Looking back going forward - LONG TERM GLOBAL GROWTH APRIL 2021 - Baillie Gifford
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Looking back going forward LONG TERM GLOBAL GROWTH APRIL 2021
In this issue:
Welcome to the latest edition of Looking Back Going Forward
Earlier this year Long Term Global Growth hosted a webinar reflecting on the
previous 12 months. It was an extraordinary period for all of us, but also for
the disruptive companies in which we invest. Our first article summarises these
LTGG • Contents
discussions and outlines what recent events mean for the growth prospects of
the portfolio.
A quarter of a century ago Bill Gates wrote that “we always overestimate the
change that will occur in the next two years and underestimate the change that
will occur in the next 10”. We may be in an exceptional period at present, but
there is no doubt that we should continue to expect profound changes over the
coming decade. The articles that follow delve into some areas where we believe
there is still enormous change to come.
In ‘Charting progress’ we observe that the rapid development of multiple
vaccines is just one illustration of how innovation and progress over the past
decade have led to a range of revolutionary new therapies. We also recount
lessons learned from past LTGG healthcare investments and enthuse about
the opportunities for some newer holdings.
While on the subject of change we could hardly fail to mention LTGG’s eight
years as shareholders in Tesla. ‘Dramatic’ is the best descriptor on a number of
fronts – dramatic headlines, dramatic operational progress, and dramatic returns
for our clients. In ‘Leading the charge’ we reflect on our journey since 2013
and ask whether we should reframe discussions of ‘sell discipline’ as ‘hold
discipline’.
Away from changes happening in the ‘real world’, there is a structural shift
underway in financial markets: namely in how fast-growing private companies
choose to access capital. Baillie Gifford has been investing in private companies
for nearly a decade, providing exciting opportunities for all of our clients.
Finally, we bring you an update on an article from the April 2020 edition of
our magazine – ‘Lessons from the Sonoran Desert’ – in which we explore the
common characteristics shared by outlier companies and illustrate how the
LTGG portfolio measures up.
We hope you enjoy the magazine and, as ever, would welcome any feedback.
If you’d like to hear more from the Long Term Global Growth team,
please visit ltgg.bailliegifford.com
Contents
02 Reflecting on an
30 The private
Looking back going forward
extraordinary year opportunity
2020 hindsight: what Shifts in equity markets
changed and what didn’t offer exciting prospects
10 Charting
progress 40 The anatomy
of outliers
The Covid vaccines showcase At-a-glance: common
medicine’s new momentum characteristics of star
performers
18 Leading
the charge
Reflecting on LTGG’s
long Tesla road trip
1
Reflecting on an
LTGG • Reflecting on an extraordinary year
extraordinary year
In a webinar looking back on a tumultuous 2020, LTGG team members Mark Urquhart,
Linda Lin and Gemma Barkhuizen considered what the transformations brought about
by the global pandemic might mean for the future
2
3
Looking back going forward
>>>
4
LTGG • Reflecting on an extraordinary year
It used to be said that investment managers only
experienced one or two big market-shaking events
DECADES-OLD in their careers. For Mark, the past 25 years shattered
that rule, encompassing as they did the Asian currency
CERTAINTIES CRUMBLED crisis, the dotcom bust, the 2008 financial crisis, the
OVERNIGHT ALONG WITH European sovereign debt crisis, and Brexit.
THE BERLIN WALL Then came Covid-19. The coronavirus crisis has
wrong-footed supposed experts and prompted a
rethink of investment norms. In ‘Reflecting on an
Looking back going forward
extraordinary year’, a client webinar held in February,
Mark outlined its implications for real growth in the
next decade.
He drew a parallel with his days as an Oxford
undergraduate in 1989 when Soviet communism
started to disintegrate. Decades-old certainties
crumbled overnight along with the Berlin Wall,
confounding university Sovietologists who hadn’t
modelled imminent changes to the status quo.
“In my first term as a student of politics, philosophy
and economics, there were multiple revolutions as the
dominoes toppled in eastern Europe, leading to the
breakup of the Soviet Union itself. It taught me always
to expect the unexpected, and about the alacrity with
which things can happen.”
Likewise, the speed with which coronavirus hit
families, economies and markets was, Mark said,
a lesson for the LTGG team. But so too was the role
of disruptive companies in delivering new structural
growth, and its implications for valuation. A lesson
central to how LTGG shapes the portfolio to 2030
and beyond.
Mark said he couldn’t remember a time when more
industries and sectors were so ripe for disruption, in
the way, say, that cinema has been undermined by
the likes of Netflix and Disney Plus. “The idea of
going to the cinema and being constrained to eight
or ten movies playing at certain times, sitting next to
noisy people throwing popcorn at each other, sounds
anathema now. It’s the same with other sectors, like
food and healthcare. It feels like a Rubicon has been
crossed. It’s very unlikely we will see a reversion to
the mean.”
5
The destruction of the Berlin Wall.
© Sygma/Getty Images.
Asked about the uptick in portfolio turnover,
Mark answered: “This is a different crisis than
any before. If you look back to previous crises
our turnover was very low because we felt the
brave decision was to hold on to the companies “In the case of Zoom, technology
that we had. that was relatively niche even
“This time it seems to us that to do our job just a year ago became essential
LTGG • Reflecting on an extraordinary year
properly we have to recognise some of the large
changes. There are some companies where it does business infrastructure in a very
feel that the market has come round to our way of
thinking, which is where the recycling of capital
short space of time”
has come from. But the flipside of that is the
excitement we have about these new companies
and their ability to change the world.”
