Woodford Patient Capital reports interims – Woodford Patient Capital has reported interim results to 30 June 2019. The company released the following:
- NAV of £654m as at 30 June 2019, following an interim review;
- Borrowings reduced to £111.1m as at 26 Sept 2019;
- Independent valuation review of the top 20 investments completed, following mandate from the board;
- Board agreed with its lender greater flexibility around certain obligations relating to the company’s debt facility for a period of time while the company pursues the disposal of certain unquoted assets;
- Stephen Cohen, Jane Tufnell and Raymond Abbott appointed as independent non-executive directors of WPCT, consistent with previously stated objective to evolve the board, Louise Makin has resigned;
- Board continues to evaluate the position of the manager and remains in dialogue with other potential managers.
Susan Searle, chairman, WPCT, says: “This has undoubtedly been the most challenging period for the company since it floated in 2015. Events at the manager have been disappointing for everyone associated with WPCT, shareholders and board members alike. Protecting shareholders’ interests as these difficult circumstances continue to play out remains the board’s priority. We have already taken a number of decisive and proactive measures following the gating of the LF Woodford Equity Income Fund (WEIF) and remain focused on taking the necessary actions to support the future value of the company’s portfolio.”
“In the near term the company faces a number of difficult issues, but it is important to remember that the company was established to provide ‘patient capital’ to support the development of high-potential UK growth companies. Its investment objective is to provide long-term returns to shareholders as the underlying technologies of the investee companies become proven and commercialised. The board’s focus is to navigate through the current challenges without unduly impacting these longer term potential returns to shareholders.”
Neil Woodford, WPCT’s manager, had this to say: “Shareholders have endured an extremely disappointing six-month period, for which I am very sorry. While shareholders can be forgiven for thinking there are no positives, I continue to believe that the majority of the businesses we have invested in are making good progress, in line with our pre-agreed milestones.”
“This is not to gloss over the setbacks which the portfolio has suffered since WPCT was launched in 2015, nor the significant downward pressure both the NAV and share price have endured since the suspension of WEIF on 3 June 2019.”
“The journey to positive outcomes has been longer and more painful than investors would have liked, or anticipated, but the returns to be gained by delivering on the progress, I believe, will ultimately reward the patient investor.”
Change to investment policy?
The current investment policy states that no more than 80% of gross assets may be in unquoted investments at the time of purchase. As the chairman says, “the current environment has made it more challenging for the company to operate within the limits set out within its investment policy“. The board is “giving consideration to amending the investment policy to permit investment in unquoted companies to exceed 80% of gross asset value” and intends to consult shareholders.
Susan Searle discusses valuation
“There has been considerable external commentary around our valuations, which are conducted through a wholly independent process. Valuation of unquoted investments is a complex process and is performed by Link Fund Solutions Limited (Link) (the company’s alternative investment fund manager (AIFM) and valuation agent) which undertakes the valuation of unquoted investments over a six-monthly cycle, in the normal course of events, or following a triggering event being identified. In addition to this independent valuation process, the board requested that Link conduct a specific valuation review of the top 20 investments as at 30 June 2019 for the half-year process, which has been reviewed by Grant Thornton as part of its independent interim review of the Company’s half-year results.
Since 28 June 2019 through 26 September 2019 there has been a decline in the daily NAV of 20.9%, representing a decline in the portfolio NAV from £748m to £591m. The process whereby Link has reviewed the values of the top 20 holdings has led to a number of valuation changes to individual holdings as compared with the valuations used to calculate the daily NAV as at 28 June 2019, published in early July. During the valuation process when information has come to light that was reflective of conditions that existed at 30 June then it is required by accounting standards to reflect this in the investment valuation as of 30 June for the purposes of the half-year results. This has resulted in the published NAV of £654m in the half-yearly financial statements.
In addition to these adjustments there were also five “post balance sheet events”, reflective of information and conditions that arose after 30 June 2019, including write downs in Benevolent AI and Industrial Heat. The write downs that took place in Benevolent AI and in Industrial Heat have been treated in accordance with accounting principles as having been in part valuation adjustments reflected in the 30 June 2019 balance sheet and in part as post balance sheet events. Benevolent AI accounted for £46m and Industrial Heat £32m in total. All adjustments have now been reflected in the 26 September NAV. The board believes that while this has been a lengthy process, it has undoubtedly been a worthwhile exercise in order to provide assurance to shareholders regarding the value of the portfolio after the events of the first half of the year.
As the portfolio develops there is more information to review and analyse in relation to our investee companies. This analysis and the governance that appropriately exists around the valuation process takes time and will become increasingly unsuited to the publication of a daily NAV. The board is therefore considering moving from daily NAV reporting to potentially monthly or quarterly reporting. This is in line with our peers, and we believe will result in a NAV process which is aligned to the information flow from our portfolio going forward.
Additionally, the board is aware of the process being conducted by Link to affect the sale of unquoted assets from WEIF. Certain of these assets are also owned by WPCT. The board understands that this sales process should complete towards the end of 2019. Any sales undertaken by WEIF of unquoted portfolio assets pursuant to this process that are also held by WPCT may have an impact on WPCT’s valuation of those assets. Where such disposals by WEIF are considered a ‘forced transaction’, it is not necessarily expected that the company’s assets would be marked to the same value. In the case of an ‘orderly transaction’, the sale by WEIF may present a new valuation metric for the asset. This may result in a change in value depending on the sale price. No information is available to the board, or IHS Markit, of this process and no account has been taken of it in the valuation. The board continues to liaise with Link and Woodford and will update shareholders and the market as necessary.”
Currency hedging!
Unbelievably, this from the manager’s report ” Currency hedging – We have historically left currency exposures unhedged unless our investment view pointed to sterling appreciation in the medium-to-long term. During the period under review, we did have some hedges in place and the fall in sterling has meant that there was an unrealised loss carried by the company at the period end. The position has been settled and no further hedging is being taken at this time.” [a new and inventive way to destroy more of shareholders’ capital]
[QD comment: So the plan seems to be that the new board, is going to soldier on, retain the manager, for now, and retrofit the investment policy to suit the mess that they find themselves in. It might be time for the chairman to resign and be replaced by someone who is more clearly independent from the manager (Susan Searle was the chief executive of Imperial Innovations when Woodford was the largest shareholder) or at least step down from the management engagement committee.
The shift to publishing the NAV less frequently looks like a cynical ploy to reduce media scrutiny of the fund to us. Also, trumpeting the reduction in gearing to £111.1m is all very well but this translates as gearing of 18.8%, dangerously close to the 20% maximum level imposed by the lender (especially if Rutherford Health – formerly Proton Partners comes looking for the balance of the £32.5m that Woodford IM promised it). There must to be a real risk that the lender either ups the interest rate again or decides not to renew the facility when it matures on 16 January 2020.
The suspended Woodford open-ended fund (WEIF) is said to be looking to sell its unquoted investments by the end of 2019. Perhaps Patient Capital should offload some of its positions at the same time. After all, should the new board decide to put the fund into run-off mode, whoever buys the WEIF positions is going to be faced with a new overhang of stock from Patient Capital. Avoiding that situation might result in better prices being achieved for both funds.]
WPCT: Woodford Patient Capital reports interims