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Woodford Patient Capital to slash debt and enlarge board

Woodford Patient Capital plans to retire its debt within a year
July 4, 2019

Woodford Patient Capital Trust (WPCT) plans to cut its level of debt and enlarge its board, in response to recent discussions with shareholders after LF Woodford Equity Income Fund (GB00BLRZQB71), which is also run by Woodford Investment Management, was suspended from trading. The moves follow a plunge in the trust's share price and a massive widening of its discount to net asset value (NAV). The trust was on a share price of 77p and discount of 14.1 per cent at close on 31 May – the last trading day before LF Woodford Equity Income stopped trading. By close on 2 July the trust was on a share price of 56.1p and discount of 31.9 per cent, according to broker Winterflood.

Woodford Patient Capital has debt, known as gearing, of about 18 per cent via a borrowing facility with Northern Trust, from which it can draw up to £150m. It currently has about £126m drawn on which the interest payable is based on Libor+1.35 per cent margin.

The trust’s investment policy allows it to borrow up to 20 per cent of its NAV, measured at the time of borrowing. But it has agreed with Woodford Investment Management to reduce the level of gearing to below 10 per cent within six months and to be generally operating ungeared within 12 months. After this, it will only take on gearing at lower levels with the intention of reducing it soon after with money from realisations of investments. Any drawdown from its borrowing facility that would take the gearing over 10 per cent would require the trust’s board’s approval.

The board also said that when the gearing has been reduced, if the trust is still trading at a large and persistent discount to NAV, it will buy back shares to try to bring it in – as long as it has cash available. The trust’s board “will also balance the need to use available capital for supporting investee businesses and its commitment to share buybacks”.

Private equity funds sometimes commit to providing capital to the companies they invest in. At the end of 2018, Woodford Patient Capital had outstanding commitments to existing investments of £16.8m. However, the trust’s board said that, where possible, it will fund this from realisations of other investments, and expects to be able to do this with a number of these over the next 18 months. The trust has held some of its unquoted investments for three or four years and they are reaching a point where investors in them could make a full or partial exit.

But Iain Scouller, managing director of investment funds research at Stifel, said: "Unless there is a significant cash inflow as a result of portfolio sales, it appears it will be some time before share buybacks are implemented. We do not think any of the measures proposed will have any immediate impact on the portfolio. For the share price to have a significant recovery, there need to be catalysts. [For example], realisations of sizeable unquoteds at gains above previous valuation, clarification and certainty over the long-term management team and arrangements, and resolution of the LF Woodford Equity Income situation, with clarity on the long-term proposal for it."

 

Valuation concerns

There are concerns that the value of the unquoted holdings Woodford Patient Capital holds in common with LF Woodford Equity Income may be reduced, if the latter fund is forced to sell them quickly, at lower valuations, to meet redemptions. Stifel estimated that at the end of April unquoted investments held by both these funds accounted for 64.2 per cent of Woodford Patient Capital’s NAV.

However, International Private Equity and Venture Capital Valuation Guidelines say that: "Fair value is the hypothetical exchange price taking into account current market conditions for buying and selling assets. Fair value is not the amount that an entity would receive or pay in a forced transaction."

So the trust’s board said: "In the case of a forced transaction [by LF Woodford Equity Income], it is not necessarily expected that Woodford Patient Capital’s [holding in that asset] would be marked to the same value. In the case of an orderly transaction, the sale by LF Woodford Equity Income may present a new valuation metric for the asset. This may result in a fall or increase in value depending on the sale price."

But Mr Scouller argued: "Even if the valuers conclude that the sale of an unquoted from LF Woodford Equity income has been forced, the market would be wary if Woodford Patient Capital did not adopt a similar valuation for these same investments, given that this value would probably be the only transactional validation of the investment. If Woodford Patient Capital held assets at valuations materially above those achieved in a sale of the same companies by LF Woodford Equity Income, the market would apply a commensurate discount to the valuation of [the trust’s] unquoted portfolio to reflect this. This would be reflected in the share price discount to NAV at which Woodford Patient Capital trades."

