Star manager Neil Woodford is launching the Woodford Patient Capital Trust via a £200m initial public offering (IPO). The trust will invest in early-growth companies, typically quoted; and quoted and unquoted early-stage companies, which are expected to have a "significant exposure to medical science".
Instead of charging an annual management fee, the investment trust will earn a performance fee which will be payable in ordinary shares, which Woodford Investment Management believes will further align its interests with shareholders.
It follows the launch last year of Mr Woodford's CF Woodford Equity Income (GB00BLRZQ513), which has posted strong performance and is a member of the IC Top 100 Funds.
The investment trust will aim for a return in excess of 10 per cent a year over the longer term, though Mr Woodford does not expect to deliver that in year one. "I wouldn't expect early stage companies to be able to do this immediately," he said.
Woodford Patient Capital will also hold listed mid and large-cap mature companies which offer growth opportunities. These will initially account for most of the portfolio, but allocation to early-stage and early-growth companies should gradually increase. This may take one to two years from admission, though Mr Woodford hopes to do it within 12 months. When the portfolio is mature he expects that around three quarters will be in early stage companies, with 25 per cent in mature dividend payers which will cover the trust's costs.
The trust will have 50 to 100 holdings predominantly from the UK, though Mr Woodford says that there will be no set geographical split and he will accept "all comers."
Although investment trusts can take on debt he will initially have none as he feels this would raise the costs of the trust, and while he hopes this can continue said there maybe circumstances where the trust will borrow.
The trust is likely to be popular with investors but investment advisers caution that this will be much higher risk than CF Woodford Equity Income Fund. "Devoted fans of his approach to income investing do therefore need to realise that this investment will be at a completely different end of the risk spectrum before reaching for their cheque book," says Jason Hollands, managing director at Bestinvest. "Unquoted investments and listed smaller companies are illiquid investments and therefore an investment trust is certainly the right structure for such a strategy."
"Investors should think before they invest," adds Adrian Lowcock, head of investing at AXA Wealth. "Mr Woodford himself makes it clear this is only suitable for long-term investors. In addition this trust is not likely to generate an income - in the short term at least. Therefore it is a different type of investment to the funds by which Mr Woodford made his name - equity income. Investors need ask themselves does this fund meet their appetite for risk and are they able to invest for the long term, at least 10 years. This fund should be considered riskier than other smaller companies funds because it will invest significantly in unquoted investments."
The IPO prospectus will be published in late February and the issue is expected in mid April. Thereafter the trust may do further issues. "It is not an absolute fixed pot of capital and has the ability to grow," explained Mr Woodford. "My ambition is to deploy a significantly larger amount than £200m into this space."
Mr Woodford said the trust is being launched because the lack of long-term patient equity capital has created a compelling opportunity to invest in businesses with outstanding intellectual property. An investment trust is a good structure with which to invest in assets that can be hard to buy and sell because investment trusts do not have to meet investor redemptions, as is the case with open-ended funds. He also said it is good that the businesses he is investing in know they have permanent capital.
"Venture capital typically thinks immediately about realisation, and that constrains ambition," he said. "But with a closed-end structure investees know they can grow their capital over time."
Mr Woodford will have principal responsibility for the management the trust's portfolio but be supported by a team including Stephen Lamacraft, who will focus on FTSE 350 companies, and Saku Saha and Paul Lamacraft who will focus on early stage companies. Woodford Investment Management is also in the process of hiring more people as Mr Woodford says that "we need to have more resources to support what we are doing."
