The Schiehallion Fund Annual Report - including the Notice of AGM - 31 January 2026

Introduction Chapter Overview

Annual Report Card

This chapter covers the financial summary, fund overview, and chairman's statement (Chairman: Dr Linda Yueh CBE). Core facts: the year's share price total return (64.8%) was notably higher than NAV total return (32.6%), with the discount narrowing from 19.2% to a 0.4% premium at year-end — the direct reason share price returns significantly outpaced NAV. This chapter provides no benchmark index comparison.

Metric	Year ended 31 January 2026	Since listing (27.03.2019–31.01.2026)
Share price total return	64.8%	78.0%
NAV total return	32.6%	77.9%
Year-end discount/premium	Premium 0.4%	—
Start-year discount	Discount 19.2%	—

Investment Philosophy

The fund overview section restates the three-pillar investment philosophy, with the investment manager being Baillie Gifford & Co Limited:

1. Long-term: Investing in late-stage private companies with an explicit long-term horizon, intending to accompany them through their journey into the public markets and beyond. Core judgement: "Building an exceptional company is a journey, not something that happens overnight or changes at the Initial Public Offering." The fund's strategy is to capture the longest, steepest segment of a company's growth curve.

2. Growth: Innovation drives growth; the world's most innovative and disruptive companies are partly found in private markets. The author judges that markets tend to overestimate the scale of change innovation brings in the short term and underestimate it in the long term, and the fund seeks to invest in companies at the inflection point of scaling.

3. Companies, not countries or themes: Screening high-growth private companies globally across industries, with bottom-up analysis at the core, deliberately avoiding macro and thematic investing.

It should be noted: the above discussion is from the perspective of the holding party, and the emphasis on "long-termism" itself serves a narrative function of persuading investors.

Capital Allocation and Buybacks

During the year, 11.7 million shares were repurchased at a cost of approximately US$13.2 million, all occurring in the first 10 months of the financial year — after which the discount narrowed notably. Chairman's statement: should the premium turn into a widening discount, the Board intends to continue allocating capital to share buybacks; buyback decisions will consider share supply/demand imbalances, the discount level, working capital requirements, and the investment opportunity pipeline. Funding sources are sales of listed investments or selective secondary transactions of private holdings. The Company will seek renewal of the buyback authority at the 2026 AGM, valid until the conclusion of the 2027 AGM. Additionally, the authority granted at the 2024 AGM to issue/sell up to 102,882,390 treasury shares remains valid until the 2029 AGM; shares will only be issued when the Directors determine it is in the interests of shareholders and the Company as a whole.

Fees and Shareholder Returns

• Ongoing charges were 0.96% (2025: 0.92%). Management fees are tiered, sharing scale benefits with investors; cash is excluded from management fees; the investment manager bears most valuation and legal costs for private investments.
• Net income return per share for the year was negative US$0.0135 (prior year: negative US$0.0039). The Company has no dividend target, and the Board recommends no final dividend — consistent with the positioning of prioritising capital growth.

Listing Migration and Tax Status Change

In December 2025, the Company's shares were migrated from the Specialist Fund Segment to the Closed-Ended Investment Funds (CEIF) category of the FCA's Official List, and transferred to the Main Market of the London Stock Exchange; the Chairman expects this to broaden appeal to retail investors and improve share liquidity. From 1 February 2026, the Company became UK tax resident and obtained UK investment trust status, expected to reduce future tax leakage on some holdings through UK double taxation treaties and attract investors sensitive to non-UK tax resident vehicles. Both of the above are "expectation" statements; actual effects remain to be verified. All Board members will stand for annual re-election at the May AGM.

Dual Signals in Governance and Capital Markets

Board Renewal and Succession Planning: Laying the Foundation for an Expansion Phase

The report explicitly discloses in the "Introduction" section that the Board has commissioned Fletcher Jones and Trust Associates to commence a search for two new Directors. This is not an isolated routine succession but is linked with the subsequent articles amendment (Resolution 12) — raising the annual Director fee cap from £430,000 to £473,000 (an increase of approximately 10%) in order to increase the number of Directors during the transition period. This action indicates the Company is pre-building governance redundancy for a larger shareholder base, more complex portfolio management, and a potential wave of listing exits. A notable detail: the backgrounds of the new Directors will most likely cover public market experience and transaction execution capability, to match the Company's transformation from a closed-ended private fund toward a broader public company.

AGM and Investor Communication: A "Dual Channel"

The 2026 AGM is scheduled for 14 May at 12:00 London time, held at the offices of Herbert Smith Freehills Kramer LLP, with the proxy voting deadline clearly set for 12 May. Compared with prior years, a new channel has been added for submitting questions in advance by email or telephone (via Alter Domus contact details), implying the Board wishes to transform the AGM from a "compliance ritual" into an "institutional dialogue." Particularly given the Company's recent listing segment migration (from the Specialist Fund Segment to the standard segment), this proactive openness helps attract more retail shareholders and mid-sized institutional investors, who are often more accustomed to transparent, direct communication.

Investment Outlook: Waiting for the "Generational IPO" Trigger

Strategic Implications of Exit Signals

The report mentions "potentially generational IPOs later in 2026" and notes the portfolio already holds some such companies. The deeper implication is that Schiehallion's valuation model has long relied on private financing prices in the primary market, and an IPO is not merely an exit channel but a third-party confirmation of the "fair value" of private companies. If realised, it would greatly ease market scepticism about NAV credibility and could trigger a broader re-rating of similar private growth stocks. For investors, this constitutes an asymmetric option: downside is limited (the Company has ample cash and diversified assets), while upside depends on the pricing of a few leading IPOs.

Timing Logic of the Articles Amendment

Submitting the Director fee cap and succession plan to shareholders as a package, on the surface, is for "smooth transition," but combined with the IPO expectations in the investment outlook, this looks more like preparing a more efficient Board for potential major capital events over the next 12–24 months (such as additional issuance, acquisitions, or spin-offs). The absolute increase of £43,000 is not large, but the symbolic "adjusting the cap to increase Board size" signals an expected expansion of the Board, implying rising business complexity for the Company.

Key Highlights of the Investment Manager's Report

Performance: The Resonance of Discount Elimination and Segment Upgrade

Metric	Value	Note
NAV growth (as of 31.01.2026)	+32.6%	Full year
Share price growth (same period)	+64.8%	Far exceeding NAV
Q4 2025 NAV growth	+9%	Quarterly
Q4 2025 share price growth	+23%	Quarterly
Discount at reporting period end	-0.4% (premium 0.4%)	First elimination of discount since October 2022

Share price growth significantly exceeded NAV, reflecting that market confidence in asset-side fundamentals recovered far faster than net asset growth itself. The segment migration completed in December (from the Specialist Fund Segment reserved for professional investors to the standard segment) was a key inflection point, allowing more retail and non-professional institutions to participate, thereby improving secondary market liquidity and narrowing the discount.

Portfolio Health: Growth Quality Far Exceeds the Index

Metric	Schiehallion Portfolio	Nasdaq 100	Multiple
Weighted average revenue growth (as of 31.12.2025)	54%	approximately 20% (estimated)	≈ over 2.5x
Top 10 holdings revenue growth	66%	—	Higher
Proportion of companies that are profitable (net income basis)	62%	—	—
Proportion of holdings with cash runway <2 years	17%	—	—

The above data indicates the portfolio does not rely on concept stories but has genuine cash flow support. The 62% profitable companies mean that even if market interest rates remain elevated, dependence on external financing is reduced; and only 17% short-term cash shortfall exposure lowers the portfolio's overall dilution risk.

Contributors and Detractors: Head Concentration Further Elevated

Three Major Positive Contributors

• Bending Spoons: Acquisition-driven integration capabilities continue to be validated; completed a new financing in Q4 and announced the acquisitions of AOL and Eventbrite, consolidating its dominant position in digital products.
• SpaceX: A secondary offering launched in December (potential valuation of US$800 billion) directly lifted NAV, becoming the portfolio's second-largest holding (behind only Bending Spoons). The post-period announcement of acquiring xAI further strengthens its core competitiveness around launches and Starlink.
• ByteDance: Ended the year strongly, aided by reported equity auction valuations and increasing clarity over the future structure of US TikTok.

Three Major Negative Detractors

• Dailyhunt (Ver Se Innovation): Operating revenue declined, forcing the Company to strengthen cost control, leading to a downward valuation.
• Solugen: Scaling of the Bioforge facility progressed slower than expected, encountering operational headwinds.
• Brex: A sharp drop in comparable company valuations and slowing growth triggered a downward revaluation; the announcement before the reporting period end of an acquisition by Capital One (expected to close mid-2026) instead provided clear downside protection for the portfolio.

Portfolio Structure and Geographic Distribution: A New Global Equilibrium

Region	Proportion
United States	54.3%
Europe	20.6%
China	11.2%
United Kingdom	9.4%

At the period end, the portfolio held 53 companies, of which 6 were listed (11.9% of net assets). The three largest sector exposures were information technology (estimated first), industrials/consumer and others (the original text does not disclose specific proportions, but information technology remains core). Notably, Europe (including the UK) together accounts for 30%, significantly higher than traditional US-focussed growth funds, reflecting Schiehallion's distinctive ability to capture European private technology companies (such as Bending Spoons).

New Judgement on the Overall "Introduction" Narrative

The most important incremental information in this continuation is the coincidence in timing of discount elimination and segment migration; it is not accidental but the combined result of corporate governance adjustments, improved investor communication, and improved fundamentals of the underlying assets. The articles amendment proposed by the Board at the AGM is precisely intended to sustain this virtuous cycle — reserving room for more Directors, more shareholders, and larger transaction possibilities. The investment manager's report, meanwhile, uses data to prove the portfolio has moved from the "storytelling" stage to the "financial statement validation" stage; in particular, the 62% profitability ratio is enough to make any public market investor questioning its valuation method re-examine the reasonableness of the discount.

If the next section involves specific financial data or investment case details, deeper verification of the sustainability of these trends will be required.

A Paradigm Shift in Capital Deployment: From Building Phase to Recycling Phase

The Activity section discloses a milestone detail: Schiehallion achieved full deployment for the first time in the reporting year, clearing all Treasury bills mid-year. This means the fund has formally exited the "building phase + cash buffer" operating model and entered a mature stage relying more on circularity of existing capital. The complete landscape of capital activity for the full year is as follows:

Capital Activity Type	Number	Representative Targets
New investments	8	Revolut, Anduril, Rippling, Avanci, Clear Street, Cellares, Inspire (Xiaohongshu), Anthropic
Additional investments	7	Not individually disclosed
Complete sales (public market)	3	Airbnb, Oscar Health, Warby Parker
Complete sales (secondary transactions)	1	Masterclass
Post-IPO reductions	3	Wise, Affirm, Tempus AI
Secondary transaction reductions	2	SpaceX, Cohesity (the latter also had post-period activity)
IPOs	2	Chime Financial, HeartFlow

By count, 8 new investments versus 4 complete sales means a net increase of 4 companies; but once IPOs, reductions, and secondary transactions are included, actual capital turnover is far larger than the surface numbers suggest. The original text uses "competition for capital" to describe internal resource allocation pressure; in essence: Schiehallion has established an internal cost-of-capital threshold — any existing holding whose expected return cannot cover new opportunities faces the prospect of being recycled. The three complete sales of Airbnb, Oscar Health, and Warby Parker are all late-stage scaling companies; their fundamentals did not deteriorate, but their growth slopes no longer met the fund's requirements for asymmetric returns.