In her overview, Gemma noted how the pandemic
had widened the gap between innovative growth
companies constantly arming themselves for
“But when that isn’t the case, then do we make
the future, and sleepy incumbents. The latter’s
reductions – as we’ve done with Amazon, and
complacency rendered them acutely fragile
with Tesla. We think it doesn’t make sense to
in 2020. She cited one famous example of a
make a fetish of what looks like a high multiple
disrupter that became omnipresent through
in itself. This is the right approach given the
the pandemic.
structure of equity returns, where a very small
“In the case of Zoom, technology that was handful of companies account disproportionately
relatively niche even just a year ago became for stock market outperformance. It’s a much
essential business infrastructure in a very short worse mistake not to buy a company that ends
space of time.” Gemma also noted an apparent up going up tenfold because the multiple seemed
tipping point away from fossil fuels and towards high at the beginning than it is to own a company
renewable energy and electric vehicles (EVs). that has an optically high multiple but which ends
Tesla was one beneficiary of this marked change up disappointing.”
in perception.
In response to the LTGG portfolio’s strong
She also addressed the question of valuation: performance last year, Gemma said the team
“The way that we think about valuation is through had trimmed some holdings and reinvested into
the long-term earnings potential of the company. eight new ones. The holdings ranged from areas
We don’t think about this year’s earnings or such as video streaming and digital payments to
next year’s earnings, because ultimately those innovative companies re-imagining the future
contribute a very insignificant proportion of of food, such as US plant-based protein pioneer
company value. Beyond Meat. Healthcare company Moderna,
best known for its approved Covid-19 vaccine,
“In that context when we’re thinking about a was another, based on its ability to combine
multiple on next year’s cash, earnings or sales, genome sequencing and machine learning. She
our question is really ‘has that multiple reached suggested that Moderna is “more like a software
such a level that upside from here becomes company than a biotech because of the unique
more challenging in that it requires us to make characteristics of its [vaccine technology] in
overly stretching assumptions about that future a treatment platform and the scalability of its
earnings power?’ business model”.
6
7
Looking back going forward
>>>
LTGG • Reflecting on an extraordinary year
8
Meituan drivers at a morning meeting.
© VGC/Getty Images.“We think that Baillie Gifford’s long-term,
supportive investing style gives us the best
access to management teams [in China]”
Joining the webinar from our Shanghai office, Linda but Alibaba is a company that’s spent around 20 years
described how the team are thinking about the next talking with the Chinese Government. I know there
Looking back going forward
phase of growth in China. Chinese companies now are antitrust issues, but our trust in the management
account for 30 per cent of the LTGG portfolio, up team gives us confidence that this is a company that
from 12 per cent in 2014. Linda explained how the can get through the market noise. We believe that the
team is identifying the Chinese growth companies opportunity for Alibaba remains exciting.
of the next decade. She highlighted businesses such
as Pinduoduo, a ‘social commerce’ company that “This is not only an ecommerce company, it’s a
connects consumers directly to manufacturers, company building the digital economy for China from
which has been helped by the trend for rising the cloud to the payment systems, from healthcare to
consumer spending in lower-tier cities. She also consumption. We had calls with the CEO and CFO
cited new energy technology, such as EV battery of Alibaba last week. I think we were one of the few
company CATL, new infrastructure, like 5G networks investors who had the opportunity to communicate
and next-generation cloud companies such as Agora, with them and hear about the process of talking with
and healthcare companies such as cancer researcher the regulator. Our conclusion is that they have good
BeiGene – which is a relatively new portfolio holding. feedback from the government about antitrust issues,
and they are not targeted at Alibaba specifically;
A key part of the approach, Linda explained, is to instead it’s about helping the [online] industry to
listen to the founders of leading Chinese companies grow healthier.”
such as ecommerce titan Alibaba and food delivery
leader Meituan. “They are the visionary leaders Closing the session, Mark pointed to another big
transforming the Chinese economy.” About half of change from previous crises: the sharper focus
the new companies we meet are introduced to us by on environmental, social and governance (ESG)
existing holdings. “We think that Baillie Gifford’s issues, and a greater responsibility on the part
long-term, supportive investing style gives us the of asset managers to find companies that are not
best access to management teams here,” Linda said. only profitable but sustainable and responsible.
Managers, he warned, must be active in prioritising
Linda also expanded on her view of Alibaba and its ESG responsibilities, because it’s increasingly by
financial arm Ant Group’s well-documented tensions assessment of these factors that “customers will
with the Chinese regulatory authorities, which, she vote with their pounds, dollars, yen and renminbi”.
suggested, should be weighed in the balance against
Alibaba’s importance to the Chinese economy. With uncertainty one of the hallmarks of 2020, it was
also a year of profitable disruption of the status quo.
“Alibaba is providing jobs directly or indirectly to The lesson, Mark said, was to remain fleet of foot. In
more than 100m people in China and has facilitated his words: “While LTGG holds its ideas passionately,
$1trn gross market value in consumption upgrades. we have to hold them lightly because the world can
I’m sure there will be ups and downs about regulation, change extremely rapidly.”
9Charting
progress
The response to Covid-19, unimaginable a
few years ago, is just one illustration of how
LTGG • Charting progress
healthcare innovation has led to a range
of revolutionary new therapies
10Innovation in healthcare has been a source of enduring
fascination for Long Term Global Growth. We have always
Looking back going forward
been attracted to businesses finding new ways to take costs
out of the healthcare system.
Healthcare is on the cusp of monumental change, thanks
to converging technologies and a rapidly advancing
understanding of human biology. Progress in gene
sequencing is helping to unlock the secrets of human biology
and address the molecular and genetic causes of disease.
Medicine is progressing from reactive treatments towards
prevention and cure, helping us live healthier and longer
lives. Change will be driven by those with the most powerful
and creative solutions to global needs.
To put this in context: it took 13 years and $3bn to sequence
the first human genome in 2003. Today, it can be done in less
than an hour at a cost of $600. Illumina, an LTGG portfolio
holding since 2011, made gene sequencing accessible to
virtually any scientist. What was rare and expensive a few
years ago is affordable and pervasive today. As a result we’re
getting better and faster at studying and diagnosing diseases.
That’s impacting every area – from cancer to heart disease
to mental ill-health. Everything we thought we knew about
disease is being re-examined through the lens of genetics.
