differs from going listed? I mean, is it higher risk, higher rewards? Probably a bit more nuance than that." }, { "speaker": "Mat Masters", "startTime": "182.285", "endTime": "208.685", "body": "Yeah. So it can appear lower risk because private assets, the valuations don't change that often. So the the sort of wiggly line, as I call it, of progress doesn't wiggle quite so much with private assets. With with with listed assets, even listed funds, you got a lot more volatility, so they appear to have different risks. Of course, they're investing in companies, and they're taking precisely the same equity risk." }, { "speaker": "Mat Masters", "startTime": "208.685", "endTime": "242.73502", "body": "So you don't be misled by how by by that sort of stability. I think, you know, you need to weigh up, you know, what are the what are the types of assets that the manager's investing in and are they paying high multiples, are they putting lots of leverage against it, you know, how have they been generating their returns over time. Post the great financial crisis, the GFC, just to sort of remind people what it stands for these days, was a while ago. A long time ago. Was a long time ago now." }, { "speaker": "Mat Masters", "startTime": "243.13501", "endTime": "273.585", "body": "Yeah. Interest rates went very low, and private equity had a you know, it's probably turned out to be a golden decade of very low interest rates. And so, you know, you could really improve your equity returns by taking out quite a lot of debt, and then, you know, that magnified, you know, any any any improvement of value that you enjoyed over that time. So so, you know, you'll be careful about looking at that period and expecting that, you know, to repeat repeat going forward. So it's quite a bit of homework to do as you're going into private assets." }, { "speaker": "Mat Masters", "startTime": "274.19998", "endTime": "301.83502", "body": "I think it is a good area to invest in though. I mean, you can invest behind good quality managers who perhaps aren't using lots of leverage, aren't paying high multiples, they've got high quality portfolios, and it's a good way of getting behind companies and getting behind perhaps we can talk about, you know, the the way these companies are managed and the alignment that they enjoy, which I think, you know, counts towards where they perform well over time." }, { "speaker": "Dave Baxter", "startTime": "301.915", "endTime": "303.83502", "body": "So what is that alignment? What do you mean by that?" }, { "speaker": "Mat Masters", "startTime": "304.06", "endTime": "329.64502", "body": "So, you know, the difference between private assets and public assets, if you boil it all down, is the shareholder, obviously. In in public markets, you've got lots of different shareholders. You've got a share price every day. You know, there's kind of a lot of day to day investor relations to sort of worry about and be concerned with. When you're in a private asset, if, say, for example, in our portfolio, you know, we sit on the board." }, { "speaker": "Mat Masters", "startTime": "330.20502", "endTime": "357.295", "body": "Well, first of all, we're very selective about the assets we invest in. All private equity investors do a lot of homework before they invest. So the shareholders are really well informed about the asset, the management team, the market when they go on the board. So you've got brilliant understanding of relationship between your shareholder and your management team, and it they tend to be long term holders of these assets. It's great for management teams being able to invest in their company." }, { "speaker": "Mat Masters", "startTime": "357.615", "endTime": "397.98", "body": "You know, at Caledonia, we're investing from the balance sheet, so we're not investing from a fund, so we didn't have to think about recycling the money. And we have a family shareholder in Caledonia, provides Caledonia with additional stability. And so that means that the management team can really have that stable platform and really develop and improve the quality of the business over time. Mhmm. You know, in terms of return on investment, the generally, the highest return on investment we'll get in companies is when they're able to invest in their overheads, in their p and l, in their sales teams because the people generally know what they're doing and they can generate additional revenue or whatever it is and make good progress." }, { "speaker": "Mat Masters", "startTime": "398.38", "endTime": "420.665", "body": "But in the short term, that might bring profit down. That's a complicated sounds simple, but that's a complicated story to tell the public markets. But when you're a private asset, you just talk to your shareholder who's on your board, and everyone understands what's going on. So the investment decisions are a lot easier to do, a lot more clear to do. So they just have a bit of an advantage in terms of how they're set up to do well." }, { "speaker": "Dave