Notably, the sale of Masterclass was completed through a secondary transaction rather than waiting for its IPO. This confirms the increasingly important role of the private secondary market in pricing technology assets, and also shows that Schiehallion's exit path has shifted from "passively waiting for IPOs" to "actively managing liquidity."

Three Threads in New Investments: AI, Automation, and Financial Restructuring

The 8 new investments superficially span multiple industries but can be compressed into three clear thematic threads:

Thread	Company	Underlying Logic
AI infrastructure	Anthropic	Frontier model developer; heavy reinvestment by AI-native companies in compute and talent
Deep automation	Anduril, Cellares	Using software to redefine defence systems and labour-intensive segments of cell therapy manufacturing
Generational replacement of financial infrastructure	Revolut, Clear Street	Fundamental reconstruction of digital banking and clearing systems
Modular enterprise software	Rippling	Integrating HR, IT, and finance into a single platform, changing the fragmented state of enterprise software
Chinese consumption combined with AI	Inspire (Xiaohongshu)	High-net-worth user community + consumption decisions + AI enablement

The investment in Anthropic is specifically discussed within the framework of "disruption compounding," implying Schiehallion does not view it as an isolated AI thematic allocation but as a portfolio-level productivity factor. Advances in frontier AI not only increase Anthropic's own value but may also reshape the cost structures, product iteration speeds, and competitive landscapes of other companies in the portfolio. Anduril represents another type of investment logic — targeting a defence procurement system unchanged for decades, entering the hardware cycle with a software mindset.

An additional signal is the addition of Inspire (Xiaohongshu). Against a backdrop of rising global geopolitical sensitivity, this investment shows the fund has not avoided Chinese assets but rather is more focused on local consumer platforms with genuine brand moats and the ability to integrate AI applications. This is consistent with the "China long-term consumption trend + AI" expression — selective allocation rather than systematic return.

The "Selective Reopening" of IPOs: Lessons from Two Diverging Cases

The original text uses "in a selective way" to describe the public market's revaluation of large private companies, and the two IPOs during the reporting period happen to provide opposing evidence:

Company	Listing Date	Post-IPO Performance	Implied Information
Chime Financial	June 2025	Share price under pressure	Homogeneous digital banks face long paths to profitability; market lacks patience
HeartFlow	August 2025	Relatively steady, positive contributor	Med-tech AI with clinical validation gains recognition

This divergence shows the IPO window has not fully opened; the market gives a premium only to companies with unique technological barriers and clear commercialisation paths. For Schiehallion, this means future exits will still rely on a "combination punch" — public market reductions (Wise, Affirm, Tempus AI), secondary transactions (SpaceX, Cohesity), and complete exits in parallel — rather than betting on any single exit channel.

Also noteworthy: three of the four complete sales were listed sales. This reflects the structural advantage of a closed-ended fund — when a holding is already listed, the fund can exit at any time using public market liquidity, without being limited by fund life or discount negotiations in block trades, unlike traditional PE.

Concentration, Revenue Loss, and the Cost Structure of Full Deployment

Financial Metric	2026	2025	Change
Ongoing charges	0.96%	0.92%	+4bps
Revenue loss per share	(US$0.0135)	(US$0.0039)	Loss widened approximately 2.5x
Share count	1,013.0M	1,024.7M	-1.1%

The substantial widening of revenue loss is not operational deterioration but the direct financial cost of full deployment. Previously, holding Treasury bills generated steady interest income; now those funds are allocated to high-growth, low-dividend, or even pre-profit private companies, so interest and dividend income have fallen sharply, while fund-level operating expenses, due diligence costs, and secondary transaction commissions continue to accumulate. This "exchange of current income for long-term capital appreciation" is entirely reasonable — NAV grew 32.6%, far exceeding the roughly US$0.01 per share revenue loss.

But full deployment also brings new structural constraints: the marginal funding source for future new investments is no longer cost-free cash reserves; it must rely on selling existing holdings, natural reductions after IPOs, or secondary transactions. This means the fund's management focus will partially shift from "finding new targets" to "managing exit timing."

The top 10 holdings concentration of 58.9% is described in the original text as "expected given the asymmetric return profile." Under full deployment, this concentration means portfolio volatility will be more directly reflected in valuation changes of the top 10 companies; but Schiehallion's investor base has clearly accepted this characteristic — long-term holders are not buying diversification but exponential growth potential in high-conviction tracks.

Annual Return Attribution: Dual Drivers of NAV Growth and Discount Repair

Over one year, the share price rose 64.8%, far higher than NAV growth of 32.6%, with the difference coming from substantial narrowing of the discount. Decomposing shareholder returns into independent factors:

Driver	Contribution	Explanation
NAV growth	+32.6%	Increase in intrinsic portfolio value
Discount repair	approximately +24.3%	-19.2% → +0.4%
Total share price return	+64.8%	Compound effect of the two factors

Discount repair contributed approximately one-third of the share price gain. This repair was not simple mean reversion; there was clear fundamental support: strong NAV growth made the original discount rate unsustainable, while sustained buybacks in the period provided a price floor signal. The net reduction in share count of approximately 1.1%, corresponding to buybacks of about 11.7 million shares, is not huge relative to a market capitalisation of around US$1.8 billion, but it is consistent with management's statement of "buybacks at attractive discounts," forming an effective positive market signal.

The annual price range better reflects the severity of the repair: the share price low of 83.00¢ corresponded to a NAV low of 125.08¢, implying a discount of approximately -33.6%; by year-end, NAV of 177.28¢ corresponded to a share price of 178.00¢, already turning into a modest premium of +0.4%. The 34-percentage-point swing in discount/premium fully demonstrates that the fund's pricing in capital markets does not linearly follow NAV, but is affected by the interaction of market sentiment, liquidity, and management actions.

Cyclical Traces in Five-Year Data

From a five-year perspective, Schiehallion has experienced a complete "bubble — clearing — repair" cycle:

As of 31 January	NAV (¢)	Change vs prior year	Share price (¢)	Discount/Premium
2022	158.20	+7.6%	212.00	+34.0%
2023	119.42	-24.5%	92.00	-23.0%
2024	118.37	-0.9%	71.50	-39.6%
2025	133.69	+12.9%	108.00	-19.2%
2026	177.28	+32.6%	178.00	+0.4%

From the high premium at the start of 2022 (+34.0%) to the deep discount at the start of 2024 (-39.6%), and then back to a positive premium at the start of 2026, the entire cycle clearly shows the overshooting characteristics of closed-end fund investor sentiment. Even after the strong rebound in 2026, NAV is only 12.1% higher cumulatively than at the start of 2022, while the share price remains below its level at the start of 2022 (178.00¢ vs 212.00¢). This shows that long-term holders' returns depend heavily on the discount/premium state at entry — investors who entered during the deep discount period earned excess returns, while those who entered during the high premium period may still not be profitable even after NAV repair.

The C shares, which existed briefly in 2022 and 2023 before exiting the stage, also reflect the trade-off between fund expansion and dilution — over time, Schiehallion's core capital structure ultimately converged on a single ordinary share structure.

Three Reasons in the Outlook: Assessment of Argument Strength

Management condensed its optimism into three points: strong portfolio fundamentals, maturity of the largest holdings, and breadth of the opportunity set. The three arguments each have different evidentiary strength.

The first point is the most direct but also an open-ended assertion. The so-called "high growth, improving profitability, ample cash runway" is a standard qualitative description of a private portfolio; its real meaning is that companies in the portfolio can continue operating without relying on external financing, which is an important defensive attribute against the dual backdrop of geopolitical turmoil and tighter market financing conditions.

The second point is the most persuasive. The text explicitly mentions that Schiehallion holds six of the world's top ten private growth companies. This objective fact responds to the core challenge of closed-end private investment — the unobservability of NAV. When companies such as Anthropic, SpaceX, and Revolut continuously obtain new financing from external investors, their valuations cease to be management estimates internal to Schiehallion; instead, they have a real external price anchor. The continued generation of external datapoints is the most effective mechanism for reducing NAV subjectivity and strengthening shareholder confidence.

The third point is essentially a direct response to the liquidity issue after full deployment. Management did not avoid the reality of being "fully invested" but instead emphasised "disciplined recycling of capital" — natural liquidity generated through IPOs and secondary transactions, plus ongoing portfolio management, leaves room for future investment. This is effectively a declaration that selling activity will continue in the next financial year, and the sale channel will rely more on the secondary market than on the IPO window.

Part 4/12: Deep Dive into the Portfolio — Rising Concentration, Strengthened AI Thread, and Rotation Logic

I. Another Reading of the Time-Series Data: Confirmation of an Inflection Point

The 2020–2026 time-series data in the continuation, viewed over a longer dimension, reveals the cyclical characteristics of the fund's performance. Combined with the recent strong performance analysed earlier, this data provides a more complete cyclical positioning:

Fiscal Year	Key Characteristics	Interpretation
2020	Positive returns, moderate size	Early building phase after inception; steady performance
2021	Significantly positive returns	Global technology bull market; private market valuation expansion
2022	Significantly negative returns	Fed rate hike cycle began; growth stock valuation compression
2023	Deeply negative returns	Private equity market "winter"; decline accelerated
2024–2026	Strong rebound	AI wave propelled; portfolio entered harvest period

Notably, the 2023 trough (where multiple negative metrics appeared simultaneously) and the 2024–2026 V-shaped reversal form a stark cyclical contrast. This inflection was not accidental — the 2022–2023 valuation pullback provided the fund with opportunities to add quality assets at more reasonable prices, while the acceleration of AI commercialisation from 2024 provided substantive fundamental support for holdings.

II. Structural Evolution of the Top Ten Holdings: From Diversification to Concentration

2.1 Head Concentration Significantly Increased

Comparing the top ten holdings data for fiscal 2025 and 2026, one clear trend is the rapid increase in the weight of the largest holding:

Metric	FY2025	FY2026	Change
Largest holding (Bending Spoons)	8.1%	14.6%	+6.5pct
Second-largest holding (SpaceX)	9.4%	13.6%	+4.2pct
Top two combined	17.5%	28.2%	+10.7pct

The sharp rise in head weight reflects both valuation growth of the holdings themselves (Bending Spoons' market value rose from US$111.2 million to US$261.4 million; SpaceX from US$128.8 million to US$243.5 million) and a shift in the fund's risk profile from "diversified bets" to "heavy positions in a few high-conviction targets."

2.2 Bending Spoons Overtakes SpaceX as the Largest Holding

This is a highly signal-worthy change: SpaceX has long been one of the most sought-after targets in global private markets, yet Bending Spoons — an Italian digital product integration operator — has overtaken it. The logic behind this merits deeper examination:

• Bending Spoons' strategic advantage: Its "acquire → integrate technology → optimise monetisation" business model has unique resilience in the current environment of high capital costs. Unlike traditional tech companies that rely on external financing for expansion, it funds acquisitions with cash flows from its own product portfolio, forming a self-reinforcing flywheel effect.
• SpaceX's valuation base effect: SpaceX's absolute valuation is far larger than Bending Spoons', but the fund holds a larger relative share of the latter. This reflects the fund's active repositioning between the two — adding to the former (net purchase of US$9.965 million) and reducing the latter (net sale of US$24.999 million) — despite SpaceX's 89% valuation increase during the year, showing the classic quality-holding characteristic that "the portion sold is far less than the rise."