It’s all part of an exciting broader trend: the convergence of
technologies. This dramatically accelerated our response to
the coronavirus pandemic. The virus’s genome helped us to
understand the nature of Covid-19: how we can diagnose it,
and how to develop and produce a vaccine. Sequencing also
enables us to track how the virus spreads and evolves.
This combined approach is driving innovation in drug
development, medical devices and the operational side
of healthcare, while driving down costs. For decades drug
discovery has largely been trial and error, with low success
rates. But a new cohort of biotech companies is emerging,
built on technologies that may provide a platform that can be
used across multiple diseases.
11
>>>One company at the forefront is Moderna, It’s that ability to repeat success In a bid to protect domestic drug
which makes treatments based on mRNA, that excites us as investors. Our past companies, the Chinese Government has
enabling us to introduce instructions into investments in biotech companies taught historically tried to keep rival western
human cells to make proteins that treat us that, without repeatability, the outside drugs out of the country. Thankfully this
or prevent disease. Moderna’s success capital required reduced the likelihood of is changing, and the regulatory direction
has not come easily and the company has outsized returns. As investors, developing of travel is towards greater innovation,
been investing in its mRNA platform for a a platform technology greatly skews the quality and efficacy. In this context,
decade. While the Covid-19 vaccine was odds in our favour as it enables an ongoing BeiGene, a recent addition to the portfolio,
its first commercial product, it is the tip of revenue stream that these companies can has stayed a step ahead in getting its drugs
the iceberg and further drugs or vaccines reinvest at high rates of return. Doing so to approval stage and in raising funding.
will be developed more quickly and allows them to grow exponentially. In stark contrast to China’s incumbent
LTGG • Charting progress
more cheaply. The beauty of Moderna’s producers of generic drugs BeiGene was
approach is that by simply changing the While the Covid-19 vaccine roll-out created from the outset as a genuinely
sequence in its vaccine, for instance, it remains most urgent, there’s hope that innovative drug company that would
has the ability to create new drugs over the virus will become manageable now adhere to strict global quality standards.
and over again. This is how Moderna that we have several approved vaccines We believe its ambitious pipeline of drugs,
was able to move so quickly – its mRNA and treatment protocols. Of course, other full commercial team and interesting
technology was already proven safe in health crises abound. Naturally they culture all give it an enduring edge.
10 other clinical trials. Moderna took only include cancer, nowhere more evident than
two days from inserting the sequence of in China, which accounts for around a third Happily our route to understanding
the coronavirus into a computer to arriving of global cancer deaths. The country’s diseases, diagnosis and treatment is
at the vaccine being used today. ageing population means this is only set becoming faster, cheaper and more precise.
to get worse. The next area of healthcare to explore is
Consider this: Moderna had a vaccine delivery of care.
for Covid-19 by 13 January 2020,
a full two months before the World
Health Organisation declared it a
global pandemic.
Moderna’s success with the Covid-19
Moderna took only two days from
vaccine was seen by the LTGG team as inserting the sequence of the
a validation of its mRNA technology. In
effect it de-risked its other programmes coronavirus into a computer to arriving
in development. Most biotech companies
essentially start from scratch with each
at the vaccine being used today
new drug, and the odds are stacked against
them. Nine out of ten drugs fail in clinical
trials. This is changing. We are beginning
to see companies that can structurally shift
the odds of repeated success strongly in
their favour.
12Looking back going forward
13
Gene expression chips allow multiple simultaneous
tests on a single sample of genomic DNA >>>As in so many industries, the events of last year
forced the rapid acceptance and adoption of remote
technologies, in this case telemedicine. Virtual
consultations replaced practically all medical
appointments that didn’t require physical contact,
leaving sceptics confounded and paving the way for a
new norm in providing and accessing care. This shift
has benefited companies such as Ping An Good Doctor
in China, which the LTGG team has been following
for a couple of years. However, this is perhaps just the
start. Our healthcare services are currently centralised
in hospitals and clinics where equipment and expertise
are concentrated. As monitoring and diagnostic
LTGG • Charting progress
equipment gets smaller and smarter, location becomes
less important. And as costs continue to fall, we will Dexcom’s continuous glucose
see more of these devices in our local communities
and even our homes. monitoring devices provide live
However, it’s not just where we receive care that’s
information and can prompt
changing. New business models are making healthcare doctors to adjust treatment
more proactive and continuous. Diabetes treatment
is one area where this is most advanced. Dexcom’s when needed
continuous glucose monitoring devices provide
live information and can prompt doctors to adjust
treatment when needed, without waiting for the next
routine appointment or an emergency. Aside from There’s no doubt that healthcare is on the brink of
the significant improvement in patient experience, dramatic change. Technological advancement has
the potential cost savings are huge. Diabetes is the enabled a new breed of companies to supercharge
most expensive disease globally, and preventable the pace and success of drug development. Sensors
complications account for two thirds of the total and technology are shifting healthcare delivery from
cost. The pandemic has accelerated the adoption of hospital visits to remote monitoring and proactive
remote monitoring technologies to maintain social treatment when needed – stripping out costs and
distancing. Ultimately these technologies are changing improving both patient experience and outcomes.
the healthcare service we receive. They are tailoring
care to each individual and making it more effective. Let’s not forget, however, that the LTGG portfolio
And over the long term, this has the potential to create is built from the bottom up. Each holding must earn
tremendous value. its place in the portfolio based on its own merits.
While we have covered a few of the transformational
Where care has to be delivered in a hospital healthcare companies in the portfolio, whether they
environment, specialist tools and equipment are be developing novel therapies or driving efficiencies
helping drive further efficiencies. Intuitive Surgical, within the system, there have been some notable sales
a leader in robot-assisted, minimally invasive surgery, of companies that no longer made the grade.
is one such example and has been owned in the LTGG
portfolio for over a decade. Its technology offers a
compelling proposition to both healthcare providers
and patients alike. Less invasive surgery means
patients benefit from quicker recovery and fewer
complications. This leads to shorter hospital stays,
saving costs to the provider.
