RTW Venture (RTW) has published its annual results for the year ended 31 December 2022, During the year, RTW’s NAV declined by -10.2% (from US$363.0m or US$1.71 per share to US$326.1m or US$1.54 per share) with the main detractor being the markdown in Ji Xing (c. -2.2% contribution), after the IPO was delayed due to market conditions, despite a positive operating performance. Otherwise, the mark to market share price performance of Prometheus Biosciences (c. +9.1% contribution) and the realised gain in RTW Royalty Holdings 1 (c. +4.9% contribution), following the successful sale to Bristol Myers Squibb, were two good results in a year that RTW says saw its comparator index, the Russell 2000 Biotechnology decline by 32.0%. RTW is now three-year’s old and since admission its NAV per share has appreciated by 47.6% against a -5.3% decline for the comparator index, according to RTW. Despite recent challenges, the outperformance since launch looks very strong.
RTW’s share price fell to a discount to NAV during the year, along with the overwhelming majority of the investment companies sector. Those that provide growth financing to private companies often found themselves at the sharper end of the sell off. RTW’s manager thinks that this was, perhaps, exacerbated by a change in US tax regulation affecting publicly traded partnerships (PTPs), which the company was formerly classified as for US tax purposes. A number of custodians effecting transactions in RTW’s shares informed shareholders that, as a result of the imposition of a new US withholding tax obligation, they would no longer hold or deal with RTW’s shares if the company continued to be classified as a PTP. RTW thinks that this likely led to some selling pressure on the shares as the 1 January 2023 deadline approached until the company changed its tax status on 1 December, which was subsequently ratified by an EGM held on 19 December 2022. The share price has recovered significantly since and RTW says that it is optimistic that this will continue with further NAV accretion in an improving market environment.
Portfolio and performance update
As of 31 December 2022, approximately 71% of the portfolio was invested in the core portfolio (private and public), a 5% increase versus 31 December 2021. Within that, the mix changed slightly. Core private exposure stands at 25% of NAV, a 3% reduction on last year, while core public exposure increased by 10% to 46% (RTW’s manager defines core public companies as companies that were initially added to its portfolio as private investments, reflecting the key focus of the company’s strategy). The manager’s investment approach is defined as full life cycle and, therefore, involves retaining private investments well beyond their IPO, hence RTW’s core portfolio consists of both privately-held and publicly-listed companies.
Approximately 29% of the company’s NAV is currently invested in other publicly listed companies in lieu of holding cash for future private investments. The manager says that the portfolio of assets has been carefully selected by it, matching, on a pro-rated basis, the long investments held in its other funds. The investments represented in this portfolio are similarly categorised as innovative biotechnology and medical technology companies developing and commercialising potentially disruptive and transformational products.
The -10.2% reduction in NAV during 2022 was largely driven by the “other public” portfolios (-9.3% contribution), which it says declined roughly in line with the comparator index. The core portfolio made a small positive contribution to NAV with the core public portfolio contributing +0.2% and the core private portfolio detracting -0.1%. Within its core private portfolio, gains of +4.9% of NAV were crystallised when RTW Royalty Holdings sold Mavacamten to Bristol Myers Squibb. However, these gains were offset by write-downs across the majority of the private portfolio based on declining public market comparables. The manager comments that the positive return of the core portfolio, in a year when small cap biotech companies, particularly newly public ones, performed very poorly, highlights the selectivity of its process, quality of RTW’s investments and value of its full life cycle approach. Income and expense (offset by both the mark to market on the Performance Allocation Share for the period from 1 January 2022 through 30 November 2022 and Non-Controlling Interest for the period from 1 December 2022 through 31 December 2022) make up the balance of returns (-0.7% contribution).