How you can claim a stake in the hottest companies BEFORE they strike it big
It’s an extraordinary time to be an investor. As the world is reshaped by momentous trends, from the growth of AI to a new space exploration era, opportunities abound to cash in on exciting companies.
But not everyone has an equal chance to get in on the action. Some of the most promising firms are not listed on the stock exchange, where ordinary investors buy and sell shares.
Instead they are held privately and rely on investment from wealthy individuals, funds, banks and institutional investors to enable them to grow. By the time they eventually list on the stock exchange, they are often well-established companies and the era of their most rapid growth is over.
That means these early investors reap the rewards of this impressive growth – and ordinary investors are left in the cold.
Take Anthropic – an AI firm that owns chatbot Claude – which is set to list as early as next month on the US tech market Nasdaq.
Anthropic is currently a private company, so investors can’t yet buy shares on the stock exchange. By the time it lists, valuations suggest it could be worth as much as $2 trillion.
Those early private investors who took a punt will be in line for a massive payday.
However, there is one way you can access some of the most exciting up-and-coming firms before they hit the public market.
Investment trusts also hold types of assets you cannot typically buy, such as infrastructure, office blocks and windfarms
Investment trusts are a type of fund available to ordinary investors to put into their portfolio. You can buy them in your stocks and shares Isa, pension or investment account. Unlike many other types of funds, investment trusts can easily hold both stock market listed and privately owned companies.
They can also hold other types of assets you cannot typically buy, such as infrastructure, office blocks and windfarms.
Investment trusts are run by expert fund managers who search high and low for new companies set to be tomorrow’s winners.
It’s when seeking out private companies that managers really have to work.
They have their own strategies – some scour research coming out of universities, others have countless meetings with entrepreneurs and company founders in the hope of finding a gem.
There is a lot less information about private companies than those publicly listed, so they need to decide if a fledgling company has potential or will flop. Plenty flop.
Then, when the fund manager finds a company with potential, he or she must present as a good, trusted investor. Hot new companies can afford to be selective.
You can buy shares in investment trusts on the stock exchange. They are similar to conventional funds, except for a few unique characteristics.
Having a well-diversified portfolio is key. One investment trust is unlikely to provide that on its own – you may need to hold several that have very different remits to get a good balance.
Here, Wealth investigates exciting companies that are closed to ordinary investors, but available through investment trusts.
Tech firms with a buzz
When SpaceX made its debut on the stock exchange in June, its early investors got very rich. Founder Elon Musk became the world’s first trillionaire overnight.
Ordinary investors who have bought shares since it listed may still make a good return. Shares are down some 7 per cent but may rise over the long term. But it is very unlikely SpaceX could replicate the success of its first 24 years when it was growing rapidly.
Some ordinary investors, however, managed to benefit from this early growth phase because they held shares in an investment trust that had a stake in SpaceX.
For example, Scottish Mortgage Trust first invested in SpaceX in 2018. By the time it listed, its initial £150 million investment had ballooned to around £3.8 billion.
This growth is passed on to shareholders in the form of share price growth and dividends.
Elon Musk became the world’s first trillionaire overnight when his company, SpaceX, made its debut on the stock exchange
Scottish Mortgage Trust, which is part of the Baillie Gifford fund house, specialises in finding the latest privately owned technology companies. It holds Anthropic, as well as data and AI platform Databricks, which could also have a public listing on the horizon.
Challenger bank Revolut, another holding of Scottish Mortgage, is also expected to debut on the stock market, though not until 2028. The trust had difficult years after Covid when interest rates rose, but recovered well. Shares are up 41 and 14 per cent over one and five years respectively.
Schiehallion, another Baillie Gifford trust, is mostly dedicated to buying private companies.
It also holds Anthropic, while the biggest holding is tech firm Bending Spoons.
The Italian company, which buys neglected digital products to improve them, hit stock markets this year at $29 a share.
By the time Bending Spoons listed, Schiehallion’s holding was worth nine times as much as when it first invested.
Trusts can hold on to their investments when a company lists on the stock market in the hope of further growth – or sell to bank a profit. The Baillie Gifford Schiehallion trust is still holding on to SpaceX and Bending Spoons.
Sound infrastructure
A toll road or super sewer may seem a dull investment compared to likes of Anthropic or SpaceX. But infrastructure, including transport, hospitals, schools and power, could give investors a nice income in the form of dividends.
Many investors like to hold a mixture of investments that should produce share price growth, plus those that offer an income. This strategy is another way of spreading your risk by holding a variety of investments.
Infrastructure trusts that invest in or operate these kinds of assets have had a stellar run this year, with a 17 per cent return in the past 12 months on average.
At the Association of Investment Companies showcase this month, director Annabel Brodie-Smith said: ‘The income these trusts offer could provide protection against stubborn inflation.’
Although they may seem boring, infrastructure such as transport, hospitals, schools and power, could give investors a nice income in the form of dividends.
The trusts should have a reliable stream of cash flow from fees and tariffs, which can be distributed to shareholders. Revenues can be inflation-linked, providing even more security, and many assets held are often backed by the Government via long-term contracts.
For a retail investor, holding infrastructure outside a trust would be almost impossible, unless you have a spare few million pounds.
Jonathan Moyes, of investment service Wealth Club, picks out International Public Partnerships, a £2.9 billion trust that is invested in Sizewell C nuclear power station and Tideway, London’s super sewer. The trust has returned 19 per cent in the past year, up from just 14 per cent over the past five years and pays a dividend of 6.4 per cent.