Baxter", "startTime": "421.49", "endTime": "456.91", "body": "And I want to return to the point about the kind of DIY investor. Yeah. As you mentioned, they all tend to be accessing this area through funds, whether it's kind of dedicated private equity funds, whether it's some of the more mixed investment trusts. Obviously, I alluded to earlier things like SpaceX and Bailey Gifford had a lot of exposure there. But what are the key things DIY investors should perhaps be looking at if they're trying to, say, look into one of these funds, understand the process, understand the companies?" }, { "speaker": "Dave Baxter", "startTime": "457.22998", "endTime": "461.07", "body": "I suppose what metrics and general traits should they be sort of looking out for?" }, { "speaker": "Mat Masters", "startTime": "461.38998", "endTime": "499.695", "body": "Well, they should have a look at the portfolio and look at the companies in that and try and understand if they're, you know, good quality companies or not. And then in terms of metrics, things I'll be looking for is how much debt is being used to drive returns. The more debt, the more volatile because as you know with our mortgages, you know, house price might change them. The bank doesn't change the mortgage, so it's the equity bit that fills the pain, and, you know, some some people can use quite a lot of debt, so you need to watch out for that. It's great when it works well, but when things go off a boil, it can be painful." }, { "speaker": "Mat Masters", "startTime": "499.695", "endTime": "518.49", "body": "Mhmm. And then also the valuations. So you can managers generally tell you what the portfolio or the underlying valuations are. And, you know, the higher the valuation, the more right about the future you've got to be. And, you know, we've seen it." }, { "speaker": "Mat Masters", "startTime": "518.81", "endTime": "593.16504", "body": "All those three things lining up when times are good, and it can cause problems when things change. So, you know, for example, you know, software as a service is still a good quality business to be in. You know, the marginal cost of selling a new license sort of almost zero, maybe a bit of sales commission and very sticky, you know, revenue. So they're good businesses and consequently, they are valued quite highly, they're predictable, so there's quite a lot of debt in there and so they that's sort popular assets to own. But when AI comes along and we're yet to see whether their risk materializes, but certainly the perception is there's risk around them, so the valuations reduce, you've got a lot of debt in there, back to that mortgage analogy, you know, the valuations come under pressure, you know, so you need to think through, you know, what risk you're willing to take when you invest in these funds, and when you're after that sort of thing, the SpaceXs of this world, if you like, whether you want something a bit more stable, so you're looking for things with less leverage, and perhaps the companies are a bit more more of a broader portfolio and and maybe sort of lower valuation risk in there." }, { "speaker": "Mat Masters", "startTime": "593.16504", "endTime": "595.71", "body": "So those would be the things I'll be I'll be looking at." }, { "speaker": "Dave Baxter", "startTime": "595.71", "endTime": "619.585", "body": "And I guess as with even sort of listed equity funds, maybe that sector consideration is quite important. You know, as you alluded to, software can be quite present in some of those kind of private portfolios. And I suppose you can also look at maybe how potentially more cyclical a portfolio is and if you look at kind of what sectors are dominant there." }, { "speaker": "Mat Masters", "startTime": "619.905", "endTime": "633.88", "body": "Yeah. Absolutely. If it's cyclical, if it's in in one sector, you know, you're just taking on more risk at any point in time. Mhmm. You might be wondering what the thing is worth." }, { "speaker": "Mat Masters", "startTime": "634.36", "endTime": "650.025", "body": "Yeah. I suppose you trade that, you know, with having clarity about the story around the portfolio, a nice clean message, but then you do run the risk of all the eggs being in one proverbial basket when things change, and it's very hard to predict the future." }, { "speaker": "Dave Baxter", "startTime": "650.265", "endTime": "670.165", "body": "Yep. And what are the, I suppose, kind of key risks that you see for the sector at the minute that investors might need to be aware of? I mean, we've discussed the software issue. You did also earlier mention rates, and rates might potentially, I suppose, stay a bit higher for longer on on in the wake of the kind of Middle East conflicts." }, { "speaker": "Mat Masters", "startTime": "670.165", "endTime": "697.855", "body": "Well, they could go up. You know, no one knows actually what's going to happen with interest rates. You know, we we read in the telegraph about which way they're gonna go, but no one actually knows. So