· Implementation of a plan to reduce gearing levels
· Additional controls in place to preserve the value of the Portfolio
· Reiteration of independent valuation policy
· Search process in place for two new Board members
The Board of Woodford Patient Capital Trust plc (LON: WPCT) has today addressed a number of points raised as part of its ongoing engagement with shareholders, following the Company Update of 10 June 2019.
Susan Searle, Chair, commented:
“The dialogue we have had with shareholders has been thoughtful and constructive. The main areas of discussion for shareholders are consistent with the Board’s immediate priorities, notably: gearing levels, the share price discount to net asset value, valuations, Board composition and the ongoing developments at the Portfolio Manager.
“As a result, the Board is building on some of the immediate measures taken following the gating of the Woodford Equity Income Fund on 3 June 2019 and as the situation remains fluid, will use the additional controls in place while continuing to monitor and assess the situation as it evolves, to ensure the long-term interests of shareholders are protected. We will continue to update shareholders as appropriate.”
WPCT uses gearing to provide funding for its investee businesses through a borrowing facility for up to £150 million. As at close of business on 26 June 2019, approximately £126.0 million was drawn under the Facility, which equates to gearing of 16.8 per cent. of Net Asset Value. The Company is permitted, under its investment policy, to borrow up to 20 per cent. of NAV, measured at the time of borrowing.
Following discussions with shareholders, the Board intends to reduce gearing over time. While the priority for the Board is to ensure that funding is available for portfolio companies, it has agreed a schedule with Woodford Investment Management Ltd to reduce the level of gearing to below 10 per cent. within six months and to be generally operating ungeared within 12 months. The intention thereafter is for gearing to be utilised at lower levels primarily for capital flexibility (including investments) with the intention for any such gearing to be reduced by realisations shortly thereafter. Any draw down on the facility where the gearing exceeds 10 per cent. will require Board approval.
Furthermore, the largest assets in the Company’s portfolio are reaching a stage of maturity, with many having developed a diversified investor base. While the Company will be required over time to provide funding to some of its portfolio companies, it intends to achieve this, where possible, by using a proportion of the net proceeds received through disposals and realisations in the Company’s portfolio, a number of which are anticipated over the next 12-18 months.
Share price discount to NAV
The Board notes the discount to NAV at which the shares trade has widened from 14.1 per cent. as at close of business on 31 May 2019 (the business day prior to the gating of LF Woodford Equity Income Fund) to 33.4 per cent. as at close of business on 26 June 2019.
Once the gearing is at a reduced level, if the Company’s shares continue to trade at a sustained and material discount to NAV, the Company intends to undertake share repurchases in order to seek to mitigate the discount to NAV. Any share repurchase will be subject to the working capital requirements of the Company, the Company having sufficient distributable reserves at that time and the amount of cash available to fund such purchases. The Board will also balance the need to use available capital for supporting investee businesses and its commitment to share buybacks.
There has been recent commentary around the valuation of WPCT’s unquoted assets, following events relating to WEIF.
The Board wishes to reiterate to investors that there is an independent valuation process relating to the valuation of the unquoted assets that comprise WPCT’s portfolio, which in turn informs the Company’s NAV.
The pricing of unquoted securities, in line with Financial Conduct Authority regulations, is solely the responsibility of the appointed Alternative Investment Fund Manager, Link Fund Solutions Limited (“Link”). Link provides independent oversight of pricing and conducts its own Fair Value Pricing Committee with the support of an independent valuation firm it employs.
Link’s Fair Value Pricing Policy provides an objective, consistent and transparent basis for evaluating the fair value of unquoted equity securities in accordance with Financial Reporting Standard 102 as well as International Private Equity and Venture Capital Valuation Guidelines.
An in-depth valuation of each investment is performed independently by IHSMarkit using information publicly available, in addition to that supplied by the Company’s investee companies. A valuation occurs: (i) at the time of initial investment; (ii) with a semi-annual frequency thereafter; and (iii) as required where a ‘triggering event’ has occurred (where a ‘triggering event’ is an event that may materially impact the value of an investee business).