14 Image: © Dexcom, Inc.Looking back going forward
The most recent was Ionis Pharmaceuticals, the proceeds of
which were invested in Moderna and BeiGene. While this
was a difficult decision, ultimately we felt there were better
opportunities elsewhere. Our investment case focused on the
development of a treatment platform to address a wide variety
of diseases. Given the increased competition and the economics
of its partnership with Biogen, we felt the upside potential was
no longer attractive. Looking back further, in 2018 we sold our
holding in Seattle Genetics an early-stage biotech company
developing anticancer drugs. While during our five-year
ownership the company had made significant progress with a
lymphoma treatment, on the balance of probabilities we felt the
five-times growth case was no longer compelling.
15
>>>Bluebird Bio’s exit from the portfolio in 2019 is perhaps one to dwell
on. In this instance we sensed a change in management narrative, and the
company appeared to start diluting its expertise across an increasingly BIONTECH’S PURPOSE IS
wide array of partnerships in a bid to become an oncology leader. For TO COMBINE BIOLOGY,
us, this sounded alarm bells. A core element of the LTGG research
IMMUNOLOGY AND
process is assessing a company’s culture, which we believe holds the
key to long-term success: any sense of a weakening or change of culture TECHNOLOGY TO
will always prompt questions. In complete contrast, BioNTech, Pfizer’s IMPROVE LIVES
vaccine partner, the most recent healthcare name to enter the portfolio,
has an interesting history and a strong and sound culture which we are
prepared to back. Mark Urquhart recently spoke to Dr Uğur Şahin,
BioNTech’s CEO and co-founder. His report from this meeting is worth
quoting at length:
LTGG • Charting progress
“As a young boy, he [Şahin] moved from his homeland of Turkey to
Cologne. In 2001, armed with a doctorate in immunotherapy, he and
his wife, Dr Özlem Türeci, the German daughter of a Turkish immigrant,
founded Ganymed Pharmaceuticals, which sought to treat cancer
with monoclonal antibodies. This was followed by the founding
of BioNTech, which added mRNA to the technologies they wished
to use to tackle cancer.
“The ‘NT’ in the company’s name is important as it stands for ‘New
Technology’ and for him BioNTech’s purpose is to combine biology,
immunology and technology to improve lives. Disruption happens when
you bring innovations together and this is central to everything they do
at BioNTech. In recruitment, the question he always asks is whether the
person fits the company’s DNA – he doesn’t want people who just want
to make money, rather they must share his vision of wanting to make a
difference for the whole planet. It is easy to dismiss such a sentiment as
corporate hogwash but there is a genuineness to Dr Şahin that compelled
me to believe him.
“For me, this first encounter with Dr Şahin left a large impression. He
told an anecdote about a big pharma executive who dismissively told
him at a conference that mRNA treatments are ‘simply not possible’
and how he has used that as fuel to drive him forward. As hundreds of
thousands of daily vaccines are delivered to patients globally, it seems
fair to say that Dr Şahin’s vision has triumphed over the unnamed
executive’s cynicism. Dr Şahin stands out from other founders in this
area whom I have encountered in the past not because of the New York
Times cover spreads or FT Person of the Year awards but because this
company is his life’s work. He is passionate, committed and someone
whom I am happy to entrust our clients’ capital with over the next
decade and beyond.”
Even in the inherently scientific and data-driven field of healthcare
we find the intangible and the qualitative to be hugely interesting and
important. A great transformation is underway in our understanding
and treatment of disease but there is much more progress to be made.
Companies with vision, passion and adaptability are the ones we are
keenest to back.
Dr Uğur Şahin and Dr Özlem Türeci.
16 © Felix Schmitt /Focus/eyevine.17 Looking back going forward
LTGG • Leading the charge
rge
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We reveal the
research behind one of the
ng
highest-profile investments
in Baillie Gifford’s 113-year history
a di
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18
© Bloomberg/Getty Images.19
Looking back going forward
>>>LTGG • Leading the charge
© Warner Bros/Kobal/Shutterstock.
20In Little Fockers, the lazy but enjoyable third movie in the Meet the Parents franchise,
the perfect ex-boyfriend and spiritual tree-hugger played by Owen Wilson rocks up
to the family house in a silent orange sports car and jumps out. On seeing the open-
mouthed wonder of the Focker family, he shrugs and says: “Yeah … I guess it’s a
Tesla Roadster or something? Supposedly eco-friendly, like that 2003 Prius.”
When we think about seminal automobile moments in Hollywood, what
comes to mind? Probably Steve McQueen’s green Mustang in Bullitt,
bouncing sonorously down the streets of San Fran, or James
Bond’s silver-birch DB5 with innovative weaponry in
Goldfinger. Maybe it’s time to add a third icon, in
2007
terms of entry into collective consciousness: the
orange Tesla Roadster in Little Fockers.
Looking back going forward
But when did Long Term Global Growth’s
consciousness about electric cars awaken?
The answer predates the 2010
release of that film and, like
many successes, it
stemmed from
to 2010
initial failure.
Our investments in the 2007–2010 period in alternative energy stocks
(Vestas, First Solar, Q Cells) did not pan out well, as we have recounted
before. But in 2008 one offshoot of the alternative energy investments was
a look at electric vehicles, which we did through one of our inquisitive
researchers, Daniel Simpson. We sent him off to try out whatever electric
vehicles he could find. A few of you may remember the children’s toy
dimensions of the G-Wiz, and at the time that’s exactly how the public
thought of electric vehicles.