the risks are definitely that. So if you're in equities, the risk free rate interest rates is sort of governing your returns somewhat because if interest rates go up, then, you know, your equity returns are gonna have to go up and so your valuations today are gonna come down." }, { "speaker": "Mat Masters", "startTime": "698.495", "endTime": "721.35", "body": "That gets exaggerated if you've got lots of debt in there. So there's quite a lot of PE funds, not Caledonia because we don't use very much debt because we're aware of all these risks. We use a couple of turns of debt, really. If you've got five, six, seven times debt in there, you know, that's in terms of debt to profit ratio. You know, you're gonna take you know, you've got a you've got much more of that risk to worry about." }, { "speaker": "Mat Masters", "startTime": "721.35", "endTime": "757.965", "body": "And, Sure, these PE funds will fix the interest rate on the debt that they have, but at some point, those debt instruments will be required to be refinanced and those fixes will come off, and you'll have to go to the new rate environment. So you you do need to be mindful mindful about that interest rates. You need to be mindful about markets. You know, if the stock market sells off in a big way, that's gonna make its way into the value of the portfolio, and and and you need to think about other of other a whole host of other issues in terms of the quality of the assets as well." }, { "speaker": "Dave Baxter", "startTime": "758.04504", "endTime": "773.31", "body": "Yeah. How great is that kind of correlation with public markets? Because, I mean, occasionally in the past, I almost hear people trying to describe private assets as a diversifier Mhmm. Against public, and I'm never sure quite how well that stacks up. Well, they" }, { "speaker": "Mat Masters", "startTime": "775.495", "endTime": "801.37", "body": "ultimately, they're both underlying companies that at some point, someone's gotta really work out what they're valued at and and pay some money to buy them. That's the ultimate test of valuation. There's a phrase though, what happens overnight in the equity markets can take a while to work its way through to the private markets, and and that's sort of referencing the fact that you might have an equity market sell off, but the private market valuations don't change very much." }, { "speaker": "Dave Baxter", "startTime": "801.37", "endTime": "801.69", "body": "Mhmm." }, { "speaker": "Mat Masters", "startTime": "801.69", "endTime": "839.565", "body": "Now there is there is a sort of sound reason behind that, and that when these private assets are valued and everyone follows, you know, the guidelines and they're all audited, so no one's doing anything wrong, they they are considering what a willing buyer and a willing seller would trade at. So if the stock market has just sold off last week, that'll somewhat be brought into the thinking, but not completely. There need to be a a persistent change in the market and and the market for those assets to work its way into the valuations. So you do have that that difference occurring. I think, you know, the what is it?" }, { "speaker": "Mat Masters", "startTime": "839.565", "endTime": "851.32", "body": "The proof of the pudding is in the eating, and so you can quite often see what value assets are being sold at. Mhmm. That's quite an interesting reference point. There's this term pop on exit you might have come across." }, { "speaker": "Dave Baxter", "startTime": "851.32", "endTime": "852.44", "body": "Is that the uplift? Or" }, { "speaker": "Mat Masters", "startTime": "852.68", "endTime": "889.40497", "body": "That's the uplift. And what they tend what people tend to do is they say, we've sold so we've just sold Stonehenge Fleming. It's literally sold got the money in a few weeks ago. You know, we've we've said, well, we've sold it for nearly £300,000,000, our share of it, you know, having paid 90,000,000 for it, by the way, in 2019. And, you know, we've said probably told people that versus the March 2025 valuation, so the undisturbed value before the buyer came along a year ago, that's a 30% uplift that it went at." }, { "speaker": "Mat Masters", "startTime": "889.40497", "endTime": "905.62006", "body": "That's the pop on exit, that 30% uplift. That's been a common pop on exit across our private portfolio for us, and that's somewhat helpful in letting people see whether we're overvaluing or undervaluing our assets. And other managers, you know, will also provide similar data." }, { "speaker": "Dave Baxter", "startTime": "905.94", "endTime": "922.405", "body": "I suppose there's also the kind of volume of so called realizations and sales of assets, you know, when problems kind of a hove interview, you sometimes get rid of a slowdown with sales. Yep. Yeah. Perhaps that's also another metric." }, { "speaker": "Mat Masters", "startTime": "922.405", "endTime": "948.835", "body": "Yeah. That's a good point, Dave. You certainly got that going