The independent valuation by IHSMarkit, as adopted by Link, is reviewed by Grant Thornton UK LLP as part of the half-year review and annual audit process which includes using their own valuation experts as required. This provides an additional measure to test the validity of the portfolio valuation.
The Board is also aware that there has been commentary around the price at which WEIF may dispose of certain assets also held by WPCT. While this would be considered in the valuation process the context of the transaction is also considered.
IPEV Guidelines state that: “The objective of measuring Fair Value is to estimate the price at which an Orderly Transaction would take place between Market Participants at the Measurement Date. Fair Value is the hypothetical exchange price taking into account current market conditions for buying and selling assets. Fair Value is not the amount that an entity would receive or pay in a Forced Transaction…”
The Link FVPC and IHSMarkit would need to determine whether any sale by WEIF is considered a ‘forced’ or an ‘orderly’ transaction. In the case of 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 fall or increase in value depending on the sale price.
The valuation of the Company’s portfolio is inherently subject to a degree of volatility given the early-stage nature of the Company’s investments and will vary over time reflecting many factors taken into account by the independent valuer. The Board believes it is equally important to consider the operational progress of the underlying businesses as value will ultimately be delivered through the commercialisation of the investee businesses and in that regard, the Company continues to be confident in the long-term potential within the portfolio.
The Board’s primary focus is to preserve the value of the assets in the portfolio and to protect the interests of shareholders in the Company. Therefore, since 3 June 2019 and the gating of WEIF, the Board has introduced additional controls within WPCT to ensure that any of the following are brought to the Board in advance of such transaction:
· any proposed sale of an asset that is also held by WEIF or any other mandate managed by the Portfolio Manager;
· any proposed investment into new assets, although it is worth noting that no new investments are anticipated at present; and
· any proposed further investment in existing assets.
The Board is independent of the Portfolio Manager and there are robust processes in place to avoid any conflicts of interest. It has a blend of experience including investing in and working with early-stage companies.
In a separate release today, we have announced the appointment of Stephen Cohen to the Board as an independent non-executive director. Stephen has committed to dedicating an enhanced amount of time to WPCT for an initial period following his appointment. We are also actively engaged to identify a replacement for Carolan Dobson, who has stepped down from the Board today.
The Board is also seeking a further independent non-executive director, in-line with its existing objective to evolve the Board. Once the current recruitment process is complete, an evaluation will be made at that time to determine whether any further changes are appropriate.
At present, the Board is closely monitoring the situation and continues to have regular dialogue with the Portfolio Manager. It is using the additional controls in place to ensure appropriate oversight and visibility of the assets within the portfolio and is committed to a reduction in the Company’s gearing over time. As ever, the Board remains focused on protecting the value of the portfolio and shareholder interests.
Woodford Patient Capital Trust plc also announced the appointment of Stephen Cohen as an independent non-executive director with immediate effect. Stephen will also become Chair of Audit, Risk and Valuation Committee.
Stephen joins the Board with extensive asset management and fund experience. He spent the bulk of his career at Mercury Asset Management where he led both investment teams and business units. He has been actively involved with open-end and closed-end funds, in multiple jurisdictions, for over 30 years. He is currently the Chair of the Audit Committee at JPMorgan Japan Investment Trust plc. Stephen has committed to dedicating an enhanced amount of time to WPCT for an initial period following his appointment.
The Board further announced that Carolan Dobson has stated her intention to step down as a non-executive director with immediate effect. Carolan joined the Board in July 2016.
The Board is actively engaged in identifying a replacement for Carolan Dobson and, in addition, is also seeking to appoint a further independent non-executive director. The Board hopes to be in a position to update on both these processes in due course.
Susan Searle, Chair, Woodford Patient Capital Trust, said:
“I am pleased to welcome Stephen to the Board of WPCT. Stephen has deep asset management and investment trust experience and will be an important voice on the Board at a critical time for WPCT.
“While it is disappointing that Carolan is stepping down from the Board, we understand her decision and would like to thank Carolan for her input over the last three years.
“We have already initiated a process to identify a replacement for Carolan, and further strengthen the Board, as part of our continued succession planning. I hope to be able to update on both in the near future.”