25th February 2015
Experts cast a professional eye over the prospectus for the launch of the Woodford Patient Capital Trust…
Following this week’s publication of the prospectus for Neil Woodford’s latest offering, Fidelity and Hargreaves Lansdown share their analysis of what we know so far.
Tom Stevenson, investment director at Fidelity Personal Investing, said: “The publication of the Prospectus for the Woodford Patient Capital Trust launches the offer period for what appears to be a very interesting investment opportunity. Investing in these kinds of early-stage technology companies offers potentially attractive returns, although not all investors will have a stomach for the implied risks. Backing the UK’s knowledge economy is a laudable aim and I look forward to hearing from Neil Woodford how he intends to help commercialise Britain’s intellectual capital.”
Stevenson’s analysis of the trust’s key features:
· Woodford Patient Capital Trust aims to raise at least £200m and as much as £500m.
· It will invest in early-stage science and technology-focused companies, aiming to plug a funding gap in the commercialisation of Britain’s ‘knowledge economy’.
· The portfolio will develop over a period of one to two years. To begin with it will invest in mature medium to large companies and progressively move into small, developing companies (quoted and unquoted) as opportunities arise.
· Example companies highlighted by the Prospectus include: an unquoted company providing broadband to rural areas; a company developing an innovative “(almost) waterless washing machine”; and a business spun out of Oxford University focused on molecular diagnostics such as DNA sequencing.
· In time the portfolio will comprise approximately: 25% mature companies; 25% revenue-generating but still cash-flow negative businesses; and 25% early-stage companies, which will be riskier and typically not yet even generating sales.
· The trust is targeting a 10% annual return for investors.
Due to the long-term nature of these investments and their relative illiquidity, in some cases, Woodford has decided to launch the portfolio as an investment trust. This avoids the need for the manager to maintain liquidity to fund redemptions or to invest inflows when no opportunities are available. The investment trust structure means he can take a longer-term view. Investment trusts are different in a number of ways from open-ended funds:
· The price of the trust is determined by the balance of buyers and sellers of its shares. This means that the price can vary, sometimes significantly, from the underlying value of its assets.
· Investment trusts can invest borrowed money in addition to shareholders funds, although Woodford says he does not intend to employ long-term gearing in the Patient Capital Trust.
Stevenson says a notable feature of this trust is its fee structure:
· Woodford Investment Management will not take an ongoing management charge but will instead be remunerated via a performance fee. In essence, it will only be paid if the performance of the trust exceeds a hurdle rate of 10% a year. It will take 15% of any excess returns above this level. In theory this structure aligns the interests of the manager with other shareholders.
· There will, however, be an ongoing charge levied by the trust to cover administrative and other costs. This is not expected to be more than 0.35% of the net proceeds, assuming these are £200m.
· In addition to the ongoing charge and performance fee, applicants for the offer should realise that the costs and expenses of the IPO will be taken from the initial proceeds. The company believes these will be £3m, assuming £200m of gross subscriptions. That means that the net asset value of the trust will start at 98.5p, not 100p.
The Prospectus sets out a long list of risk factors. This is quite usual for this kind of offer and most of them are no more than an investor would expect when making any investment. However, some are worth highlighting:
· Investing in early-stage and early-growth companies carries some unique risks that investors are less likely to experience with larger more mature companies.
· Up to 60% of the trust could be invested in unquoted companies – these are by definition more difficult to buy and sell quickly than companies quoted on an exchange. The valuation of these companies is also less frequent (perhaps only every six months).
· The trust will not be constrained by a benchmark nor by specific sector weightings. This means investors are more reliant on the manager’s good judgement than in a more constrained fund. In part this risk may be mitigated by the portfolio’s spread of investments, which will be up to 100 holdings and at least 40. The trust will not invest more than 15% in any one holding and overseas holdings will be limited to 30% of the trust.
Stevenson added: “The offer period for Patient Capital Trust will last until mid-April. This enables investors to shelter any allocation to shares within either this year’s ISA allowance or next year’s or both. In the case of an oversubscription above the top end of the £200m to £500m range, applications will be scaled back.
“During the offer period, I will have the opportunity to speak to Neil Woodford about the new trust and I will provide updates on the fund, including my assessment of its potential, after those discussions. In particular I am keen to explore the manager’s experience of investing in this kind of early-stage and unquoted opportunity.”
Mark Dampier, head of investment research at Hargreaves Lansdown said:
“The launch of this relatively small and niche trust would pass most people by if it weren’t for Woodford being at the helm. Everything Woodford does continues to attract high levels of investor interest and this latest launch is no exception. We have secured a significant guaranteed allocation for the benefit of everyone who applies through Hargreaves Lansdown, the only execution only broker to receive this guarantee.”
Hargreaves Lansdown said it will receive a significant guaranteed allocation, the only execution only broker with this guarantee. It said it has been asked not to disclose how much it has been guaranteed, but can assure investors that it is considerable. This means if the offer proves popular and allocations are scaled back, then Hargreaves will receive a better overall allocation than other execution only brokers, and will be able to offer clients more shares as a result.