Schroder UK Public Private ((SUPP), the “patient capital” investment trust previously run by Neil Woodford, is hoping for a £ 3 to 4 billion IPO through top holding company Oxford nanopore can turn his fortune over after a painful one 20% depreciation this month.
Fund managers Tim Creed and Ben Wicks (below), who took over the closed-end fund in late 2019 after Woodford resigned after the collapse of its business, showed strong confidence in the UK DNA sequencer. Nanopore accounts for 21.6% of the trust’s assets, bringing the stake to £ 68.7 million. The listing plans offer a big potential boost to the net asset value (NAV) of SUPP on December 31, which was reduced to 35.01 pence per share this month from 43.84p per share at the end of September.
Because of that reaction, the stock was trading at 31.9p, less than a third of the 100p level introduced six years ago.
The pair told Investment Trust Insider that they held Oxford Nanopore valued at £ 1.9 billion, reflecting the last round of funding more than a year ago. That’s less than half of the £ 4 billion Berenberg analysts Nanopore could get in an initial public offering (IPO). It’s also less than £ 2.3 billion IP group ((initial public offering), a publicly traded early-stage investment group, kept the company on their books at the end of March.
Instead of relying on projections, Creed and Wicks would point out how Nanopore’s reputation had grown during the Covid-19 pandemic, when its devices were used to track the spread of the virus in more than 85 countries.
“It was nice to see how many predictions other people are making, and we certainly have great confidence in the company’s management team to achieve a successful IPO and continue to grow,” said Creed.
He added that if Nanopore went public, they would not be “forced sellers” as the restrictions on position sizes in the trust only apply to new investments.
Investec analyst Alan Brierley estimated that an IPO of Nanopore to £ 3.9 billion, recent reports suggested, would add around 23% to the trust’s net asset value.
“For the sake of reasoning, adjusting the net asset value by the end of 2020 for this increase would mean the stocks are currently trading at around 26% discount,” said Brierley. The previously wide discount has been reduced from 20% to 9% due to the depreciation.
Brierley made a “sell” recommendation, saying that despite Nanopore’s “glimmers of hope”, “the rest of the old portfolio does not inspire confidence.”
What’s going on at Mafic?
After the write-down, which undid earlier positive news of divestments, and Sanofi’s acquisition of Kymab, which raised £ 115m to repay SUPP’s debt, there are doubts about the trust’s previous Woodford investment of 290 £ million inevitable.
Investors of concern will also be the disclosure of the annual report that the trust has followed Link Fund Solutions, administrator of SUPP and the wound up Woodford Equity Income Fund, in a top-up investment in the Woodford-era holding company Mafic earlier this year.
Link announced in March that it had invested more in the loss-making basalt fiber maker, despite the fact that its last 2017 financial statements had not been signed by its auditor.
At Mafic, the managers pointed out that this was one of the few investments they now had in common with Woodford Equity Income. The company is the trust’s sixteenth-largest holding, accounting for just over 1.6% of its assets, according to the Schroders duo.
“It took a little more capital because it’s a bit off profitability. That’s why we invested a bit of money early this year, ”said Creed.
Creed also spoke about the company’s operational progress over the past year, with production at its new North Carolina facility, the largest of its kind in the world, which began last July.
Although the results indicated that funding uncertainty remained for Mafic, Wicks said they made no follow-up investments unless they saw room for improvement.
“If we didn’t see a path to more transparency and better governance in a company that needed it, we would have much bigger question marks about supporting that company,” he said.
NAV clearly disappointing
In the results, Schroders praised the “clearly disappointing” extent of the NAV hit last year.
“I can’t promise or predict that this will be the final write-off, but I can say that we have worked very hard to help companies position themselves really well for today’s world and for the uncertainties of tomorrow, ”said Creed.
Almost three quarters of the portfolio is in healthcare, which by and large performed well over the past year despite the challenges. Rutherford Health however, stood out. The provider of proton beam therapy for the treatment of cancer dealt the NAV the biggest single blow. The stocks are publicly traded but illiquid, which means they are externally valued based on Link’s operational progress. The downgraded valuation reflected slower than expected commercial progress and increased risk to the outlook for shareholders.
However, the fund managers added that as of late 2020, more than 80% of the trust’s portfolio of assets has now been valued “based on some form of external funding event” – such as a fundraiser – to better validate the net asset value.
Keep an eye on new purchases
On a more positive note, after repaying its debt on April 15, the trust achieved a net cash position of more than 3% compared to gearing or borrowing of nearly 32% at the end of December.
This will allow the fund managers to make two new private investments and two new public investments this year, the first in their tenure. They are looking for innovative UK companies outside of the healthcare sector to improve diversification.
On the public side, Wicks said the initial focus would be on “more fluid names” than micro-caps. For unlisted opportunities, the emphasis will be more on proven business models and companies with or near profitability than on investing in earlier stages.
The £ 75 million Schroder British Opportunities ((SBO) trust, which Creed is co-managing, recently announced its first two private investments in the semiconductor business Graphcore and payment company Rapyd.
SUPP prays for the nanopore lift to replenish Woodford’s Mafic