2.3 Wayve: The Tension Between the Smallest Holding and the Largest Gain

Wayve has the smallest valuation among the top ten (US$72.762 million, 4.1% weight), but during the year it achieved a doubling from US$36.275 million to US$72.762 million. As a UK autonomous driving technology company, its "end-to-end deep learning + low-cost camera solution" closely benchmarks Tesla FSD's technical route.

The deeper signal in this report: the fund neither increased nor decreased its position in Wayve (net buying/selling of zero), choosing to let the holding grow naturally. This is consistent with the classic logic of private equity investing — for early-stage targets in a critical period of technical validation, maintaining the original position and letting valuation grow with milestone events is often superior to frequent trading.

III. Deep Interpretation of Performance Attribution: A Few Winners Drive the Vast Majority of Returns

The contributor and detractor data reveals the fund's typical power-law distribution:

```

Top five contributors combined: +20.6 percentage points (63% of the 32.6% total return)

Top five detractors combined: -5.8 percentage points (-18% of absolute return)

```

This highly asymmetric return structure is a hallmark of top-tier growth private equity — 20% of the portfolio's positions contribute 80% of returns.

3.1 AI Is Both the Biggest Winner and a Potential Concern

Current AI-related exposures in the portfolio include at least: Bending Spoons (AI-driven product optimisation), ByteDance (AI recommendation algorithms), Databricks (AI data platform), Anthropic (frontier models), and Tekever (AI + defence).

The advantage of this distribution is diversification across different sub-segments within the same theme — from infrastructure (Databricks) to application layer (ByteDance), from general models (Anthropic) to vertical scenarios (Tekever).

But structural risk should also be flagged: if the AI narrative experiences a periodic pullback, these holdings face the correlated downside risk of falling together. The historical lesson of 2022–2023 (multiple negative metrics appearing simultaneously) shows the fund is highly sensitive to growth stock valuation volatility.

3.2 Commonality Among Detractors: The "Valley of Death" for Early-Stage Companies

Dailyhunt (Ver Se Innovation) fell 70.1%, Solugen fell 48.4%, Brex fell 31.9% — the three worst detractors operate in completely unrelated industries: content platforms, green chemicals, and fintech. Their commonality: all are early-stage companies in the business model validation period, not yet possessing sufficient defensive moats to withstand macro headwinds.

This also indicates discipline in the fund's sell decisions: there is almost no hesitation in disposing of detractors (Solugen was listed as a new purchase in the 2025 report and became one of the largest detractors just a year later), showing the fund decisively stops losses on targets whose investment logic has been broken, rather than waiting indefinitely for a reversal.

IV. Strategic Implications of Rebalancing: From "Buy and Hold" to "Lifecycle Management"

The lists of new purchases, reductions, and complete sales sketch a clear holding lifecycle management path:

4.1 New Purchases: All-in on AI Infrastructure and Defence Technology

Anduril Industries, Anthropic, Avanci, Cellares, Clear Street Group, Inspire, PsiQuantum, and Tekever — new purchases are heavily concentrated in the two themes of AI and defence. Among them, PsiQuantum (photonic quantum computing) and Cellares (cell therapy manufacturing) represent frontier technology bets with longer holding periods.

4.2 Reductions and Liquidations: De-financialisation and De-consumerisation

Operation Type	Target	Signal Interpretation
Significant reduction	Affirm (-US$35.047 million)	Consumer finance retreat; concerns of peaking credit cycle
Significant reduction	Wise (-US$13.571 million)	Intensifying competition in payments
Complete sales	Airbnb, Masterclass, Oscar Health, Warby Parker, Nuro	Removing consumer and autonomous delivery exposure

This operational direction contrasts sharply with holdings that appreciated significantly such as ByteDance (+63.4%) and SpaceX (+127.6%). The fund is shifting capital from "defensive growth" to "offensive disruption" — selling mature or slowing consumer technology and concentrating resources in tracks such as AI and space with greater exponential potential.

V. Changes in Regional and Sector Distribution: Europe's Rise Under US Dominance

5.1 Geographic Dimension: Italy's "Unexpected" Leap

Italy rose from 8.1% to 14.6%, becoming the second-largest country exposure, entirely driven by the single holding of Bending Spoons. This change suggests: true alpha opportunities can come from any geographic region — the key is finding local champions with global competitiveness, rather than being limited to traditional tech hubs (Silicon Valley, Beijing, London).

5.2 Sector Dimension: Information Technology's "Overwhelming" Rise

Sector	FY2025 Weight	FY2026 Weight	Change
Information technology	30.6%	42.3%	+11.7pct
Healthcare (estimated)	approximately 10–15% (not listed)	Declined	Capital outflows

Information technology's weight jumped 11.7 percentage points in one year, crowding out the relative weight of almost all other sectors. This means the fund has fully tilted toward digital economy + AI infrastructure as its track selection, betting on continued technological breakthroughs amid global macro uncertainty.

5.3 Cash Level: From 5.8% to 0.6%

Net current assets fell sharply from 5.8% to 0.6%, indicating the fund invested almost all available capital into the portfolio during fiscal 2025–2026. This change can be read in two ways:

• Optimistic side: The fund manager has high confidence in investment opportunities at current valuations
• Cautious side: The cash buffer is extremely thin, and resilience to sudden market pullbacks has been significantly reduced

VI. Supplementary Conclusions to the Preceding Text

Based on the analysis in this section, the following new judgements can be made on Schiehallion Fund:

1. The change of the largest holding (SpaceX → Bending Spoons) marks a shift in investment style from "concept-driven" to "cash-flow-driven"; even though growth remains the primary objective, the fund has begun to place greater weight on the self-funding capacity of business models.

2. The portfolio exhibits a "dual imbalance": high sector concentration in information technology and high individual stock concentration in the top two names. This structure maximises returns when markets move in one direction but may face significant drawdown risk during style rotation.

3. Most of the reduced positions are companies with existing public market valuations (Wise and Affirm are both listed), suggesting the fund is capitalising on the private-to-public valuation premium window to take profits and redeploy capital into private companies with higher growth potential — a typical "private market arbitrage" strategy.

4. The most noteworthy marginal change: Tekever, a Portuguese company, entered the top ten holdings with a 112.7% gain; combined with new purchases in defence technology such as Anduril, it can be inferred that the fund is building a "defence + AI" thematic portfolio line. In a macro environment of sustained geopolitical tension, this allocation is highly forward-looking and defensive — even if the AI bubble bursts, the rigidity of defence demand can provide some downside protection for the portfolio.

Valuation Governance: A "Double Insurance" Design of Independence and Trigger Mechanisms

Schiehallion's valuation process embodies a key design in its governance structure: the valuation team is independent of the investment team, and all voting members come from different business lines; portfolio managers are only notified after the final valuation is applied. This "information isolation" is not formalism but directly targets the potential conflict of interest in private valuations — investment managers are naturally inclined to maintain optimistic valuations of their own investments, whereas an independent valuation committee can more neutrally judge whether trigger events (such as significant changes in comparable listed company valuations, IPO intentions, or fundamental changes) warrant sufficient adjustment to fair value.

Even more notable is that S&P Global, as external valuation adviser, plays a role beyond mere "review" — it is embedded in the routine monitoring process. The valuation team tracks relevant market benchmarks weekly and, where appropriate, updates valuations "in a manner consistent with the latest reports of the external valuers." This turns the external adviser's perspective from a quarterly or annual point-in-time audit into a continuous input. This arrangement bridges the gap between the "lag in market data" inherent to private valuations and the "need for real-time disclosure of the fund's NAV."

Revaluation Frequency: The "Quasi-Public" Management of Private Assets Behind High Activity

Number of Revaluations	Share of Portfolio
4 times (normal quarterly cycle)	34.4%
5 times or more	65.6%

The fact that 65.6% of holdings were revalued more than five times in one year reveals two things:

1. The "event-driven" nature of private holdings has been fully activated. During fiscal 2025–2026, popular private companies in AI, defence technology, fintech, and other fields experienced frequent financing rounds, benchmark adjustments, or IPO processes, each constituting an independent revaluation trigger.

2. Timeliness of the fund's NAV takes priority over stability of valuations. In public market funds, NAV is calculated daily; quarterly revaluation is standard practice for private equity, but Schiehallion has chosen to roll monthly evaluations for a third of its holdings, layered with immediate trigger adjustments, effectively making its NAV as close to a "quasi-market price" as possible. This increases transparency for secondary market investors, but it also means NAV volatility may be amplified — for example, if companies such as Anduril or Anthropic experience upward valuation revisions in a short period, NAV responds quickly rather than waiting until quarter-end.

Listed Exit Performance: IPO Is Not the Endpoint but the Starting Point of Risk Exposure

The performance chart of listed holdings shows absolute performance from initial investment to IPO and then from IPO to January 2026. The most important message of the chart is that there is no stable correlation between IPO-day or early listing performance and long-term performance. For example:

Company	Characteristics
Performance divergence	Some companies continued to rise significantly after IPO (e.g., Tempus AI, Wise), while others fell after IPO, dragging down total returns
Geometric chain returns	The chart notes emphasise that pre-IPO and post-IPO returns cannot simply be added, indicating the capital appreciation path from the private stage to the public market stage is non-linear

This implies Schiehallion's exit strategy is not "listed equals success." For targets with strong long-term growth prospects, the fund may continue to hold even after an IPO (Chime Financial and HeartFlow, though listed during the year, remain "listed holdings converted from private investments") and bear the valuation volatility of the public market. This also explains why the portfolio contains 6 "listed holdings" alongside 47 private companies — the fund is managing a continuous lifecycle portfolio spanning primary and secondary markets, not merely a pure private equity fund.

ESG: From a "Screening List" to a "Constraint of Long-Term Operations"

Schiehallion's ESG discussion deliberately avoids the "moral responsibility" framework, instead framing it as "an inevitable part of the long-term investment philosophy." In the 10-question research framework, question four focuses on leadership and culture, question five on whether customers love the company, and question six on the opportunities and risks of environmental and social factors — the ordering of these three questions is interesting: internal governance (Q4) → external stakeholders (Q5) → narrow ESG (Q6).

This shows the fund treats ESG as an input factor to a company's "scaling and profitability," not an additional compliance cost. Especially over a 5–10 year investment horizon, a company losing its social licence (e.g., triggering regulatory backlash, customer trust crises, or cultural collapse among employees) is often more destructive than a single valuation markdown.

Another detail worth noting: although the fund does not take Board seats, it occasionally obtains observer seats and frequently provides "encouragement, advice, and introductions" on governance structures. This is a typical Baillie Gifford style — not exerting pressure through voting power, but influencing the path of corporate governance evolution through knowledge resources and networks. For companies approaching IPO, this "pre-listing governance groundwork" is especially important because it directly affects whether they can meet exchange governance standards after listing, and hence whether institutional investors can include them in their investable universe.

Portfolio Concentration and Net Current Assets: A Boundary Experiment in High-Conviction Strategy

As of 31 January 2026, the top 5 private companies accounted for 44.5% of net assets, the top 10 for 56.5%, and all 47 private companies combined for 87.5%, with net current assets of only 0.6%. This is an extremely high-conviction structure — almost no cash buffer, almost no perpetual debt or diversification buffer.

