The Morningstar Bronze-rated Woodford Equity Income fund has taken a stake in Woodford Patient Capital (WPCT) as it transitions the unquoted part of its portfolio, Woodford Investment Management has confirmed.
Woodford Equity Income, which will be moving from the Investment Association’s Specialist sector to its UK Equity Income sector, has sold five of its individual unquoted stocks to WPCT for a non-cash consideration of £72.9 million.
In exchange for these stocks and an additional subscription of £6 million in cash, the open-ended mandate will receive shares in the closed-end fund. The extra cash raised by WPCT will be used to “increase its position in companies the board views as the next wave of disruptors”.
"This transaction also brings on board a new institutional long-term shareholder, which is also supportive for [WPCT] going forward," adds Susan Searle, chairman of WPCT.
The five firms in question are Atom Bank, Carrick Therapeutics, Cell Media, RateSetter and Spin Memory. Exposure to individual unquoted holdings within the Equity Income portfolio will be further reduced as companies reach a more mature stage of their growth cycle, the firm added.
The move seems partly in response to a recent Financial Conduct Authority discussion paper on Patient Capital and Authorised Funds. In it, the regulator noted that these assets are currently constrained by liquidity and exposure limits in open-ended funds.
While it is currently exploring whether these restrictions are appropriate, or whether they should be relaxed, it added that, for open-ended funds, investing into a closed-end structure that in turn holds patient capital assets can “have the advantage if providing a more liquid way of holding patient capital, as well as increasing the fund’s diversification”.
In a statement, Woodford Investment Management noted that WPCT had yet to be listed when Woodford Equity Income was launched. Thus, “there was no obvious alternative for [manager Neil Woodford] if he wanted exposure to unquoted securities, other than the way he has been investing in them for years”.
“Had WPCT, a vehicle for the patient, long-term investment in, and management of, early-stage opportunities, been around when Woodford Equity Income was launched, it is highly likely we would have bought the trust in the fund from the start,” it added.
Woodford Equity Income has now invested in a new unquoted company since June 2017 and its unquoted holdings have made a positive contribution to the portfolio since launch almost five years ago.
Morningstar Analyst View
The move makes sense from a number of viewpoints, says Morningstar analyst Peter Brunt. First, from an overall portfolio liquidity standpoint, as WPCT is a listed entity that can be traded daily.
It should also be cost-neutral to the investor and may additionally make investors feel more comfortable than having direct exposure to illiquid, unquoted names in the portfolio.
Brunt does caution, however, that investors will not be entirely insulated from the liquidity issue. Over the past 21 months, Woodford Equity Income has seen net outflows of £3.77 billion, according to Morningstar Direct data.
“Any further redemptions from Woodford Equity Income would likely trigger proportionate sales of WPCT,” explains Brunt. This could force the discount to net asset value (NAV) on WPCT, currently at 12.78%, to widen significantly and, in turn, impact the NAV of Woodford Equity Income.
