On the 10th of June Cerno Capital hosted a round table discussion with Douglas Brodie, the head of Baillie Gifford’s Global Discovery Team and a group of early stage investors, founders of businesses and fund raisers. The sectors represented were broad, including food, fashion, insurance, technology, sport, natural resources and logistics. Constituent companies included Jack Wills, Rapha, Tesla, Patisserie Valerie, Edgebold and a number of smaller concerns.
Douglas opened by sharing his enthusiasm for innovation emphasising that his approach to small company investing centres more on immaturity than simply looking for small companies. Given the audience, there was some debate as to the availability of these traits in listed companies. Douglas noted that founding individuals remain involved in over half of the companies in his portfolio. Serial consumer sector investor Mark Farrer-Brown noted that in his successes, it has been selecting the right people that have driven a business forward, pointing to his choice of CEO and CFO at Patisserie Valerie.
During a discussion of capital market structures, the size of recent investment trust capital raising to target the unlisted sector was noted. Some participants commented on the willingness of listed equity investors to tolerate the variable income streams associated with immature, entrepreneurial businesses. It was also noted that the behaviour of co-investors can be as influential as the success of the underlying business and can also result in businesses coming to market to early. The flip side of this, when partners fall out, was referenced by Michael Pennington of Longwall Venture Partners. Many of these challenges were seen as opportunities for the listed equity investor with an appropriate time horizon – a camp with which Douglas aligned himself.
When asked to contrast the UK and US on the innovation stakes, Brodie observes that the UK excels in the initial idea generation and concept stage, but lags the US in commercialising technologies, making the comment that US companies have been far more successful at taking ownership of a market. This thinking is behind investments in IP Group which aims to redress the balance. Robert Shaw, co-founder of Jack Wills agreed, noting that his company’s successful expansion in the US delivered significant benefits for his UK operations as he drew on the high standard of retailing expertise shown by his US competitors.
Sachin Patel of Funding Circle brought his credit experience to bear and asked the group to consider common traits in failed investments. Failure to execute the strategy was offered as the most common cited reason. Brodie gave the example of Angies List as one such execution failure. Charles Davies, founder of Edgebold Capital Ltd noted that he currently operates five logistics related businesses in Mozambique and that his success will hinge on his ability to operate effectively rather than on any technology. Meanwhile Michael Pennington discussed his ability to assess multiple roadmaps for game-changing technology as all commercial outcomes cannot be known when a technology is in its infancy.
While Brodie and Baillie Gifford have been investors in Tesla for some time, Christian Eidem, an advisor to the electric car manufacturer, suggested that Brodie might be overestimating any challenges the company faces. The potential level of disruption that Tesla will bring to the automotive sector was not lost on the group with Richard Chenevix-Trench drawing parallels with the advent of the personal computer and its impact on the typewriter industry.
Discussion of electric cars inevitably led the group onto energy and the outlook for the oil and coal producers. Richard Chenevix-Trench noted the potentially huge level of capital destruction if currently capitalised reserves are left in the ground. Pennington noted that ongoing challenge of raising capital in the renewable energy field and conducted a pole of hands to demonstrate a commonly held view that solar will ultimately result in significantly reduced energy costs.
As the meeting drew to a close, the group contemplated a rapidly changing world and its implications for the investment landscape as Brodie revealed an investment in a drone manufacturer and Michael Pennington reminded us of the small investment (just US$10,000) required to launch a cube satellite.
The Baillie Gifford Global Discovery Fund is an allocation within TM Cerno Select, the flasghip fund of Cerno Capital.