| Master Investor Magazine
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Schroder Investment Management has been appointed to take over the running of Woodford Patient Capital (LON:WPCT), but it could be a long process sorting out the legacy issues from Neil Woodford’s disastrous time in charge.
According to data from FE Trustnet, WPCT has been the worst performing investment trust on the London market in 2019, with a year-to-date loss of 56%. Its shares are trading at a 43% discount to the latest published NAV, yet there are massive question marks over the valuations of its unlisted holdings.
The board has opted for an ongoing strategy rather than a managed wind-down, which is probably the right decision for investors given the potentially massive write-downs that would be incurred if they tried to sell its portfolio of minority stakes in early stage, unquoted companies.
Schroders have said that they intend to manage the fund in line with the company’s existing investment objective and policy. The people they bring in will have relevant experience of the sector and will follow a team-based approach. They have made it clear that WPCT will be managed with a long-term view, “in support of positive outcomes for shareholders and British enterprise”.
Removed a huge amount of uncertainty
The appointment of Schroders has removed a huge amount of uncertainty for investors and, relieved of the threat of a managed wind-down, the shares were able to bounce back by 25%. Once the new manager is in place, the fund will be renamed the Schroder UK Public Private Trust.
Schroders will not take a management fee for three months, but after that it will be paid at the rate of one percent per annum on a market capitalisation of up to £600 million and 0.8% per annum thereafter.
There is no performance fee payable until the end of 2022, at which point the manager would be eligible to a fee of 15% of any excess returns above a NAV per share of 77p, which represents a premium of 22% on the current level. After that it will be calculated as 15% of any performance above a hurdle of 10% of net assets each year, subject to a high watermark.
The portfolio mainly consists of early-stage unlisted companies. These are independently valued and many have experienced large write-downs to reflect the recent events. By 26 September the portfolio NAV had fallen by 21% compared to the originally disclosed – and since re-stated – end of June NAV.
How many further write-downs are necessary?
It remains to be seen how many further write-downs are necessary. Many of the unlisted holdings form part of the £3.1bn Woodford Equity Income fund that is being wound down. These positions are likely to take a number of months to sell and could have ramifications for the valuations in WPCT. The open-ended fund also owns a nine percent stake in Woodford Patient Capital that will have to be disposed of.
| Master Investor Magazine
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Another serious issue for the new manager to tackle is the high debt. This stood at £111m at 26 September, which was equivalent to the maximum permitted level of gross gearing of 20%. Borrowing to invest in assets that are falling in value simply serves to magnify the losses. More flexibility has been agreed with the lender, yet Schroders will still be faced with the challenge of disposing of hard to sell assets to bring the gearing back down within its agreed cap.
As if that wasn’t enough, WPCT is struggling to comply with its investment policy that limits its unquoted holdings to a maximum of 80% of gross assets at the time of the investment. This makes it difficult for it to provide further funding to its existing unlisted holdings and may require shareholder approval to ease the restriction.
The appointment of Schroders is good news for investors and improves WPCT’s long-term prospects, but there are serious challenges to overcome in the next few months. It will take time to change the unlisted portfolio and reduce the gearing without impacting on the valuations, while the realisation of Woodford Equity Income hangs like a sword of Damocles overhead.