Metric	Value
Top 5 private companies	44.5%
Top 10 private companies	56.5%
Total private companies	87.5%
Net current assets	0.6%
Total investments	99.4%

The implications of this structure are:

• Performance amplifier: Valuation swings in Bending Spoons (14.6%) and SpaceX (13.6%) will directly and sharply transmit to the fund's NAV.
• Tolerance for liquidity mismatch: Net current assets of 0.6% mean the fund has almost no ordinary buffer for redemptions or operating cash needs, but as a closed-ended investment trust, its capital structure itself permits this extreme fully-invested state.
• Concentration echoes the "non-indexed" declaration: The sectoral distribution table specifically notes it is "not derived from any index," implying this is an actively constructed bet centred on specific trends (AI, fintech, aerospace), not a sector-balanced allocation.

Such extreme concentration is not unusual in private equity funds, but in a listed trust where secondary market investors can buy and sell shares at any time, the risk is amplified by a "liquidity illusion" — holders can sell fund shares at any time, but the realisability of the fund's underlying assets is far less. This may be the deeper reason the fund repeatedly emphasises valuation transparency and external audit in its annual report: using the credibility of underlying asset valuations to compensate for the inherent weakness of their illiquidity.

The Investment Manager's Participation in "Deep Water": From Capital Structure to IPO Accompaniment

This section reveals a core capability that distinguishes Schiehallion from traditional secondary market funds — "participation at the source." Because most holdings are still in the private stage, the investment manager's intervention point is far earlier than that of public market investors, allowing more direct, "surgical" influence on corporate governance and capital structure. Notably, these engagements are not passive monitoring but active value creation through "network support" and "board transition."

1. Capital Structure: Confronting Complexity with Simplicity

The report explicitly states that the investment manager, in capital structure matters, "limits the accidental and destructive consequences of complex capital structures." This aligns with the typical pain points of private growth companies: after multiple financing rounds, complex arrangements such as liquidation preferences, anti-dilution clauses, and convertible instruments often arise, which can easily cause conflicts of interest in later rounds or at IPO.

Involvement Topic	Specific Direction	Strategic Intent
Equity structure	Consideration of dual-class structures	Balance founder control with protection of external shareholders
Financing instruments	Non-dilutive financing, venture debt, public bonds	Reduce equity dilution in the maturity stage
Transaction structure	SPAC/PIPE and other alternative listing routes	Ensure terms align with long-term shareholder interests

This approach is highly consistent with the fund's "long-term holding" positioning — they do not need to profit from complex terms in the next round, but are more concerned with the company's financing flexibility and governance stability over the next 5–10 years.

2. Governance Intervention: From Investor-Led to "Directing" an Independent Board

The report particularly emphasises the board transition stage. The shift of growth companies from an investor-led board to an independent board is the most fragile and most easily overlooked phase before listing. The investment manager's value-add manifests in three areas:

• Introducing independent director candidates: leveraging Baillie Gifford's decades of accumulated networks in public market investing;
• Board observer roles: maintaining information transparency without disrupting governance structures;
• Systematic training: the CFO-specific sessions held in Scotland and Palo Alto in 2025, as well as the private company AGM events in New York, are all rehearsals for "governance discipline after listing."

This data point is worth noting: most private investors stop at financial support, but Schiehallion embeds itself in the company's growth cycle through operational-level support (such as conferences and candidate recommendations), which explains why the company can continuously secure allocations in quality private projects.

3. ESG: Not Exclusion, But "Transformation"

The investment manager's ESG strategy is a typical active engagement model — not excluding companies from the investment universe due to ESG factors, but improving policies and systems through dialogue with management. This strategy is highly self-consistent with the fund's ultra-long-term holding mandate: for companies not yet listed, simply "divesting" neither influences outcomes nor seizes the opportunity to intervene before problems worsen.

However, the report also admits that specific discussion content cannot be disclosed due to private market confidentiality. This leaves a gap for external assessment of its ESG effectiveness, but at least from a governance perspective, its intervention in board composition has left auditable behavioural traces.

Voting Record: Subtle Signals Beneath Superficial Consensus

The voting data provides an interesting observational dimension:

Quantitative Metric	Value	Explanation
Meetings voted at (company voting record)	72	All supported management
Meetings actually held (voting distribution note)	82	The difference may be non-voting meetings where no vote was required
Total resolutions	298	12 not voted (possibly due to conflicts of interest or duplicate proposals)
Ballots cast and support rate	286 voted in favour, 96%	Remaining 4% abstentions/reservations/not submitted

Notably, 100% of meetings voted supported management (all 72 meetings), but at the resolution level there was 4% abstention or non-voting. This shows the fund does not mechanically assent but rather chooses to reserve its position on specific resolutions rather than openly oppose — a more refined bargaining chip than "opposing," preserving flexibility in maintaining company relationships.

Additionally, the report explicitly states that different investment teams may cast different votes on the same resolution, reflecting Baillie Gifford's decentralised decision-making culture. But for investors, this also means the "support rate" cannot simply be read as a signal on company fundamentals.

Portfolio Changes: New Entrants and a Reshuffling of Weights

Based on the list data, we compared the comparable holding changes between 2026 and 2025 (the table only includes companies with two years of data):

Company	2026 Value (US$'000)	2026 Weight	2025 Value (US$'000)	2025 Weight	Change
Bending Spoons	261,386	14.6%	111,244	8.1%	+6.5pp, value doubled
SpaceX	243,490	13.6%	128,811	9.4%	+4.2pp
ByteDance	139,178	7.7%	85,177	6.2%	+1.5pp
Databricks	80,168	4.5%	39,029	2.8%	+1.7pp
Wayve	72,762	4.1%	36,275	2.6%	+1.5pp
Wise	63,730	3.5%	83,229	6.1%	-2.6pp, value fell
Stripe	51,874	2.9%	39,796	2.9%	Flat, value slightly up
Affirm	49,857	2.8%	79,224	5.9%	-3.1pp, significant reduction/decline
Tekever	46,245	2.6%	20,790	1.5%	+1.1pp
Vinted	37,110	2.1%	23,430	1.7%	+0.4pp
HeartFlow	33,619	1.9%	15,925	1.2%	+0.7pp
Chi Forest	33,139	1.8%	21,973	1.6%	+0.2pp
Tempus AI	32,637	1.8%	46,435	3.4%	-1.6pp
PsiQuantum	27,827	1.5%	23,536	1.7%	-0.2pp
Epic Games	27,404	1.5%	27,018	2.0%	-0.5pp, value essentially flat

Key Signals

1. Significant additions to Bending Spoons and SpaceX: Together these two already account for 28.2%, close to one-third of the portfolio. Bending Spoons, a mobile application software company, saw its valuation surge from US$111 million in 2025 to US$261 million, a 135% increase — this may be driven by a business explosion or a valuation re-rating from a new financing round.

2. Four new companies: Anthropic (AI safety research, 2.6% weight), Revolut (UK fintech, 1.8%), Anduril Industries (defence technology, 1.7%), Clear Street Group (fintech, 1.7%). Among them, Anthropic and Anduril represent bets on frontier AI and defence automation — thematically echoing SpaceX, Wayve, and Tempus AI.

3. Reductions/valuation declines: The weight declines for Affirm and Wise were the most significant. Affirm fell from 5.9% to 2.8%, a 37% value contraction; Wise, a listed company, fell from 6.1% to 3.5%, a 23% value decline. This may reflect valuation adjustments in consumer credit and cross-border payments, or may be the investment manager actively realising gains.

4. Confirmation of the "private-to-public" path: The list notes specifically flag "listed investments previously held as private." Wise is clearly the most typical example — incubated from the private stage and successfully IPO'd, it remains among the top six holdings. This ability to "accompany the full journey" is the fundamental reason, as stated at the beginning of the report, that "private companies choose Schiehallion as a partner."

Understanding the Portfolio's Style

From the top holdings in 2026, Schiehallion's centre of gravity clearly leans toward AI infrastructure (SpaceX, Databricks, Anthropic, Wayve, Tempus AI) and financial infrastructure (Stripe, Revolut, Affirm, Wise, Clear Street). This layout reflects long-term conviction in the "underlying pipes of digital economic growth," rather than chasing short-term market hotspots. At the same time, the continued additions to Bending Spoons and ByteDance show its preference for consumer-grade software platforms has not weakened.

Overall, this strategy report presents a highly disciplined long-termist: in public markets it rarely votes against management (96% in favour), but in private markets it exerts influence through deep engagement; portfolio concentration has increased (top three exceed 35%), yet new targets also demonstrate a wide-reaching deal flow. The real risk may be — if the exit channels (IPO or M&A) for these high-valuation private companies continue to narrow, the fund's reliance on "IPO accompaniment" as a selling point becomes increasingly fragile.

Asset Structure Migration: Strategic Confirmation from "Waiting to List" to "Deeply Unlisted"

The most signal-worthy element in the continuation data is not the valuation fluctuation of any single company, but the overall migration of asset allocation structure. Comparing the two years' data reveals a substantive shift in Schiehallion's resource allocation logic:

Asset Class	2026 Weight	2025 Weight	Change
Listed company investments	11.9%	21.3%	-9.4pct
Private company investments	87.5%	72.9%	+14.6pct
Net current assets	0.6%	5.8%	-5.2pct

This migration has three implications:

First, the liquidity buffer is essentially exhausted. In 2025, net current assets were still 5.8% (including US Treasury bills of US$77,334 thousand); in 2026 this ratio was compressed to 0.6%, with cash and equivalents of only US$13,001 thousand. This means the fund has shifted from "holding ammunition and waiting for opportunities" to "running nearly fully invested." For a fund whose core strategy is growth-stage private investing, a near-full position amplifies sensitivity to unrealised valuation changes — once underlying assets are impaired, there is almost no buffer to absorb the shock.

Second, the contraction in listed holdings cannot be explained solely by IPO exits. The listed proportion fell from 21.3% to 11.9%, superficially reflecting the "natural dilution after investment targets mature and list," but combined with the significant expansion in net assets over the same period (from US$1.37 billion to US$1.796 billion, up 31.1%), the absolute value of the listed portion actually fell from US$290.8 million to US$212.4 million, an absolute decline of 27%. This cannot be attributed merely to dilution; more likely, post-IPO positions were actively sold or eroded by market declines. The annual report text mentions the Company was approved to transfer to the closed-ended fund category of the LSE's Official List on 10 December 2025; this change in listing status may have been accompanied by a portfolio-level recalibration — swapping listed holdings into targets still in the private stage.

Third, the costs of failure cases are beginning to be explicit. The continuation contains several noteworthy "written to zero" or "near-zero" cases:

Company	2026 Valuation (US$'000)	2025 Valuation (US$'000)	Change
Northvolt	–	600	Written to zero
Blockstream	–	339	Written to zero
McMakler	–	2,079	Written to zero
Illumina CVR	75	407	-81.6%
Indigo Agriculture	15	100	-85.0%

Northvolt's write-off is especially noteworthy — the Swedish battery manufacturer was once a flagship project of European green industrialisation, still valued at US$600,000 in 2025, then written to zero in 2026, a classic bankruptcy path. McMakler's fall from US$2.079 million to zero represents the collective collapse of the German real estate technology track in the rising-rate cycle. These cases together lost approximately US$3 million, a small absolute amount (about 0.2% of net assets), but they reveal the true distribution of "tail risk" in a private portfolio — a small percentage of targets contribute most of the losses.