 

Woodford Patient Capital Trust top 10 holdings (%)
Benevolent AI8.93
Proton Partners International7.83
Oxford Nanopore7.54
Atom Bank7.31
Autolus6.87
Industrial Heat6.32
Industrial Heat A1 Pref2.78
Immunocore A2.68
Kymab B Pref1.97
Mission Therapeutics1.95
Source: Woodford Investment Management as at 31 May 2019

 

Inherent value?

Some investors have bought or are thinking of buying shares in Woodford Patient Capital. Arguments in favour of doing this include its holdings in maturing unquoted investments that are being commercialised or have shown progress. The trust highlighted a number of such investments in its last annual report, for example, Proton Partners, Federated Wireless, Inivata and Carrick Therapeutics.

The trust has an ongoing charge of only 0.19 per cent because it does not charge an annual management fee, but rather a performance fee. And so far this has not been triggered.

Woodford Patient Capital is also on a very wide discount to NAV. "A lot of the bad news may already be in the price,” said Mick Gilligan, head of fund research at broker Killik & Co. “Over five to 10 years it could do well from these levels."

If the trust succeeds in reducing the level of gearing and there is more clarity over the valuations of its unquoted holdings, the discount to NAV could come in.

Mr Gilligan suggests that existing investors hold their investment in the trust for now. With regard to putting new money into the trust, he said investors with a high risk appetite and long enough time horizon could consider a small position.

Philip Milton, a chartered wealth manager, said: "It is hard to know what catalyst will turn things around in a hurry as short-sellers have been having a field day. [But] even if there are troubles ahead for some of the biotech enterprises [the trust] has supported, and is obliged to keep supporting with more money, some will come good. And you need less patience now to find out [if this will happen] than you would have done [if you had invested] at inception."

A professional investor told Investors Chronicle that he had added to Woodford Patient Capital when its share price fell to 52.5p. This was on the basis that there could be further writedowns on some investments, but others might offer some value in the next two or three years. But he added that this was only a trust to buy into at these levels, as part of a broad portfolio.

David Liddell, chief executive of IpsoFacto Investor, said that even if LF Woodford Equity Income Fund is forced to sell unquoted holdings at lower valuations in the short term, these companies could come good for other investors who hold them for longer.

But he added: "I wouldn’t sell [an existing holding] in Woodford Patient Capital at the moment, but I wouldn’t pile into it either. The debt is my main concern. We don’t know the terms of the covenants."

Woodford Investment Management could cease to be the manager of the trust if, for example, it can no longer afford to run it for no fees or the trust’s board decides to switch to another company. And a new management company would be likely to charge fees, resulting in higher charges for shareholders.

LF Woodford Equity Income, meanwhile, holds about 9 per cent of  Woodford Patient Capital’s shares. If it sells them it would be likely to further depress the trust’s share price, although before the fund was suspended from trading it had been indicated that it would be a long-term holder of Woodford Patient Capital.

Analysts at Winterflood said: "Despite the widening discount, it is not possible at this time to declare Woodford Patient Capital a value opportunity given the uncertainty surrounding its holdings in common with LF Woodford Equity Income. This may take some time to resolve and we suspect that the share price will continue to be volatile in the interim."

 

Performance

Fund/benchmark1 year total return (%)3 year cumulative total return (%)5 year cumulative total return (%)
Woodford Patient Capital Trust NAV-9-6n/a
Woodford Patient Capital Trust share price-32-33n/a
Direct private equity trust average NAV73596
Direct private equity trust average share price1270128
FTSE Small Cap ex Ics index-92430
FTSE All Share index33037
Source: Winterflood as at 3 July 2019

 

Board changes

Woodford Patient Capital has appointed Stephen Cohen to its board to replace Alan Hodson, who stepped down in May. He will also become chair of the audit, risk and valuation committee, and initially dedicate an enhanced amount of time to Woodford Patient Capital. Mr Cohen has over 30 years' experience of working with open-ended and closed-ended funds, and spent most of his career at Mercury Asset Management where he led investment teams and business units.

Woodford Patient Capital is also seeking a replacement for Carolan Dobson, who stepped down last week, and a further member, to enlarge the size of the board. A spokesperson for the trust said that shareholders said they want a stronger board.