Write-downs on the way at Woodford Patient Capital?

The fallout from the suspension of Neil Woodford’s flagship Equity Income fund has forced the Board of Woodford Patient Capital to take steps to try to limit the damage.   

Investors in former star manager Neil Woodford’s funds have had a chastening experience, with his £3.7bn open-ended Equity Income fund suspended from dealing following massive client redemptions. Woodford has appointed specialist bankers to help raise cash by selling the illiquid, unlisted holdings in his portfolio, but these also account for around 60% of the value of his Woodford Patient Capital (LON:WPCT) investment trust.

WPCT is not affected in the same way as the open-ended fund as investors can sell their shares on the stock exchange whenever they want without any cash flow implications for the portfolio, although they have still been badly burnt by the fiasco. Shares in the trust have fallen 29% year-to-date and they now trade on a 29% discount to the latest published NAV.

Forced the board to take action

Its shareholders are obviously deeply unhappy and have forced the board to take action and to clarify certain matters, not least in relation to the valuation of the unlisted holdings. These are subject to an independent valuation process that is the responsibility of Link Fund Solutions, the Alternative Investment Fund Manager (AIFM), and are conducted in-line with the relevant guidelines and accounting standards.

If the sales by Woodford Equity Income at potentially depressed prices are deemed to be ‘orderly’, they may result in a write-down in WPCT’s net asset value, but if they are considered to be ‘forced’ then that would not necessarily be the case. This is because ‘fair value’ is defined as the price at which an ‘orderly transaction’ would take place, although whatever the outcome it’s the market that will be the final arbiter.

The fund’s poor returns have been exacerbated by the gearing, which is capped at 20%. WPCT has a borrowing facility of £150m, of which £126m was drawn at June 25^th, equivalent to 16.8% of the net assets.

Given what has happened the board has said that it intends to reduce the gearing over time. It has agreed a schedule with Woodford Investment Management to cut it to less than 10% within six months and to be generally ungeared within 12 months.

Required level of funding

The board’s priority though is to make sure that the holdings in the portfolio have access to the required level of funding. To make money from these early-stage growth companies you need to be able to participate when they raise capital, as this ensures that they have enough resources to execute their plans and that your stake in the business is not diluted by new shareholders.

This is a difficult balancing act and may prove hard to achieve given the illiquid nature of the holdings. Paying back borrowings of £126m, whilst also meeting future funding requirements, could be a real challenge and will limit the ability of the board to undertake share buybacks to tackle the wide discount.


Stephen Cohen has been appointed as an independent non-executive director and Chair of the Audit, Risk and Valuation Committee to help beef up the board, and Carolan Dobson has stepped down with immediate effect, although I am not aware of any explanation having been offered.

The changes and additional disclosures will be welcome news to shareholders, but they have done little to dispel the doubts about the valuations and the uncertainty regarding the future funding of the holdings without Woodford’s ongoing support through his open-ended fund. It should also be remembered that Woodford Equity Income owns 9.9% of WPCT, which could conceivably have to be disposed of.