The Other Side of Portfolio Concentration: Extreme Diversification and a "Quasi-Indexed" Strategy

From the complete holdings list in the continuation, the largest single holding, Faire, accounts for only 1.5% of net assets, the top five combined approximately 7.5%, and the top twenty approximately 25–30%. For a fund whose stated goal is "identifying companies with transformational growth potential," such concentration is unusually low.

This suggests a possibility: Schiehallion's actual operational logic is closer to a "quasi-index fund in the private market" than a traditionally highly concentrated investment vehicle. Its 63 private investments, US$1.376 billion of cumulative investment, and average investment size of approximately US$21.8 million per deal are typical of a "spreading the net" approach in late-stage venture/growth equity.

The advantage of this strategy lies in diversifying the failure risk of individual targets — even if targets such as Northvolt or McMakler go to zero, the impact on the overall portfolio can still be controlled within 0.1%. But the cost is equally clear: when the largest holding accounts for only 1.5%, even a 10x return on a star project would contribute only about 13.5% to NAV; generating meaningful performance alpha requires an extremely high hit rate.

A Neutral Reading of Key Metrics

The fund's disclosed performance metrics — IRR of 10.6% since inception, MOIC of 1.5x, and 11 IPOs/listing events — need to be judged against an appropriate benchmark:

Metric	Schiehallion	Typical Late-Stage VC Fund (reference)
IRR	10.6%	15-20%
MOIC	1.5x	2.0-2.5x
Listing rate	11/63 = 17.5%	20-30%

Excluding new investments made in 2026 and looking only at the valuation change between 2025 and 2026 (net assets from US$1.37 billion to US$1.796 billion, up 31.1%), this year was actually one of the fund's best-performing years. However, how much of that growth came from capital raising (issuing new shares) rather than fair value increases in underlying assets remains to be verified by the cash flow statement. If growth came mainly from new capital injections rather than appreciation of existing holdings, then the 10.6% IRR actually understates the true return potential of the underlying assets.

The Deep Constraints of Investment Restrictions on Portfolio Construction

The investment policy section discloses several hard constraints worth interpreting from a portfolio construction perspective:

• Single holding ≤19.9% of NAV: The key implication is that once an investment appreciates significantly, the fund is effectively forced not to add further — it cannot increase its position after the thesis has been validated, and can only let winners grow naturally until hitting the cap.
• Single target shareholding ≤20% of voting rights: This means the fund is always a minority shareholder and cannot intervene through control to fix underperforming targets.
• Borrowing limit of 10% of NAV (short-term bridging only): This completely rules out the possibility of amplifying returns through leverage.

These restrictions stacked together shape a "passive growth investor" profile — high standards at screening, but lacking tools for active intervention or adding after investment. This is also part of the structural reason the portfolio is so diversified: since one cannot place heavy bets, one must cast a wide net.

Risk Points Awaiting Verification

The continuation data also exposes several risk signals requiring further analysis:

1. Valuation reasonableness of new targets. Companies appearing for the first time in 2026 include Rippling, Cellares, Solugen, and others, together adding roughly US$600–700 million of new positions — if these targets' valuations were based on private market peaks in 2025–2026, they may face a future impairment path similar to Northvolt's.

2. Sustainability of capital deployment speed. In 2026, private investments increased from US$999.6 million to US$1,572.6 million, up 57.3%, while cash fell from US$77.3 million to US$13.0 million. This pace means that within an investment window of approximately US$1.3 million, the fund actually deployed about US$600 million, an annual average exceeding any prior period. If subsequent capital raising slows, this deployment speed will be difficult to sustain.

3. Valuation concentration risk in API/platform-type targets. The holdings list shows a large number of API backend, SaaS infrastructure, and developer tool companies (Merlin Labs, Runway AI, Avanci, Kepler Computing, etc.), which received high valuations during the 2024–2025 AI investment boom. If market sentiment around the AI narrative reverses, these companies' valuations could face systematic compression — and their common characteristic is strong revenue growth but not yet validated profitability.

The "Two-Way Arbitrage" Mechanism of Capital Allocation: The Closed Loop of Treasury Shares and Buyback/Issuance

The most worthy part of this section for deeper interpretation is not either policy in isolation, but how the two form a closed loop through treasury shares. The data shows: as of 31 January 2026, the Company held 12,170,000 treasury shares, versus just 465,000 in the prior year, an increase of roughly 26 times; over the same period, buyback amounts rose from US$4.246 million to US$13.175 million, an increase of approximately 210%. Meanwhile, between February and April 2026, the Company re-issued 1,250,000 shares from treasury. This series of operations reveals a typical "buy low, sell high" capital arbitrage logic:

• Buybacks at a discount: The buyback price is hard-capped at "not exceeding the latest reported NAV," ensuring every buyback at least does not dilute existing shareholders' NAV, and accretes per-share NAV when the discount is significant.
• Issuance at a premium: The issuance price is required to be "not less than the latest reported NAV," and issuing from treasury shares can bypass certain pre-emption procedures. Once the share price turns to a premium, the Company can sell treasury shares above NAV, further accreting per-share NAV.

This mechanism is more sophisticated than simply "managing the discount with buybacks": it does not seek to eliminate the discount or premium but exploits market sentiment fluctuations for counter-cyclical operations. In terms of actual effect, the discount narrowed from 46.8% to a 0.4% premium; aside from fundamental improvements, this two-way mechanism itself contributed additional per-share NAV growth. Notably, the 102,882,390 share issuance/treasury sale authority granted at the May 2024 AGM was entirely untouched before 31 January 2026, yet within two months after the discount turned to a premium, 1.25 million shares were immediately used — indicating the Board is both restrained and agile.

The "Three Nos" Financial Philosophy: No Borrowing + No Dividends + High Cash Tolerance

The Company simultaneously emphasises "holding cash without restriction" and "no borrowing whatsoever." This combination is very rare among private equity investment trusts, and its internal logic warrants unpacking:

Financial Strategy	Schiehallion	Common Industry Practice	Potential Impact
Borrowing	Zero borrowing	A subscription facility (revolving credit line) is commonly used to accelerate capital calls	Avoids interest costs and rate risk, but sacrifices capital efficiency
Cash holdings	No upper limit	Often a certain proportion of assets must be invested, with cash proportion limited	Tolerates "cash drag" but gains absolute freedom in investment timing
Dividends	No target, no distribution	Some private trusts offer a small dividend to attract income investors	Excludes large shareholders and annuity-type capital, but also reduces rate-sensitive holders

These three "nos" form a self-consistent risk preference: no borrowing means the Company has no debt repayment pressure and is not forced to sell assets at market troughs; no dividend means all exit proceeds can be reinvested in new targets or used for share buybacks; high cash tolerance corresponds to the long cycle of private transactions — "identification, analysis, negotiation" — especially for targets above US$500 million, where the period from mandate to closing may exceed 12 months. Missing a quality project because of insufficient cash would be the greatest opportunity cost.

But this strategy carries costs as well. In a rising-rate cycle, the yield on large cash equivalents (US Treasuries, money market funds) rises, yet remains far below long-term capital appreciation targets. If future quality investment opportunities diminish, accumulated cash could become a "drag" on NAV growth, and the market may re-impose a discount. Thus, whether the modest 0.4% premium is sustainable will depend heavily on whether the investment manager can continue to find private companies meeting the "US$500 million+, growth" standard in the market.

The "Soft" Design of the 10% Concentration Limit: Avoiding Inadvertent Breach

One easily overlooked exemption clause in the investment policy: exceeding the 10% initial investment cap on a single target is not a breach if caused by "changes in asset values or exchange rates after committed investment." This effectively acknowledges a reality of the private secondary market: there is a time gap between signing an investment commitment and actual settlement, during which NAV may fluctuate sharply. If calculated strictly at settlement-date NAV, the investment manager might be forced to reduce or cancel trades mid-process — a huge reputational and opportunity cost.

This clause also implies that the Company's daily NAV fluctuations may be substantial. Since it holds unlisted companies whose valuations depend on periodic fair value adjustments, quarterly NAV changes can exceed 10% during public market turbulence. The exemption guarantees: as long as concentration is compliant at the time of the investment decision, any subsequent breach caused by market movements is automatically excused. This shows the Board controls risk while avoiding rules that constrain investment flexibility.

The deeper meaning is that this limit is not purely a "diversification" requirement but an ex-ante constraint on the maximum size of any single investment decision. The 10% threshold combined with the US$500 million minimum market cap means the portfolio needs at least 10 targets initially to achieve full diversification, but in reality the first three years may have only 8–10 investments. In contrast, many large private equity funds allow single targets to account for 20–25% of NAV; Schiehallion's relatively conservative 10% cap reflects its caution toward liquidity risk — after all, these investments have no public market exit channel, and excessive concentration could provoke a liquidity crisis.

The "No Dividend" Trap in KPIs: The Misleading Nature of Total Return Metrics

The Board uses "NAV total return" and "share price total return" as KPIs. On the surface, this is reasonable for a company that pays no dividends — total return is entirely equal to price appreciation. But the problem is: total return strips out the impact of holding-period cash flows on investor behaviour. A real investor who bought at a 46.8% discount at the end of 2022, even if share price total return turned positive, may have endured significant opportunity cost during the holding period (inability to receive dividend reinvestment income). Institutional investors typically use "time-weighted return" to assess manager skill, while individual shareholders are more concerned with "money-weighted return."

Another fact hidden from view: between listing in March 2019 and January 2026, the discount moved from zero (at issuance) to -46.8%, then narrowed to +0.4%. This means share price total return volatility was far greater than NAV total return volatility. If NAV total return is annualising around 10%, share price total return might be annualising at 15% (because the discount narrowed sharply), but the negative returns of earlier years may have severely harmed early investors. The KPI report does not distinguish the contributions of "valuation growth" and "discount repair," giving the Board and investment manager some degree of informational discretion.

The Marginal Effect of Buyback Intensity: Diminishing Discounts and Incremental Returns

The Company first committed to US$20 million in buybacks, then added US$30 million. As of 31 January 2026, cumulative buybacks totalled 19.5 million shares at a cost of US$19.3 million, a simple average price of approximately US$0.99 per share. Given that NAV was likely around US$1.5–2 in the same period, this means each repurchased share saved roughly US$0.5–1, a significant accretion to NAV. But from a financial principle perspective, the marginal effect of buybacks diminishes as the discount narrows — after the discount fell from 46.8% to 0.4%, the NAV accretion effect per US$1 of buyback fell from approximately US$0.87 to US$0.996, almost meaningless. At that point, shifting the budget toward "issuing from treasury shares" is the more rational choice.

Indeed, when the Company issued 1.25 million treasury shares in April 2026, the price, under the principle of not less than NAV, should have exceeded the average buyback price. For these 1.25 million shares, the issuance price is at least equal to NAV, while the cost was likely below NAV, so the transaction directly created per-share appreciation for remaining shareholders of approximately "issue price - buyback cost." Assuming an average buyback price of US$1.00 and an issue price of US$2.00, the 1.25 million shares lock in approximately US$1.25 million of profit, equivalent to 6.4% of the Company's annual buyback total. This "structural arbitrage" through the treasury share mechanism is a form of refined capital management uncommon among traditional investment trusts.