A FEW OF YOU MAY
REMEMBER THE
CHILDREN’S TOY
DIMENSIONS OF
THE G-WIZ
21
>>>2012
LTGG • Leading the charge
But then Daniel tried the Tesla Roadster
– like a sleek Lotus Elise but with even
faster acceleration. He reported back that
electric cars had suddenly become cool and
exhilarating. This provoked our interest, as
did our global small-cap team investing in
Tesla in January 2013 (at a market cap of
$4bn) on the basis that it had a tiny chance
of being the next big thing (it made a mere
3,000 cars in the year before we bought it).
The rotation of analysts around teams
at Baillie Gifford has always been an
important part of our investment culture,
promoting collaboration and idea sharing.
When Peter Singlehurst, now head of our
Private Companies Team, moved from
our global small-cap team to LTGG at
the end of 2012, we asked him: “Which of
the 100 small-cap holdings should LTGG
own?” Peter said: “Tesla.” So, at that
point, we did our own LTGG 10Q on the
company, whose blueprint is now famous:
The blueprint
Build sports car Use that money to Use that money to Also provide Don’t tell anyone
build an affordable car build an even more zero-emission
affordable car electric power
generation options
22ELECTRIC CARS HAD
SUDDENLY BECOME COOL
AND EXHILARATING
Looking back going forward
23
© benedek/Getty Images. >>>2013
January: 10Q on Tesla
When we look at our best investments, it’s So, for Tesla in 2013 our medium-term
striking how much we got wrong. With Tesla, upside was $15–$18bn of market cap in
the share price was $8 when we wrote the five years’ time (from $4bn) and $45bn in
10Q in January 2013, versus $800 eight years 15 years’ time. As you know, the market
later. After a few months of deliberation, we cap today, eight years on, is over $600bn,
started buying it well north of $8, kicking so more than 10 times our 10 times upside.
LTGG • Leading the charge
ourselves for not getting on with it earlier. But the prescient author of the first note,
As we were doing so the share price seemed humbly sensing inadequacy, did finish
to get away from us further. We paused. The with a plea to colleagues: help me be more
share price continued up. And we resumed imaginative with the upside.
our purchases at an even more annoying $20
– more than twice the price a few months Nevertheless, what we got right was far
earlier! Imagine if we’d stopped altogether, more important than what we did not.
on ‘valuation grounds’? We believed Tesla had a huge lead in
electric vehicle technology and a huge
Deliberations over Tesla in 2013 serve as a competitive advantage over the conflicted
hugely important lesson on valuation, though (non) competition, that the auto industry
not one that clients tend to like to hear, was blind and asleep to what would
namely that the valuation we buy in at early happen over the next few years, that
on, for a great growth stock, does not matter. Elon Musk was the visionary to lead this
It really doesn’t – not if you latch on to a transformation in transportation, that
company that then grows revenues at electric would go mainstream, that the
25 per cent or 35 per cent or 50 per cent Tesla was simply a superior product to
per annum for the next decade. If the internal combustion engine (ICE) cars
company delivers on that sort of growth, our regardless of your environmental views,
investment will go up many times in value. and many other contentions.
Imagination is the key, not discipline.
The unfolding Tesla story therefore
Much like our early attempts at imagining also brought another lesson home:
how big Amazon could be, our blue-sky about the blindness that comes from
case on Tesla fell a long way short of future over-specialisation. We have long
reality. Remember, we pride ourselves on eschewed sector specialists at Baillie
being the optimists, but the lesson here is Gifford, and Tesla is a great example of
the same: if you buy the right company, then why. The worst people for predicting
even the wildest optimists (i.e. us) will be the future of the automobile, the most
miles short of imagining the scale of future blinkered observers – we did ask around
achievement. Our brains cannot compute – were without doubt the automotive
the astounding results of high-growth analysts and industry insiders themselves.
compounding (we’ve cited the Sissa and the They all trotted out the same knee-jerk
chessboard grain-of-rice story before). But “GM/Toyota/Ford will just squish Tesla
at least we were trying, and with years of when they take it seriously” line.
practice we may even be getting better.
24
Jean-Paul Sartre.
© Gamma-Rapho/Getty Images.The analysts were useful – as contrary indicators of the future. They
fell into the pattern we also saw with Amazon and the retail analysts:
“Amazon must be overvalued because its market cap is bigger than
Borders and Barnes & Noble’s combined” (2006). The auto analysts?
“Tesla is hugely overvalued because its market cap is bigger than GM”.
At a time of impending industry transformation, sector specialists will
be the last to see the wood for the trees.
That’s not to say we weren’t frequent visitors to BMW, Porsche
and Toyota ourselves, but each time we came away with the same
conclusion: their giant existing ICE businesses were continuing to
hold them back. Tesla was gaining a bigger lead by the week.
Looking back going forward
We had another go at the Tesla upside in 2017, but in the
intervening period we were reminded why being optimistic
and supportive shareholders is often tough – “hell is other people”,
as Jean-Paul Sartre put it.
25
>>>Hold discipline vs distractions
Clients and consultants often ask about ‘sell ‘shorts’ did have a point – there were several years
discipline’. This may be the wrong question. What where Tesla still had a substantial, if declining,
they should really ask managers who claim to be chance of failure. What was hard to understand was
long-term investors is: “Tell us about your hold the tone of mainstream media, and some US pension
discipline.” funds, which made you think Tesla must be a Russian
manufacturer of land mines, not an innovative West
LTGG • Leading the charge
It’s quite hard to convey now how difficult it was to Coast tech company transforming the transport
remain focused on the fundamentals of the Tesla story industry for a better future.
for the years after 2013. We have owned companies
that have gone up and down and in and out of favour, We saw numerous drawdowns of 30–50 per cent in
but nothing like Tesla. The turbulent backdrop was the stock, which meant that in June 2019 it was
reflected in many meetings with clients, the majority trading for less than in December 2016. Some of
of whom would have had us sell Tesla on this was due to the way Tesla refused to play the
several occasions. game: rather than set a target that was doable, but
that it could then surpass, Tesla took to promising the
We’ve never fully understood the waves of vitriol that impossible, then delivering the near impossible, which
Tesla has met. It has probably been the most shorted would then be called a ‘miss’. So myopic was Wall
stock of all time. We are a long-only equity firm and Street’s perspective on this that the fact Tesla was
don’t seek to profit from such a practice, but others scaling production faster than Ford in the glory years
do (such a shame to see so many of them lose their of the Model T went unnoticed.
cuff-initialled shirts on Tesla). Nonetheless, the
Tesla and Ford production
26 Source: Tesla; Model T Ford Club of America, www.mtfca.com/encyclo/fdprod.htmLooking back going forward
© LightRocket/Getty Images.