Some 99 per cent of its revenue is contracted or regulated, says chief financial officer Muhammad Anwer, so its cash flow is stable.
3i Infrastructure and Pantheon Infrastructure are two investment trusts on the riskier end of the spectrum, but Moyes says they could hold potential.
3i is the biggest infrastructure trust with a total portfolio value of some £4.3 billion. Holdings include Denmark-based ESVAGT, which provides service vehicles to offshore windfarms, and Ionisos, which owns cold sterilisation facilities for the medical industry.
They are heavily concentrated portfolios, with 11 and 15 holdings respectively, so shouldn’t form all of your infrastructure exposure on their own, Moyes warns.
Many of these trusts also invest in renewable energy infrastructure, though there are trusts wholly dedicated to this such as Foresight Environmental Infrastructure, which owns windfarms and solar parks.
The sector has bounced since the US-Iran war began as investors have seen weaknesses in oil and gas supply chains, says Brodie-Smith.
Space
Space technology seems to be the opportunity on everyone’s mind following SpaceX’s listing. But Musk’s company isn’t the only one on offer for growth investors.
Seraphim Space Investment Trust debuted on the stock market in 2021 and is the only trust dedicated entirely to space technology. It gives investors the chance to access private space companies.
WHY YOU CAN HOLD PRIVATE COMPANIES THROUGH INVESTMENT TRUSTS
One of the major challenges when investing in private companies is that they are not always easy to buy and sell.
They are not listed on the stock exchange, so if you want to sell a stake you may have to find a buyer yourself. Also, as the share price is not shown daily, it is harder to work out the value.
But for investment trusts, these issues are not much of a concern. They tend to buy and hold for the long term. And because of the way investment trusts are structured, they don’t need to be able to sell assets if investors want money back.
Investment trusts are what is known as closed ended – they issue a fixed number of shares, which investors can buy and sell on the stock market. If lots of investors want to sell at once, that will likely drive down the share price, but the manager won’t have to sell assets to return investors’ cash.
Traditional funds are known as open-ended, so expand or contract according to how much people have invested in them.
If someone sells, the fund must return the money straight away, so they can only invest in assets that can be sold quickly.
When many shareholders in investment trusts sell up, it reduces the share price but the value of the holdings stays the same. So investment trusts have two prices – their net asset value (the value of its holdings) and their share price. Where the share price is lower than the net asset value, they trade at a discount. Where it is higher, they trade at a premium.
A discount can be a chance to buy it cheaply – but there is no guarantee the share price will rise in line with net asset value.
Demand for space technology has continued to mount as defence spending becomes increasingly key, amid geopolitical tensions. It has led to a stellar year for the trust, which has achieved a 133 per cent return over 12 months and 392 per cent over the past three. It has never paid out any dividends and focuses on growth.
However, it is trading at a 19 per cent discount.
One of its main holdings is Finnish aerospace technology firm ICEYE, which uses satellites to monitor natural catastrophes and hazards.
The firm has been the driving force behind Seraphim’s success with a valuation of more than £8.4 billion during its latest round of funding in June.
You can’t buy shares in it on the stock market and a listing isn’t on the cards, so accessing it through an investment trust such as Seraphim Space is one of your only options.
Other main holdings include D-Orbit, a space logistics company, and radio frequency analytics firm HawkEye 360, which went public in May.
Digital network
Cordiant Digital Infrastructure is an investment trust dedicated to the ‘plumbing of the internet’. The FTSE 250 company holds digital infrastructure assets such as communication towers and fibre optic networks.
These may not seem the most glamorous investments, but they underpin much of the technological revolution. Blue-chip firms then pay to use the infrastructure, driving the trust’s dividends.
Holdings include Emitel, a telecommunications operator in Poland that operates TV and radio networks, more than 700 communication towers and hundreds of kilometres of fibre optic networks.
Other assets include CRA, a Czech digital infrastructure platform, and data centres, which may benefit from the AI boom.
Cordiant Digital Infrastructure aims to provide investors with income and growth. Its share price has climbed by 26 per cent in the past 12 months and its yield is 3.74 per cent. It is trading on a 19 per cent discount.
Property
If you want to invest in property, your options are typically your home, a buy-to-let or holiday let – unless you have serious cash.
But you can invest in the likes of office buildings, warehouses and retail parks as a shareholder in an investment trust that specialises in real estate, known as a real estate investment trust (Reit).
Michael Carey, manager of Living REIT, says: ‘You invest in the size of portfolio you otherwise wouldn’t be able to invest in, and in more niche sectors that are not available to the average person.’
Recent years have been difficult as high bond yields have tempted investors away from property, and commercial building valuations have slumped.
Challenges may not be over as interest rates are expected to climb. When the Bank of England base rate is higher, investors get a good risk-free return by putting their money in the bank, so the appeal of investing in property to get a similar yield diminishes.
Living REIT is well-placed to steer investors through the high inflation environment, as its rental income from tenants rises in line with inflation, says Carey.
The company mainly owns supported social housing for those with learning difficulties and mental health issues. It is trading at a chunky 33 per cent discount but income investors enjoy an attractive 8 per cent yield.
The sector has been unloved for quite some time but Moyes says at some point this will turn.
Richard Shepherd-Cross holds industrial, office and retail spaces in Custodian Property Income Reit, which he manages. He says ‘rental income growth is robust across commercial property’.
It has returned 17 over the past year and 46 per cent in the past ten years, while the yield is 7.3 per cent.