on the moment. I mean, people look at realizations, you know, when when when when you're in boom times, you may see up to 20% of the opening NAV being sold in a year, you know, like high turnover because it's a seller's market and that the assets are being sold, you know, because the market's receptive to it. That's much lower at the moment because of the war and and higher interest rates." }, { "speaker": "Mat Masters", "startTime": "950.035", "endTime": "994.13", "body": "And so that's holding up within funds. You know, point out again, Canada is a lot of funds, so we don't have this issue. But within conventional funds with a with a limited lifetime, you know, not selling assets becomes a problem because you've got to return the money, and so you're seeing continuation vehicles, lots more secondary transactions. The financial services market is nothing if not entrepreneurial, and so we've got lots of wizzy ways of sort of creating ways of apparent creating apparent liquidity, and I think the more you see of that, the more you need to sort of question why is that why is that occurring. You know, for the occasional brilliant asset, we wanna give it a lot more time to run." }, { "speaker": "Mat Masters", "startTime": "994.37", "endTime": "1001.97", "body": "You can understand why you do a continuation vehicle, but if it's becoming a systematic feature of a of a fund, it's probably because they're in trouble selling stuff." }, { "speaker": "Dave Baxter", "startTime": "1002.14496", "endTime": "1026.8999", "body": "Yeah. And those continuation vehicles have become much more prominent, haven't they, in kind of recent years? Yeah. I mean, it might be worth touching on because, you know, it's not something people automatically know. Differences between, I suppose, things like primary funds, secondary funds, and then direct investments because these are often funds will kind of blend these approaches when getting private assets, but they have different kind of characteristics." }, { "speaker": "Mat Masters", "startTime": "1026.9", "endTime": "1056.385", "body": "Yeah. Sure. So back in the old days, everybody invested, you know, individuals invested into private equity via primary funds. And these are ten year episodic funds, money's raised, deployed over the first three or four years, and then they work, manage and sell them, and then their money's gradually returned over the years six to ten or something like that, and they're aiming to sort of double your money over that period. Over time, the market has has evolved." }, { "speaker": "Mat Masters", "startTime": "1056.385", "endTime": "1088.4349", "body": "One of the issues with primary funds is it takes a while to get the money in. Mhmm. There's a there's a feature called the j curve, so the the valuation goes down because of fees and what have you before it goes up. And so as I say, financial services is very is very entrepreneurial. And so you have secondaries and funder funds and and direct investing being available, which are various different ways to address those issues, the j curve and the speed at which money gets put to work." }, { "speaker": "Mat Masters", "startTime": "1088.835", "endTime": "1113.165", "body": "So secondaries would be is increasingly common. It's quite a big market now. Mhmm. And that would be when a primary fund is nearing the getting towards the end of its life, they might choose to sell the last three assets, let's say, to another fund, to a secondary fund. And so that secondary fund it is a different investment proposition." }, { "speaker": "Mat Masters", "startTime": "1113.165", "endTime": "1159.7799", "body": "They tend to be concerned about the speed at which they can then sell those assets on. There's much more because the assets have been owned by private equity, there's a lot more sort of clarity about how things are going, and it's a sort of time value of money game, and it works pretty well, but it's a different way of doing private equity, that secondary market. It also helps with the liquidity issue that we've we've been talking about. You then have directs, which are sort of co investments generally, and you're seeing investment trusts. You know, we don't do this because we do our own directs, but where they might have a primary fund that are invested in from from time to time, the primary fund will say, well, do you wanna put some money directly into one of the portfolios companies we're about to buy?" }, { "speaker": "Mat Masters", "startTime": "1159.78", "endTime": "1181.86", "body": "So if we're paying a 100,000,000 for it, we'll put 50 in from the fund, and the other 50 will come from the part the parts of that fund, you know, directly. Mhmm. The benefit of doing that is that you generally pay less fees on that, so that saves you saves you a bit of fee money. So you've got different ways of essentially playing the same game and" }, { "speaker": "Dave Baxter", "startTime": "1182.02", "endTime": "1210.74", "body": "and it's it's it's addressing the the