Whatever was behind the disproportionate most concerned with was SpaceX – an
vitriol, the company did also bring some exciting story, one in which we ended
troubles and distractions upon itself: up investing in the private markets, but
the SolarCity acquisition (we expressed which threatened to divert too much of
dissatisfaction at the time), a couple Musk’s attention. This was the reason
of surprising volte-face capital raises, we supported the contentious incentive
Elon Musk’s weed smoking and Twitter package, as we wanted Tesla to be Musk’s
tirades, and the infamous “private funding one way of financing life on Mars.
secured” tweet which led to us spending
several weeks helping the SEC with its Weathering all these storms suggests we
investigation. The reasonable “they’ll managed to show a decent amount of hold
never make a profit” refrain rumbled discipline with Tesla.
throughout, but the distraction we were
27
>>>2017
Blue sky 2
In 2017 we had a better go at a blue-
sky scenario. Crucial elements included
factoring in the huge potential of the
battery businesses (stationary and auto),
Tesla’s autonomous driving software
becoming a reality, a higher probability
LTGG • Leading the charge
of making 25 per cent gross margins and
10 per cent operating margins on the cars
and a lower discount rate (why were we
using 10 per cent for so long?). The 2017
work got us from $70 to a blue sky of
$400, on a five to eight-year view. Not bad.
Nothing happened for a couple of
years, but the share price ascent in 2020
surpassed any near-term expectations of
operational progress recognition, and then
started gobbling up some of our longer
runway too. We were technical sellers on
a number of occasions in 2020 as Tesla
blasted through our limit of 10 per cent
of the portfolio in one stock. By the end
of the year we had recycled around
10 per cent of the portfolio out of Tesla
and into new holdings, yet Tesla was still
a 9 per cent holding. But we were only
trimming from the maximum holding
size perspective, and as little as possible
each time.
282021
March
Finally valuation has become a factor, even for us –
but about eight years later and 30 times higher than
when other analysts first felt vertigo. We said that the
entry valuation to a great growth stock early on is
usually irrelevant. It’s only at some point much later
that valuation comes in, and for us this moment
Looking back going forward
was around Tesla’s market cap of $500bn in
early 2021.
This all means that, as of February 2021, we remain
bulls of Tesla, but with an evolved perspective. A
perspective that accepts a bit more competition is
finally arriving, and a bit less upside from here is
likely than in the past. Our blended upside gives a
$1,650 share price or $1.6trn market cap. At the time
of writing, in March 2021, the market cap is $650bn,
so we see a respectable upside from here for Tesla.
This is enough for it to remain in the LTGG portfolio,
but at a reduced weighting.
What would our concluding thought (for now) be
on Tesla? The company went from a high chance of
disappearing altogether when we first bought it to a
good chance of being one of the world’s biggest ever
companies. Yet the salient Tesla reflection probably
echoes one from 17 years of owning Amazon: in
LTGG, we are set up to identify and hold a small
number of great growth companies during a decade
or more of their most transformational growth. When
we get these companies even vaguely right, our most
optimistic scenarios will fall ludicrously short of the
feats these companies achieve.
In other words, we can make many mistakes analysing
a company such as Tesla along the way – as we did
– and it will not matter. Applying our imagination to
great growth companies, and holding on to them for
many years, is a formula that stacks the investment
odds massively in your favour. It remains a mystery,
to us at least, why so few fund managers really let
their imaginations free. If there is ever a Meet the
Parents IV, expect Owen Wilson to arrive in a flying
electric car – and know that we’ve already invested.
29LTGG • The private opportunity
Long Term Global Growth lives up to its name by investing in
great growth companies during a decade or more of their most
transformational growth. We are determinedly
bottom-up investors, but identifying such companies requires
us to consider what parts of our world are ripe for, or are
already experiencing, transformational change.
Over the 17-year lifetime of LTGG we’ve seen the cost of
computing fall while its power has increased. We’ve seen the
internet become near-ubiquitous and the rise of ecommerce
and social media, while falling costs in gene sequencing have
ushered in an era of personalised medicine against a backdrop
of the digitisation of … well, almost everything.
These revolutions take place in the ‘real world’, away from the
noise and vagaries of the stock market and finance. However,
financial markets are not immune. We believe we are on the
cusp of a once-in-a-century change in how rapidly growing
companies access capital. And just as in our investing, Baillie
Gifford has sought to spot this shift in its infancy, to be
thoughtful about the long-term implications, and to
work to ensure our clients stand to benefit.
30Looking back going forward
The private
opportunity
Our Private Companies Team sets out Baillie Gifford’s view
on the enormous opportunity created by our investments
in private markets
It’s an established fact that fewer companies are choosing to list via an
IPO, and those that do are doing so significantly later in their lives than
previously. The average age of a US company at listing now stands at
12 years, up 50 per cent since the start of the millennium. The aggregate
valuation of late-stage private companies has also exploded: in 2006,
there was a little under $10bn of value in ‘unicorn’ companies – private
businesses with a value of over $1bn. As of 2019, there was more than
$1.8trn of value in these businesses. Something is clearly going on.
We think there are three big factors at work. The fundamental economics of
starting a business are changing, government rules have changed and, never
to be discounted, cultural norms among founders are changing.