The Art of "Expectation Management" in Investor Communication

The dividend policy section uses a double-negative formulation: "does not expect to pay dividends in the foreseeable future and therefore has no dividend target." This phrasing is very precise: both definitively declining and retaining the possibility of distribution in extreme future circumstances (e.g., huge exit proceeds with insufficient investment opportunities). Meanwhile, the "solvency test" add-on provides a legal floor, but does not specify under what commercial scenarios a dividend would be initiated. This works in tandem with the buyback policy of "will consider returning some capital" — the Board in practice returns capital through buybacks rather than dividends, because buybacks target "undervalued shares," whereas dividends treat all shareholders equally and cannot distinguish value levels. In periods of deep discount, buybacks are clearly more conducive to NAV accretion for remaining shareholders than dividends.

But the hidden risk of this strategy is: if the market persistently awards a premium, the Company loses room for buybacks, and since no dividend has been established, capital can only pile up. In this case, "issuing from treasury" can create profit, but it also dilutes each shareholder's percentage ownership and must be paced carefully to avoid breaking the premium. Long-term reliance on this model could turn the Company into a "quasi-market maker," deviating from its investment essence.

Governance Checks and Balances from the Authority Figures: The Symmetry of 14.99%

The 2025 AGM approved buybacks of 153,037,243 shares (14.99%), and the 2026 request was for 152,041,157 shares (14.99%); the 2024 AGM approved issuance/sale of 102,882,390 shares (approximately 10%). The buyback authority is larger than the issuance authority, and both are renewed annually — this is the "asymmetric signal" the Board sends to the market: buybacks are a routine tool; issuance is an exceptional opportunity. This aligns with shareholder expectations regarding discount management and avoids casually diluting shareholder equity at a premium. But the 2026 authority figure declined by approximately 996,000 shares, likely reflecting share capital changes between the 2025 AGM and 6 April 2026 (such as treasury share sales or cancellations), indicating the Company is dynamically adjusting the authority size to match minor changes in share capital.

Additionally, both authorisations are approximately 14.99%, just below the 15% mandatory takeover threshold (if relevant under company rules or exchange regulations). This is not coincidence. Keeping at 14.99% means that major shareholders will not accidentally trigger a mandatory offer obligation due to the Company's proactive share capital reductions — a protection of shareholding structure stability. Such precise technical handling reflects the mature governance capability of the Board and its advisers.

Conclusion: From "Passive Investment" to "Active Capital Engineering"

Throughout this section, the Company's capital management has evolved from the traditional investment trust's "passive acceptance of discounts/premiums" into an active capital engineering practice: maintaining operational flexibility through cash reserves, preserving financial safety through zero leverage, realising arbitrage between discount and premium through buybacks/treasury issuance, preventing over-concentration through the 10% financing limit, and protecting governance boundaries through authority design precise to 0.11 percentage points (14.99% vs 15%). These details appear as mere compilation in the annual report, but are in fact different dimensions of the same logic: managing the listed company itself as an investment portfolio, whose "underlying assets" are per-share NAV and market sentiment. For investors, understanding the operational logic of this capital engineering may be more predictive of the Company's long-term discount trajectory than focusing on a single quarter's NAV growth.

Continuation Analysis (Part 9/12): Deep Interpretation of Investment Objectives and the Risk Matrix

1. The "Three Time Scales" Design of Performance Targets

The Investment Manager's objective-setting exhibits a clear structural character: using a 10-year rolling period as the measurement cycle, requiring NAV total return of approximately 3x invested capital (i.e., an annualised compound return of approximately 11.6%). This target is far higher than long-run average public equity returns (MSCI World approximately 8%–9%), but given the liquidity premium risk of private growth assets, the target is internally reasonable. Notably, the Board simultaneously employs two complementary evaluation dimensions:

Evaluation Dimension	Specific Metric	Time Attribute
Absolute return	NAV total return vs. 3x capital target	10-year rolling period
Relative performance	Peer investment companies and growth investment trusts	Long-term benchmark

This design explicitly acknowledges the legitimacy of "potential underperformance in the short and medium term." From a psychological perspective, this is equivalent to granting the investment manager temporal exemption on decision-making — avoiding deviation from long-term value-capture strategy due to quarterly or annual performance pressure. But the risk is: if the target is missed over two consecutive rolling periods, internal challenges to strategy may arise within the Board, a systemic pressure not separately identified in the risk table.

---

2. The "Contradictory Signals" in the Risk Matrix Deserve Attention

The risk ratings presented in the sequel report show an interesting mismatch: the two high-risk items (market concentration risk and political risk) are both flagged as "Increasing", while most other risks are rated Moderate or Low and Stable. This suggests that management and the board are going through a cognitive phase of "macro anxiety but micro stability."

Looking specifically at the liquidity risk statement:

> "The Company has not seen any significant impact on underlying liquidity of investments, however, there are signs that the IPO market is opening up."

There is an implicit logical leap between these two sentences: the IPO market recovery is both a sign of improved liquidity and a source of potential valuation volatility — because during an IPO window, market sentiment can push Private Company valuations away from fundamentals. The correct reading should be: liquidity risk is stable in the short term, but medium-term volatility may rise. By maintaining the rating at Moderate/Stable, the board may be underestimating this transmission chain.

---

3. Valuation Risk: The "Independence Triangle" in the Governance Mechanism

Schiehallion's valuation risk mitigation mechanism is quite sophisticated, and its design is essentially a separation-of-powers structure:

Participant	Role	Independence Characteristic
Investment Manager (Baillie Gifford)	Quarterly revaluation	Executor, but overseen
Private Companies Valuations Group	Independent review	Isolated from portfolio managers
S&P Global	External advisor	Third-party independent opinion
Board + External Auditors	Semi-annual and annual review	Final oversight authority

The key to this structure lies in the information barrier between the "Private Companies Valuations Group" and the investment team. The report specifically notes that this group is "independent from the portfolio managers," which is stricter than the "investment team self-assessment + external audit" model adopted by many private equity institutions. However, the risk table does not mention valuation methodology change risk—when market conditions change (e.g., falling interest rates or contraction in industry valuation multiples), switching valuation methodologies permitted under the IPEV guidelines may cause periodic NAV fluctuations. This risk should be identified separately.

---

4. Discount Risk: The "Point-in-Time" Limitations of Data Disclosure

Discount risk was rated Decreasing on the basis that "the discount narrowed during the fiscal year ending January 31, 2026." However, the annual report did not disclose a specific discount rate figure. Combined with the aforementioned December 2025 listing migration event — a move from the Alternative Investment Market to the main market (a presumption) — this migration broadened the investor base and thereby increased demand. The causal chain is reasonable, but several points warrant attention:

• The narrowing discount may be a synchronous effect rather than a causal effect: As growth stocks saw a broad valuation recovery in 2025-2026, the narrowing of Schiehallion's discount may simply be a beta gain.
• A history of fluctuation from premium to discount: Since the fund's listing in 2019, it has experienced capital events such as the C share issuance (April 2021) and conversion (September 2023), yet the impact of these events on the premium/discount has not been quantified in the risk table.

It is recommended that future reports disclose the annual range of the premium/discount rate (e.g., high/low/average) rather than only describing the direction; otherwise, it is difficult to assess the degree to which the risk is "Decreasing."

---

5. Climate and Governance Risk: Optimistic Bias in the Downgrade Logic

Climate and governance risk was downgraded from Moderate to Low, with the report citing qualitative descriptions such as "active engagement" and "implementation focus" as justification. This downgrade is debatable on two counts:

1. Risk exposure has not decreased — only management has been strengthened: A large portion of the portfolio consists of late-stage technology companies, which often rely on energy-intensive data centers or complex supply chains. Physical climate risk and transition risk exposure have not been reduced in physical terms by management activities.

2. The "Low" rating may invite dual interpretations among investors: If external investors take the rating to mean "no attention needed," a larger expectation gap could instead emerge when the next ESG scandal erupts.

It is recommended that this risk be changed to Moderate/Low with "Stable" retained, to more accurately reflect the actual situation in which "the risk itself is above average, but management capability is strong."

---

6. Overall View of Risk Rating Changes (Comparison Table)

Risk Category	Current Rating	Direction of Change	Key Drivers
Investment Liquidity	Moderate	Stable	IPO market recovering, but fund assets still predominantly private
Market/Economic/Political Concentration	High	Increasing	Geopolitical conflicts + uncertain macro conditions
Valuation	Moderate	Stable	Effective governance structure, but market volatility triggers review
Investment Strategy	Moderate	Stable	Growth equity demand recovering + listing migration expanding the investor base
Discount	Moderate	Decreasing	Demand improves after listing migration
Climate & Governance	Low	Stable → (Downgraded)	Governance strategy strengthened
Political & Economic	High	Increasing	Global conflicts + economic confrontation
Legal & Regulatory	Not provided in the follow-up	-	Incomplete information disclosure

Herein lies a structural contradiction: the risks rated High and Increasing are concentrated in the "macro/political–market concentration" dimension, while the portfolio itself consists of private growth equities held on a "long-term hold + low liquidity" basis. This means that when macro risk events are triggered, the company will find it difficult to quickly sidestep them by adjusting positions — a mismatch between risk exposure and risk-response capacity. The board may need to simulate portfolio performance under extreme war or sanction scenarios as part of its stress-testing.

---

7. New Suggestions (Continuing the Annual Report Improvement Perspective)

Based on the above analysis, the following additions are proposed for the risk section of the next annual report:

• Risk linkage matrix: showing the transmission path of "macro-political risk → market concentration risk → valuation risk" and the trigger thresholds.
• Discount/premium historical volatility band: a chart presenting the discount/premium range for 2019-2026, with events such as listing migration and C-share issuance marked.
• Valuation method sensitivity analysis: showing the impact on NAV if different valuation multiples are applied (upward/downward 20%).
• Quantitative indicators of climate risk: such as the proportion of high-emission industries in the portfolio, or the coverage rate of the Net Zero pathway.

These new elements would make the existing qualitative judgments more persuasive and would also facilitate shareholders in independently assessing whether the board's subjective risk ratings are consistent with objective data.

This continuation section focuses on the specific execution details of the board's risk governance, as well as the logical connection from "risk identification" to "long-term viability." These contents corroborate the risk descriptions in the earlier part of the annual report, but there are several new points worth exploring in depth.

I. The "Multi-Layer Confirmation" Mechanism for Regulatory Compliance Risk

The continuation reveals the governance chain that mitigates regulatory risk:

• The Investment Manager's internal Business Risk, Internal Audit, and Compliance departments periodically submit monitoring reports to the Audit Committee;
• The Administrator (located in Guernsey) periodically submits compliance reports confirming that filings have been completed with the local regulator, in order to maintain the company's legal and tax status;
• Externally published Shareholder documents (including the Interim/Annual Report) must pass through a rigorous review process, with inside information handled in accordance with the Transparency Rules and the Market Abuse Regulations.

This design can be summarized as a three-layer defense: "internal self-certification + external independent verification + regulatory conduct self-review." Notably, regulatory risk is assessed as Low and Stable, yet the company retains a contingency plan to "make representations and seek special exemptions in the event of material regulatory changes"—reflecting the sensitivity of investment companies (particularly closed-end funds registered in Guernsey but marketed to UK investors) to differences between regulatory regimes.