fee drag and the time and the speed at which your sort of money goes to work. Yeah. And I suppose also for DIY investors, maybe they just need to consider the kind of funds available to them. You know, someone much more concentrated and you can kind of look at the companies and, you know, you get some funds that may actually just have, say, 20 investments or so. And then the fund to fund model where you talk about has you could have thousands of underlying companies, so it's harder to analyze" }, { "speaker": "Mat Masters", "startTime": "1210.9", "endTime": "1211.46", "body": "Very easily." }, { "speaker": "Dave Baxter", "startTime": "1211.54", "endTime": "1212.98", "body": "But it's more diversified." }, { "speaker": "Mat Masters", "startTime": "1212.98", "endTime": "1219.62", "body": "Yeah. Very easily. Yeah. So you sort of in investing, you've got to understand yourself first. You've to work out." }, { "speaker": "Mat Masters", "startTime": "1219.62", "endTime": "1253.955", "body": "And I also think when you invest, it's all very nice to think about how things will be when they go well. You really have to think about how you're gonna react when things don't go well. If you're a long term equity investor, there'll be periods when things don't go well, and you gotta figure out what are the things I'm gonna need to understand without having to Google every other word, so that I can understand what's going on when things are going badly. Because I might have to sell, that might be the right decision, but actually, the right decisions might be to hang on and hold. Mhmm." }, { "speaker": "Mat Masters", "startTime": "1254.115", "endTime": "1286.755", "body": "And you just gotta work out, you know, what are the sort of things that, you know, you're gonna need to hang on to, you know, when things go bad. I've been at Canada for twenty years through thick and thin, and one thing I've learned is having good quality companies, almost no debt means that when things go bad, you can go home and sleep at night. Yeah. That for me, that's important. When things go well, things sort of upside almost takes care of itself, you know." }, { "speaker": "Mat Masters", "startTime": "1286.755", "endTime": "1295.0099", "body": "You don't have to worry quite so much about that. But other people might have different risk reward. You know, people investing in SpaceX will have quite a different risk reward" }, { "speaker": "Dave Baxter", "startTime": "1295.1699", "endTime": "1295.57", "body": "view" }, { "speaker": "Mat Masters", "startTime": "1295.57", "endTime": "1297.33", "body": "than than I would, for example. Yeah." }, { "speaker": "Dave Baxter", "startTime": "1297.6499", "endTime": "1312.345", "body": "Very different ways to do it. Yeah. And finally, I mean, we've covered a lot of grounds, but were there any other kind of key trends in the space that you would kind of highlight or anything that investors need to be aware of if they're thinking of kind of getting into it for the first time?" }, { "speaker": "Mat Masters", "startTime": "1313.145", "endTime": "1343.505", "body": "Well, I think, you know, when you're doing anything for the first time, not anything, do it gradually. Don't have a number in mind that you're wanting to put to work and just do it in stages over time. Mhmm. The last thing you wanna do is, like, pick a day to create your new exposure to whatever it is because, you know, you get a bit like Gordon Brown selling the gold. You you might pick absolute worst point in the market." }, { "speaker": "Mat Masters", "startTime": "1343.5851", "endTime": "1356.62", "body": "So I would say do as much homework as you as you can sort of do. Make sure you're comfortable with with with what it looks like and how it smells and everything, that you've got the things there that you need, and then just do it gradually." }, { "speaker": "Dave Baxter", "startTime": "1356.62", "endTime": "1357.1799", "body": "Mhmm." }, { "speaker": "Mat Masters", "startTime": "1357.5", "endTime": "1378.8", "body": "You know, it's a long term game, investing, especially private market investing. It takes a long time for the companies to do their work and improve and the value creation exercise to occur, so you're unlikely to miss anything Mhmm. And and just take your time over it. Don't don't don't pick like a Tuesday afternoon or whatever it is to do it, please. Slow and steady." }, { "speaker": "Mat Masters", "startTime": "1378.8", "endTime": "1379.76", "body": "Yeah. Yeah. Absolutely." }, { "speaker": "Dave Baxter", "startTime": "1379.76", "endTime": "1380.88", "body": "Well, thank you for your time." }, { "speaker": "Mat Masters", "startTime": "1380.88", "endTime": "1382.0", "body": "Alright. Thank you, Dave." }, { "speaker": "Dave Baxter", "startTime": "1382.4", "endTime": "1394.7949", "body": "And thank you for watching and for listening. As always, do let us know what you think either via the comments or by emailing us directly on otm@ir.co.uk. Thanks again, and take care." } ] }