31
>>>Economics first. There has been a sharp
change in the levels of capital investment
most companies need before they’re
ready to enter their chosen markets
– partly thanks to changes driven by
LTGG • The private opportunity
companies held by LTGG.. Historically, an
entrepreneur might have to build a factory,
set up bricks-and-mortar outlets to achieve
national coverage and invest heavily in
servers to run IT. Today, it’s possible
to rent manufacturing capacity through
Alibaba, hire digital targeted advertising
from Facebook and Alphabet, and access
the exact amount of required computing
capacity through the cloud services of
giants such as Amazon Web Services
(AWS). The result is that many companies
can scale for much longer before the
founders have their ownership stakes
diluted by outside capital providers, whose
limited-life vehicles made them historically
impatient for an IPO ‘exit’ event.
On top of this, there’s been a revolution mean that founders have more control
in staff count. The biggest employers of their organisations and they have it
today have far fewer employees than the for longer. With outside pressures to list
juggernauts of yesteryear such as GE removed, many are taking the option to
or Ford. Where hierarchies are needed, stay private for longer.
effective business systems are easier,
cheaper and less reliant on the expertise Along the way, there have also been
of senior chiefs from large organisations. helpful changes in government rules. In
The result is that founding teams can run the US, the 2002 Sarbanes-Oxley Act
their organisations for much longer before made IPO conditions significantly more
they need to attract bosses from large stringent, while subsequent regulatory
corporations with promises of big pay-outs actions have substantially increased the
and a company listing. reporting burden on public companies.
Some chief financial officers have gone
These fundamental changes in the as far as claiming that the cost of being
economics of building and running firms public has risen more than five-fold since
32Looking back going forward
FUNDAMENTAL CHANGES IN THE
ECONOMICS OF BUILDING AND RUNNING
FIRMS MEAN THAT FOUNDERS HAVE MORE
CONTROL OF THEIR ORGANISATIONS AND
THEY HAVE IT FOR LONGER
© Bloomberg/Getty Images.
2010 alone. On the other side, the tax prestigious coming-of-age moment.
changes enshrined in the US Tax Cuts But as more and more large and well
and Jobs Act of 2017 have made it easier known companies – SpaceX, Stripe, Epic
for emerging growth companies to share Games, ByteDance (owners of TikTok) –
rewards with employees while remaining have stayed private, the link between being
private, removing one more historic source listed and being successful has weakened.
of pressure to go public. Even those great private companies that
have now listed on public markets –
Take that combination of regulatory Spotify, Airbnb, Peloton, Meituan – have
change and increased founder power, strongly reinforced this norm. Talking
and it’s not surprising that we see another to founders today, we are struck by how
great driver of this trend: norms are many view public markets with distaste,
shifting within the founder community. noting the arm’s-length mistrustful
For companies such as Facebook, ringing relationships with often all too short-term
the stock exchange bell at IPO was a shareholders.
33
>>>The world ahead
These changing trends of business economics,
government rules and corporate norms have
resulted in a late-stage private market containing
increasingly large and valuable companies. That
combination points to a 21st century where the
classic finance textbook’s neat account – initial
finance from family and friends, angel investors
and bank loans, graduating to early-stage venture
LTGG • The private opportunity
capital with associated operational support,
culminating in an IPO – seems ever more out
of date.
The simple truth is that the companies that are
staying private for longer are very different from
the immature operations that early-stage venture
capitalists specialise in finding and helping. These
are not companies that require help in making key
hires, writing HR policies or designing marketing
plans. Far from desiring it, the last thing many
of the founders of these firms want is one more
investor telling them how to run their already
highly successful and expanding business.
This matters, as private markets have never just
been about access to capital. Management teams
get to choose their investors, determining the
terms and prices at which they offer stakes in
their company. Any investor can write a cheque,
but it’s the investor the company wants that gets
the chance to write that cheque at an attractive
valuation. This is why it’s so important for us to
understand what it takes to be a natural buyer in
the rapidly growing late-stage private market.
34At Baillie Gifford, we believe that we are
natural buyers for these businesses. This began
as a tentative hypothesis a decade ago, but
Looking back going forward
has strengthened into a core belief as we have
invested in around 90 high-growth companies in
private markets. Let’s review this thesis with the
help of two key reference points.
First, we look at our ability to source proprietary
deals. We can access investment opportunities
through our own relationships and reputation,
rather than just through joining in on
bank-promoted rounds. Over the last two years,
over 75 per cent of the deals we’ve made have
come through these proprietary channels. Second,
we look to the frequency with which we receive
our full allocations in private funding rounds. In
2019, we received our full allocations more than
95 per cent of the time and in 2020 over
97 per cent. We know this is an exceptionally
high level relative to many other participants.
So why do founders choose to partner with
Baillie Gifford?
We are long-term in our approach and
understanding, with a proven record of supporting
growth businesses, both at scale and globally. We
use vehicles that let us offer continuous support,
walking with the founders through private
funding rounds and then staying with them long
into the journey into public markets. This means
we can be aligned with the management as the
company grows.
35
>>>LTGG • The private opportunity 36
Genuinely long-term:
philosophical and structural
At Baillie Gifford, long-termism has that have been typical of venture
never just been a punchline. In public investors. The vast majority of our
Looking back going forward
markets globally, the average investor private investments have been made
has a holding period measured in from permanent capital. Our clients
months whereas for LTGG it is can buy and sell shares in these
closer to a decade. We focus on the vehicles, allowing us to promise
long-term strategic opportunities companies that we will never pressure
rather than worrying about every them into timing a financing event
potential short-term tactical misstep, simply to provide us with liquidity.
and we’ve always been very upfront These vehicles also have the ability
in sharing our perspectives whenever to hold companies when they have
management have needed our support. become public. Rather than just
passing holdings as an introduction
We’ve brought this perspective with to a separate team, we can continue
us to private markets. The companies to support them as they progress to
we invest in know that we’re in no public markets.
rush to push them into an IPO. And
when they do seek that listing we This continuity point applies at a
have the firepower to support them, broader level too. There is no firewall
and continue to stand by them. At between our private and public market
the time of writing, Baillie Gifford teams. Indeed, our core Private
clients have over $5bn invested in Companies Team of seven is joined
private companies – and another by over 30 others who split their time
$43bn invested in public companies between private and public investing.
that we first invested in when they The research generated is shared in
were private. This in turn builds our our central research library, available
reputation among board members and to all our investors. The result is
management teams, helping us secure that Baillie Gifford has seamless
further introductions to other private management of private holdings when
opportunities. the companies eventually move into
public markets.