II. Operational Risk Matrix: Asymmetry Between Risk Levels and Trends

The continuation assigns differentiated ratings to three operational risks:

Risk Type	Current Rating	Trend	Key Management Tools
Third-party service provider dependence	Low	Stable	ISAE 3402 reports + independent review by the Investment Manager's business risk department
Cybersecurity threat	High	Increasing	Service provider cyber/IT policy audits, business continuity arrangements
Loss of key professionals	Low	Stable	Investment Manager annual assessments, evaluation of talent attraction and retention resources

The most salient point here is that cybersecurity risk is the only operational risk rated "High" and "Increasing." Its risk drivers are explicitly attributed to:

1. Ongoing geopolitical tensions raising the probability of cyber-attack events;

2. Emerging technologies (especially AI) expanding the attack surface for information security;

3. Hybrid working models (remote + office) increasing system exposure points.

This rating is significantly higher than that of investment risk or market risk, which have traditionally received greater attention, reflecting that the board now regards information security as a direct threat to investor asset safety and the company's reputation. In contrast, although third-party dependence is rated low, its mitigation depends on "whether the service provider can supply ISAE 3402 reports"—reports that are often time-lagged in themselves and may not cover the latest threats.

III. Viability Statement: A Rational Compromise Between a Five-Year Window and a Ten-Year Investment Horizon

In the viability statement, the board chose a five-year assessment period rather than the ten-year horizon consistent with the investment strategy. Its reasoning:

• Five years better aligns with investors' minimum holding period;
• Economic and financial scenario projections over a ten-year horizon are "difficult," with forecast errors expanding sharply as the horizon lengthens;
• Portfolio performance assessment, however, retains the ten-year perspective.

This reflects a prudent separation between "long-term investment objectives" and "verifiable viability analysis." In addition, the board conducted a dedicated stress test on the most significant risk—a sudden or prolonged downturn in the global economy—and the results did not reveal any concerns. Its resilience arguments include:

• The company has no long-term leverage obligations, so there is no risk of being forced to repay early;
• It has no dividend payment obligations, limiting cash outflow pressure;
• Portfolio industry diversification can cushion economic shocks;
• Cash and liquid assets (US$225.4 million) are sufficient to cover annual operating expenses over the entire viability period.

This liquidity figure, combined with the company's expectation of "maintaining approximately 2% of assets in cash or cash equivalents," implies total assets on the scale of US$10 billion. Allocating such a high proportion of liquid reserves to operating expenses, rather than to higher-yielding assets, is in itself a conservative, survival-oriented approach.

IV. Liquidity Management Under the Dual Constraints of Shareholder Interests and Solvency

The continuation specifically emphasizes that the Investment Manager monitors cash flow requirements in real time to meet day-to-day expenses. Under normal circumstances, a closed-end fund typically needs only minimal cash reserves. But Schiehallion, as a fund primarily investing in unlisted growth companies, faces long asset disposal cycles and low liquidity. Maintaining 2% of assets in cash is therefore not for market timing, but rather to ensure that outsourced service fees and operating expenses can be paid in any environment, thereby avoiding the risk of a "forced sale of positions."

This liquidity buffer resonates with the stress tests in the Viability Statement. Compared with peers that depend on leverage or short-term financing, the fund's liability structure is extremely simple: its viability does not rest on bank credit lines or refinancing capability, but entirely on the cash flow match between the asset side and the expense side.

V. Stakeholder Governance: Simplification and Specialization Under a No-Employee Structure

Because the company has no direct employees, the continuation, in citing Section 172 of the UK Companies Act 2006, explicitly excludes "employee interests" from its focus. Stakeholders are confined to:

• Existing and potential shareholders;
• The external investment manager (Baillie Gifford & Co Limited);
• Other service providers (Administrator, Corporate Broker, Registrar, Auditor, Custodian & Depositary);
• Wider society and environment.

This structure keeps corporate governance relatively lightweight, but it also means the board must rely on the contractual constraints and reputational mechanisms of external service providers to maintain fairness among stakeholders. For instance, the investment manager's compensation is linked to the company's performance, whereas the administrator's and custodian's fees are typically fixed or based on a percentage of assets—so the two sets of incentives are not fully aligned. The board coordinates these divergent interests through periodic audits, service agreement reviews, and direct communication, ensuring that the overarching objective of "shareholder interests" is not skewed by service provider motivations.

VI. Summary: A Closed Loop from "Risk Checklist" to "Viability Narrative"

The governance logic presented in the continuation forms a complete closed loop—risk identification → rating and trend assessment → management tools → stress testing → viability statement → stakeholder communication. In particular:

• Every risk mitigation measure has a clearly designated owner (Audit Committee, specialized departments of the Investment Manager, Administrator) and a verifiable reporting vehicle (ISAE 3402, periodic compliance reports);
• The only risk confirmed as "High & Increasing"—cybersecurity—is not matched by mitigation measures described with an equivalent degree of quantification, with "receipt of confirmation" as the principal management approach. This creates a certain asymmetry with the high rating and leaves room for potential disclosure improvements in the next annual report.

Overall, the risk and viability sections of this annual report not only satisfy regulatory compliance requirements, but also clearly convey to investors the confidence that "even if financial markets were to repeat a downturn, the company has sufficient ammunition to last five years." The rigor of its governance framework can be regarded as a best-practice reference for comparable closed-end funds.

The following is the additional analysis in Part 11/12, focusing on the specific mechanisms and governance logic of the "stakeholder engagement" section of the strategic report, without repeating the shareholder communication model or corporate governance framework previously discussed.

---

1. The "Multi-Channel Overlay" of Shareholder Communication and the Information Closed Loop

This section does not merely emphasize the importance of the annual general meeting; rather, it reveals a two-way, multi-level feedback mechanism: the annual general meeting serves as the formal venue, supplemented by informal meetings with the Chairperson and the Senior Independent Director. Most notably, the Investment Manager meets regularly with shareholders and their representatives and feeds opinions back to the board in writing — forming an information closed loop: shareholder views → investment manager → board → decision adjustment. Compared with many investment trusts that rely only on annual meetings or broker feedback, this mechanism clearly places greater emphasis on high-frequency engagement and proactive absorption of input.

From a data perspective, the 2026 annual report discloses that it "met with major shareholders during the year," but it does not disclose the specific number of meetings or the proportion of shareholdings covered. It is suggested that future annual reports could quantify metrics such as "number of meetings between the investment manager and shareholders" and "proportion of shareholdings represented by shareholders received by the board," so as to enhance transparency and comparability.

---

2. Outsourcing Governance: The Dual-Core Division of Labor Between Baillie Gifford and Alter Domus

The company delegates portfolio management to Baillie Gifford and operational administration (including tax and regulatory compliance) to Alter Domus. This raises a key governance issue: How can the board ensure that "substantive activities" do not spin out of control? The text emphasizes that the board maintains "oversight and strategic direction," but the two institutions that truly affect other stakeholders on a day-to-day basis are these two service providers.

Under this model, the board is not the direct operator but rather a supervisor and challenger. The text repeatedly uses the terms "challenge" and "evaluation," indicating that the board is not satisfied with passively receiving reports but instead actively questions them. This "collaborative but prickly" posture is designed to prevent service providers from developing inertia or complacency through long-term cooperation. Notably, the same sentence appears almost verbatim in the Depositary and Custodian sections—this is not redundancy but rather reflects a consistent governance standard applied to core service providers, preventing management gaps arising from differences in relationship closeness.

---

3. Stakeholder Engagement Table: Structured Categorization and Differentiated Strategies

The table format lists eight major stakeholder categories (Portfolio companies, Broker, Registrar, Auditor, Depositary, AIC/peers, Investment platforms, Wider society & environment, Regulatory bodies), each with "Why engage" and "How engage". This structured disclosure is itself a good governance practice, but the report can further evaluate its breadth and depth of coverage:

Stakeholder	Core Concern	Primary Engagement Method	Directly Involved Party	Direct Board Involvement?
Portfolio companies	Long-term strategic support	ESG engagement, operational and strategic discussions	Investment Manager	Indirect (via reporting)
Broker	Institutional shareholder sentiment	Attending board meetings, off-cycle meeting arrangements	Broker	Yes
Registrar	Direct shareholder services	Frequency and accuracy monitoring, internal control review	Investment Manager	No (but reports to the Board)
Auditor	True and fair financial statements	Audit committee meetings (without the Investment Manager present when necessary)	Audit Committee	Yes
Depositary/Custodian	Safety of financial instruments	Review of internal control reports, collaborative discussions	Investment Manager/Audit Committee	Partially
AIC/peers	Industry and systemic risk	Technical reviews, legislative feedback	Board/Investment Manager	Depends on the issue
Investment platforms	Indirect shareholder communication	Platform coordination, publication of annual timetable	Investment Manager	No
Regulatory bodies	Compliance and reputation	FRC/GFSC liaison	Investment Manager	No (but required to report)

The table reveals a distinctive feature: the Board personally handles only a few direct relationships (audit, shareholder meetings), while delegating most day-to-day contacts to the Investment Manager. This is consistent with investment trust industry practice, but it also means that the Board's "trust + audit" approach with the Investment Manager must be sufficiently robust. The crux is whether the Investment Manager's relationships with brokers, platforms, and regulators could be distorted by conflicts of interest. Although the text does not state this explicitly, the phrase "Investment Manager reports to the Board" implies that the Board retains ultimate right to be informed, which to some extent mitigates the agency problem.

---

4. The "Look-Through" Design of ESG Oversight

Particularly noteworthy is that while the board does not directly manage the portfolio, it indirectly influences the environmental and social behavior of investee companies through ESG assessments of investment managers. The text mentions that the board reviews "Governance Engagement reports," and that portfolio managers periodically report on strategic discussions with companies. This effectively forms an ESG impact chain:

Board → Investment Manager (ESG Strategy) → Investee Company (ESG Practice) → Society/Environment

This chain-based oversight has two advantages: first, it avoids board micromanagement; second, it leverages the investment managers' professional information advantages. However, risks also follow: if investment managers' ESG assessments become a mere formality, the board may find it difficult to detect "greenwashing" without an independent verification channel. The text does not mention whether the board engages external ESG advisors or conducts third-party assessments — this is an area for further improvement: one could benchmark against peers (e.g., using data service providers) to enhance oversight independence.

---

5. Systematic Thinking on Regulation and Industry Collaboration

The text treats AIC membership and industry peers as stakeholders, noting that "adverse market sentiment towards one investment trust can affect attitudes towards the wider industry." This shows that corporate governance is not limited to the company's own interests but also encompasses the externality of systemic industry risk. Likewise, routine communication with regulators (FRC, GFSC) is positioned as "representations" rather than merely passive compliance—reflecting a mature governance philosophy: rather than being penalized after the fact, it is better to influence rule-making beforehand.

Furthermore, "Wider society and the environment" is listed separately, with the explicit acknowledgment that "no entity can exist without having an influence on society." This candid stance is commendable, but it also implies that the company's primary environmental/social impact is concentrated at the portfolio level, rather than the operational level (since operations are outsourced). Notably, the text provides no quantitative environmental impact indicators (such as carbon footprint or negative screening criteria), which may be a direction future annual reports could supplement.

---

6. The Bottom Line for Long-Term Shareholder Interests

The report concludes by emphasizing "keeping the interests of the Company’s shareholders... firmly front of mind in its key decision making." This statement echoes all the mechanisms discussed earlier: whether shareholder communication, outsourced oversight, ESG review, or regulatory response, all ultimately aim to promote the Company's success over the long term. This governance structure—"shareholder-centric, with service providers as the execution layer"—is typical of the investment trust industry. However, a potential tension exists: shareholders focus on short-term performance, but ESG and long-term strategy may sacrifice short-term returns. The report does not discuss how to balance this contradiction, but it argues that only by clearly explaining the logic of long-term value in shareholder communication can the board avoid a breakdown of trust caused by performance fluctuations.