Second, the way in which we
approach this means that we can offer
continuous support. Not for us the
seven-to-10-year limited-life funds
37
>>>WITH CLOSE TO $2 TRILLION OF VALUE NOW FOUND
IN PRIVATE COMPANY UNICORNS, WE BELIEVE THAT
LATE-STAGE PRIVATE COMPANIES CAN NO LONGER
LTGG • The private opportunity
BE CONSIDERED AS AN AFTERTHOUGHT
38This lets us forge deep relationships and an understanding of engaging with companies we invest in to help them think about
businesses while they are private, reassuring founders that their future. We will continue to work hard at improving this
they have a potential public market investor who truly knows offering, doubling down on ensuring we remain the investor of
them. It also, importantly, helps provide the deep understanding choice for long-term-oriented private company founders.
of a business, its opportunity, management and culture, and
return prospects that the LTGG team requires before making an We believe that the world of capital provision is changing in
investment that could last for decades. It isn’t therefore a surprise ways not seen since the early 20th century. Since 2012 we have
that in the past three years LTGG has participated in as many invested over $5bn in the later stages of private markets. We have
public listings as in the previous 13 years, thanks to the insights also created ways to give our clients access to these exciting
provided by our private market investing. high-growth companies and there will be two further
opportunities to invest in our private companies funds in
Finally, these relationships allow us to work closely with founders the coming months.
and their management teams. As one of the few investors in the
Looking back going forward
world to walk with companies through multiple private rounds With close to $2trn of value now found in private company
with the intention of being a long-term public markets holder, we unicorns, we believe that late-stage private companies can no
stand out as an obvious source of advice on how to prepare for longer be considered as an afterthought. This is a new space, and
listing. Whether it is offering insight into corporate governance it requires a new kind of private investor.
policies or discussing how to behave at IPO in order to attract
At Baillie Gifford, we strive to be that investor.
good long-term public shareholders, we frequently find ourselves
Time to IPO and market capitalisation at IPO
illustrative examples:
Amazon $0.4bn Company/year founded
1994 1997
Year listed/valuation
Unlisted/latest valuation
Google
1998 $23bn
2004
Facebook $104bn
2004 2012
Spotify $27bn
2006 2018
SpaceX $46bn
2002 2021
39LTGG • The anatomy of outliers 40
The anatomy
of outliers
What characteristics do outperforming stocks have in common and how does the LTGG portfolio stack up?
Looking back going forward
The April 2020 edition of this magazine was written amid the Last year we published an article entitled ‘Lessons from the
bustle and chatter of our Edinburgh office. How much can change Sonoran Desert’ that detailed empirical work on the drivers of
in a year! As we sit at home, it’s reassuring to think about the long-run equity returns, with some initial conclusions about the
many important things that remain unchanged. One of them is characteristics shared by those few exceptional companies.
Long Term Global Growth’s focus on outlier companies with
transformational growth prospects. In the US four percent of companies had collectively driven the
entire net return of the stock market over 90 years from 1926
Since LTGG was conceived over 17 years ago, we have – 2016, generating $35 trillion of return in excess of treasuries
believed that only a fraction of companies offer the possibility and globally that skew was even more extreme. One percent of
of genuinely exceptional growth and thus returns. This belief had driven the entire net return, collectively delivering around
underpins our concentrated, best-ideas approach to investing. $45 trillion. We explored whether that special one percent of
This conviction has strengthened over the years, as we have companies had anything in common to maximise our chances
seen how technological disruption is driving a divergence of finding these companies in the future? Here are the shared
between great companies and the rest. We’ve also seen more characteristics of the one percent.
evidence-based academic work supporting our approach.
41
>>>How LTGG
stacks up
LTGG • The anatomy of outliers
42 Source: Bessembinder, H., Cheng, TF., Choi G., John Wei, K.C. Do Global Stocks Outperform Treasury Bills? (July, 2019).
The first author acknowledges financial support from Baillie Gifford & Co. US Dollars.MSCI
ACWI LTGG
Looking back going forward
Comparing your LTGG
portfolio against these
characteristics leaves
us excited about the
years ahead. There
are few signs that the
broader stock market
attaches anything like
enough significance to
the smoke signals that
identify outliers. We
remain focused on the
task at hand – find and
hold those exceptional
companies that will
drive the next decade
of returns.
Source: Baillie Gifford and underlying index provider. Data as at 31 December 2020. 43Annual Past Performance
to 31 December Each Year (%)
2016 2017 2018 2019 2020
LTGG Composite Net -4.0 54.0 -1.6 34.1 102.0
MSCI AC World Index 8.5 24.6 -8.9 27.3 16.8
Source: Baillie Gifford & Co and underlying index providers. US Dollars.
Past performance is not a guide to future results. Changes in
the investment strategies, contributions or withdrawals may
materially alter the performance and results of the portfolio.
All investment strategies have the potential for profit and loss.
Legal Notice
Source: MSCI. MSCI makes no express or implied warranties
or representations and shall have no liability whatsoever with
respect to any MSCI data contained herein. The MSCI data
may not be further redistributed or used as a basis for other
indexes or any securities or financial products. This report is not
approved, endorsed, reviewed or produced by MSCI. None of
the MSCI data is intended to constitute investment advice or a
recommendation to make (or refrain from making) any kind of
investment decision and may not be relied on as such.You can also read