---

In sum, this follow-up does not simply repeat the preceding content. Instead, through three highlights — the structured stakeholder table, the challenge principles of outsourced governance, and the ESG pass-through chain — it demonstrates The Schiehallion Fund's care in governance transparency. Should future reports seek further improvement, the following additions are suggested: ① frequency and coverage ratio of shareholder communications; ② the specific methodology of the investment manager's ESG assessment; ③ independent third-party ESG verification; and ④ quantitative disclosure of the company's own operational carbon footprint. These data-driven, verifiable enhancements would make the current process-based description more credible.

Tax Residence Migration: A Strategic Upgrade from "Compliance Decision" to "Value Creation"

This resolution migrates the company's tax residence from an offshore jurisdiction (such as the Cayman Islands, a common investment fund domicile) to the UK, while simultaneously obtaining UK Investment Trust status. It is not a mere compliance adjustment, but rather secures threefold value in one stroke:

1. Improved tax administration efficiency: The UK's network of double taxation agreements (DTAs) with multiple countries is highly mature, with particularly notable relief on US dividend withholding tax. Taking a typical US holding as an example, non-treaty residents often face a 30% withholding rate; under the US–UK tax treaty, eligible UK investors can see this reduced to 15% or even lower. This step directly reduces cost leakage in the fund portfolio and improves net returns.

2. Optimized applicable tax burden for investors: For UK taxable investors, holding a fund that qualifies as a UK investment trust means capital gains are exempt from corporation tax, and investment trust dividends can enjoy more favorable tax credits. This significantly lowers the entry barrier for "tax-sensitive" investors and broadens the potential shareholder base.

3. Synergy with listing venue status: The migration of the company's shares from the former main market category to the "Closed-ended Investment Funds" category facilitates inclusion in relevant indices and passive capital pools, thereby enhancing trading liquidity and the efficiency of valuation repair. This "dual alignment" of tax residence and listing venue reduces the cost of cross-jurisdictional interpretive uncertainty.

The table below compares the actual impact before and after the key changes:

Dimension	Before Change (Offshore Resident)	After Change (UK Resident + Investment Trust)
US dividend withholding tax rate	Typically 25%–30% (no treaty)	Reducible to 15% or lower under DTA
UK investor taxation of capital gains	Treated as non-UK fund; specific filing may apply	Corporation tax exemption on capital gains under investment trust status
Index inclusion likelihood	Lower; constrained by exchange category	Closed-ended fund category more readily meets index criteria
Shareholder base expansion	Limited appeal to UK tax-sensitive institutions	Directly includable in UK pension and retail platform portfolios

Buyback Strategy: Verifying Capital Allocation Discipline Through a "19.6-Percentage-Point Discount Narrowing"

During the year, the company repurchased 11,705,000 shares and transferred them into treasury, ultimately moving the shares from a 19.2% discount at the start of the year to a 0.4% premium at the period end. This shift not only reflects improved demand, but also reveals the fine-grained design of the buyback strategy:

• Buyback timing: All buybacks were executed at a discount to net asset value (NAV), meaning that each share repurchased creates a per-share NAV accretion for remaining shareholders equal to the discount margin. Assuming an average discount of 10%, the per-share NAV uplift from the buyback is approximately equal to 10%/(1−10%) of the buyback amount, significantly enhancing the value of existing holdings.
• Reissuance flexibility: The treasury share mechanism allows the company to reissue shares at prices not below NAV when market sentiment warms, meeting liquidity needs while avoiding dilution. The switch from discount to premium gives this mechanism an option-like "buy low, sell high" quality.
• Portfolio impact trade-off: The board explicitly noted the potential negative impact of buybacks on "portfolio composition and diversification." The Schiehallion Fund primarily invests in unlisted growth companies, where cash is a scarce resource. The size and pace of buybacks must balance the ability to add to existing positions against the dry powder needed for new investment opportunities. This disclosure indicates that buybacks are not executed mechanically, but are a tool for dynamically optimizing shareholder value.

Cross-industry comparison: many closed-ended funds face persistent discounts (for example, the UK investment trust industry has an average discount of roughly 5%–15%), yet Schiehallion reversed to a premium through proactive buybacks, which to some extent attests to its asset quality and governance confidence.

Governance Structure: An "Asset-Light" Governance System Under an Employee-Free Structure

The company explicitly states that it has no employees, is not subject to the Modern Slavery Act, and outsources all functions. This structure is common among alternative investment funds, yet transparency and accountability are still maintained through the following mechanisms:

• Annual board evaluation: External evaluation helps identify governance blind spots and is more objective than internal self-assessment. In an environment without executive directors, external evaluation is a key tool for ensuring board effectiveness.
• Annual service provider review: All service providers — the investment manager, administrator, custodian, and others — undergo a dual assessment of cost and service quality, balancing "value for money" with "control." Given that management fees are the primary cost item, this process is in substance a second layer of defense for shareholder interests.
• Digitalization and virtual meetings: Restricting non-essential travel and paper documents may have limited impact in absolute carbon emission terms, but it externally conveys ESG values consistent with the fund's holdings (mostly innovative enterprises) and meets institutional investors' scrutiny requirements regarding the "net-zero transition."

Board Diversity: A Substantive Skill Mix Beyond "Meeting the Numbers"

As of 31 January 2026, the board comprised four members: two men and two women, with the female chair having a minority ethnic background. This composition exceeds the UK Financial Conduct Authority (FCA) hard requirement of "at least 40% female directors" for listed companies on both gender and ethnicity dimensions, and the fact that the chair herself represents an ethnic minority makes it even more exemplary.

More critical is the complementarity of skills:

Director	Core Background	Value Contribution to the Fund
Dr Linda Yueh	Economist, academic appointments, extensive cross-border policy and financial regulatory experience	Macroeconomic judgment, geopolitical risk assessment, communication with regulators
John Mackie	Former CEO of the British Private Equity & Venture Capital Association (BVCA), founding partner of a private equity firm	Private market deal evaluation, exit cycle judgment, industry network resources

This combination breaks the traditional board model dominated by "finance or legal experts." When the fund manager interacts with portfolio companies post-investment, having a former BVCA chief as a director is tantamount to gaining "industry think tank" support; meanwhile, the chair's academic background helps identify disruptive technology cycles and macro turning points, coupling well with the fund's long-term holding style.

Potential Challenges and Outlook

The change in tax status is not without cost: UK investment trust status requires that at least 85% of qualifying investment income be distributed as dividends each year, which may limit the fund's ability to retain profits for reinvestment — particularly for unlisted companies still in the early growth stage, where shareholders may demand cash distributions, thereby reducing the amount retained. That said, given that the fund's cash needs are concentrated in a small number of mega investment projects, and UK investment trust rules permit blended treatment of items such as interest income, the actual distribution pressure is expected to be manageable.

The true variable over the next twelve months remains portfolio valuations and the exit environment. Should the "premium" status brought about by the buyback strategy prove unsustainable, the board will face renewed pressure to choose between continuing buybacks and preserving investment cash. Nevertheless, from institutional architecture to personnel configuration, the company is well prepared for the next phase of "liquidity release" — the migration to the closed-ended fund category is expected to attract passive buying, UK tax residence opens an investment channel for pension accounts, and the diversified board composition provides the intellectual capital to navigate complex exit negotiations.

---

Position Moves

Position	Direction	Author's One-Line View	Key Data
Bending Spoons	Add	Acquisition-driven integration capability continues to be validated; became the largest holding; business model is resilient	Weight 8.1% → 14.6%; market value $111.2M → $261.4M; net purchases $9.965M
SpaceX	Reduce	Partial profit-taking, but the appreciation far exceeded the portion sold; announced acquisition of xAI after the reporting period	Weight 9.4% → 13.6%; net sales $24.999M; valuation +89% YTD; potential secondary offering valuation US$800B
ByteDance	Hold/Watch	Valuation confirmed by external auction pricing; TikTok structure gradually becoming clearer; strong year-end performance	Equity auction valuation moved up; one of the top three positive contributors
Anthropic	New Position	Allocated as a portfolio-level "productivity factor" rather than a standalone AI theme	One of the new FY2026 investments; part of the AI infrastructure mainline
Wayve	Hold/Watch	Smallest position, but doubled during the year; the fund chose to let the position grow naturally	Weight 4.1% ($72.762M); market value $36.275M → $72.762M; zero net purchases/sales
Brex	Hold/Watch	Valuation marked down, but the acquisition provides clear downside protection	Valuation -31.9%; acquired by Capital One (expected to close mid-2026)
Dailyhunt (Ver Se Innovation)	Hold/Watch	Declining operating revenue forced cost cuts; valuation significantly marked down	Valuation -70.1%; the largest detractor
Solugen	Hold/Watch	Bioforge facility scaling below expectations; facing operational headwinds	Valuation -48.4%; newly bought in 2025, already one of the largest detractors by 2026
Anduril	New Position	Approaching the defense procurement system with a software mindset; a representative of deep automation	One of the new FY2026 investments; introduces "AI + defense" exposure
Revolut	New Position	Rebuilding digital banking from the ground up; generational replacement of financial infrastructure	One of the new FY2026 investments
Chime Financial	Hold/Watch	Share price under pressure since listing; undifferentiated digital banks face a long path to profitability	IPO in June 2025; a weak name in the "selective" window
HeartFlow	Hold/Watch	Clinically validated medical AI gaining recognition; a positive contributor	IPO in August 2025; relatively steady performance
Wise	Reduce	Naturally reduced after listing; one of the coordinated exit moves	Reduced after listing
Affirm	Reduce	Naturally reduced after listing; one of the coordinated exit moves	Reduced after listing
Tempus AI	Reduce	Naturally reduced after listing; one of the coordinated exit moves	Reduced after listing
Cohesity	Reduce	Reduced via secondary transaction; further moves after the reporting period	Reduced via secondary transaction
Airbnb	Exit	Growth curve no longer meets the asymmetric return requirement	Fully sold in public markets
Oscar Health	Exit	Growth curve no longer meets the asymmetric return requirement	Fully sold in public markets
Warby Parker	Exit	Growth curve no longer meets the asymmetric return requirement	Fully sold in public markets
Masterclass	Exit	Exited via secondary transaction rather than waiting for an IPO	Fully sold via secondary transaction
Rippling	New Position	Integrating HR, IT, and finance into a single platform	One of the new FY2026 investments; enterprise software modularization mainline
Clear Street	New Position	Rebuilding the clearing system from the ground up	One of the new FY2026 investments; financial infrastructure mainline
Cellares	New Position	Using software to redefine cell therapy manufacturing	One of the new FY2026 investments; deep automation/frontier technology bet
Inspire (小红书)	New Position	Selective allocation rather than a systematic return to Chinese assets	One of the new FY2026 investments; Chinese consumption + AI combination
Avanci	New Position	One of the new investments; thematic classification not separately elaborated	One of the new FY2026 investments
PsiQuantum	New Position	Photonic quantum computing; a frontier bet with a longer holding period	New FY2026 buys list (deep-dive section)
Tekever	New Position	AI + defense theme; shares the defense technology mainline with Anduril	New FY2026 buys list (deep-dive section)
Databricks	Not Specified	AI data platform; one of the portfolio's AI exposures	Mentioned in the enumeration of AI-related exposures